Merkel and Macron make a bold bid to unlock recovery fund
Joint initiative marks a leap by Germany into the realm of EU borrowing
When it’s running smoothly, the Franco-German engine has the capacity to shift the European debate like nothing else. We may be seeing one of those moments now.
The joint appearance of Angela Merkel and Emmanuel Macron on Monday electrified the complex debate over the financing and deployment of a proposed recovery fund to pay for the post-pandemic reconstruction.
No one should think their joint proposal for a €500bn spending plan funded by EU debt issuance unlocks a quick and easy resolution to negotiations among national governments. All 27 member states need to be on board, as does the European Parliament, for their plan to turbo-boost the EU budget to reach fruition.
But Germany’s decision to back the idea of the EU borrowing money on a large scale and then handing it out as budgetary transfers to hard-hit parts of the bloc marks a huge shift by Berlin. Ms Merkel and Mr Macron’s announcement applies pressure on the so-called frugal states in the north to concede that at least part of the recovery fund should be distributed in the form of grants, rather than loans, to beleaguered countries.
It strengthens the hand of Ursula von der Leyen, commission president, as she tries to corral all 27 member states around a bold recovery plan.
It also responds to calls for Berlin to do more in the name of European solidarity following the damaging German constitutional court ruling this month calling into question European Central Bank bond-buying. And it detaches France from its earlier alignment with Italy and Spain over “coronabonds”, defusing some of the recent tensions between Paris and Berlin.
There are two key elements to the deal. Firstly, both countries want to empower the European Commission to borrow unprecedented quantities of money on the financial markets to create the €500bn recovery fund that will help support economic reconstruction efforts across the union.
The commission already has the ability to borrow money, but it has never been permitted to do so on this scale. Henrik Enderlein of the Hertie School in Berlin calls it a potentially “Hamiltonian moment”.
Secondly, Ms Merkel’s confirmation that the money would be treated as EU “budgetary expenditure” marked an important concession by Germany, which previously sided with those advocating loans to beleaguered states.
But many of the most difficult questions have been left open pending Ms von der Leyen’s expected announcement of a full set of budget proposals from the commission next week. Chief among them: if the money is paid out in grants, how exactly does the EU’s borrowing get repaid?
Mr Macron said that the answer is still — to put it gently — a subject of negotiation. The money “could be reimbursed by the member states by a repartition key that depends on their weight in the budget, by contributions that we could choose to decide on later, or by another mechanism”, he said.
Then there is the almost equally sensitive issue of who gets the money. Mr Macron and Ms Merkel were clear that it should go to the sectors and regions that need it the most. But the money is going to be spent through EU programmes, some pre-existing, others novel, in ways that Brussels has yet to explain.
Most critically, there is the political question: Austria’s chancellor Sebastian Kurz was quick out of the blocks on Monday to say that he had consulted with other frugal leaders and they are not thrilled:
The EU’s crisis response is now more than ever tied up with negotiations on the bloc’s next multiannual budget, known as the MFF. (The Franco-German plan is clear that the recovery fund is an adjunct to the budget.) The MFF has been the subject of a two-year war of attrition between the bloc’s capitals, and a hard road of compromise-building lies ahead to get a deal.
The last big joint Franco-German initiative in the realm of fiscal policy was the Meseberg Declaration in 2018, which was meant to pave the way to a significant euro area budget but which was ultimately watered down into near-nothingness by Germany.
This joint initiative has the potential to have far more powerful implications — if, that is, Berlin and Paris can convince their partners to come along for the ride.