EU ‘frugal 4’ push back on Franco-German virus recovery plan
Austria, Denmark, the Netherlands and Sweden want loans from a time-limited fund rather than grants
The debate over the EU’s post-Covid-19 recovery fund became more fractious over the weekend after four northern European member states opposed a landmark Franco-German plan to offer grants to hard-pressed countries.
Austria, Denmark, the Netherlands and Sweden said they would support the creation of a one-off emergency fund but that they would not accept any measures that would lead to debt mutualisation or “significant increases” in the EU’s upcoming seven-year budget.
The paper from the so-called “frugal four” clashes with proposals from Germany and France, which on Monday outlined a plan for a €500bn recovery fund that would involve cash injections in the form of grants rather than loans.
The move by French president Emmanuel Macron and German chancellor Angela Merkel triggered positive reactions from southern European countries, and was hailed as a breakthrough in overcoming longstanding Franco-German differences over the need for more risk-sharing in the eurozone.
The split will complicate the European Commission’s efforts in the coming days to table its own detailed plans for the recovery fund and upcoming multiannual financial framework (MFF), which runs from 2021 to 2027. All 27 member states will need to be on board before any recovery fund plan sees the light of day.
In a further sign of the policy shift in Germany regarding debt mutualisation, Wolfgang Schäuble, one of the country’s most prominent fiscal hawks during the eurozone debt crisis of 2010 to 2015, expressed his support for the Franco-German plan and dismissed the frugal four’s arguments.
The former German finance minister, who has been president of the Bundestag since 2017, told German newspaper Welt am Sonntag that non-refundable grants rather than loans were necessary to deal with an “economic slump that we have not experienced in our lifetime”.
“If Europe wants to have any chance at all, it must now show solidarity and prove that it is capable to act,” Mr Schäuble said on Sunday. “Germans have an overarching self-interest that Europe gets back on its feet.”
“Additional loans to the member states would have been stones instead of bread, because several [member states] are already heavily indebted,” Mr Schäuble said. Noting that the recovery fund did not mutualise existing debt, he said: “Instead, the EU commission will drive the economic reconstruction of Europe.”
In Madrid, a senior officer in the administration of Spanish prime minister Pedro Sánchez involved in the EU negotiations told the Financial Times on Sunday that Spain would not accept a loan-based recovery fund because it would over-indebt countries such as Spain and Italy. Such a fund also had conditions attached that suggested the Covid-19 pandemic was a localised moral hazard problem and not an unprecedented global crisis.
In their paper, the frugal nations say they are opposed to the idea that the EU could borrow money and hand it out as non-refundable transfers to hard-hit states. They would be willing to support lending on “favourable terms” to member states in need, while limiting the risk and providing “sound incentives”, they write.
They would support a “temporary, one-off emergency fund” to support the recovery and health sectors with a sunset clause of two years.
“On top of a modernised MFF, we propose to create an Emergency Recovery Fund based on a ‘loans for loans’ approach, which is in line with fundamental principles for the EU budget,” the frugal four’s paper said, without putting forward any figures.
They said support for coronavirus-related spending could be found by seeking savings elsewhere. It would involve “front-loading” or temporarily topping up coronavirus-related expenditure to kick-start the recovery.
The frugal four also insisted recipients of recovery funding would have to display a “strong commitment to reforms and the fiscal framework” in the hope this would help promote potential growth.
The countries warned that given the depth of the economic contraction, all member states would have to devote a larger share of their national resources to the EU budget. “Additional funds for the EU, regardless of how they are financed, will strain national budgets even further,” they said.
Once commission president Ursula von der Leyen presents her own plans, Charles Michel, European Council president, is expected to oversee the negotiations.
Among the key questions that will need to be resolved are the level of the MFF, the fate of budget rebates received by frugal states, as well as the size of the recovery fund and the balance between grants and loans.