Germany and France unite in call for £450bn recovery fund

THE leaders of Germany and France have agreed on a one-off 500 billion-euro (£447 billion) fund to help the European Union recover from the coronavirus pandemic.

The proposal would add further cash to an arsenal of financial measures the bloc is readying to cope with the outbreak’s economic fallout.

Following a video call, German Chancellor Angela Merkel and French President Emmanuel Macron said the plan would involve the EU borrowing money in financial markets to help sectors and regions that are particularly affected by the pandemic.

Crucially, the money would be disbursed in the form of grants rather than loans, with repayments made from the EU budget, an unprecedented proposal that overcomes longstanding objections in Berlin to the notion of collective borrowing.

“Because of the unusual nature of the crisis we are choosing an unusual path,” Ms Merkel told reporters following the joint announcement.

Mr Macron said the proposal was a way “to make Europe move forward”.

“We must draw all lessons from this pandemic,” he said, insisting on the need for solidarity between EU member states.

He acknowledged that a French-german deal alone “doesn’t mean an agreement from the 27’’.

The EU’S executive Commission would make its own proposal to EU member states and “we hope that the French-german deal will help”, he said.

European Commission president Ursula von der Leyen welcomed the move. “It acknowledges the scope and the size of

Young people gather for a drink outside a bar in the Trastevere district of Rome yesterday as Italy’s restaurants and churches reopened in a fresh wave of lockdown easing and a gradual return to normality, following a strict two-month lockdown

the economic challenge that Europe faces, and rightly puts the emphasis on the need to work on a solution with the European budget at its core,” she said.

There has been concern in European capitals that the pandemic and the bloc’s initial uncoordinated response to it could boost anti-eu sentiment in member states.

Ms Merkel said it was important to ensure that all EU countries could respond to the economic challenge “and that requires this unusual, one-off effort that Germany and France are now prepared to take”.

“The goal is for Europe to emerge from the crisis stronger,” she continued.

National parliaments will have their say on the proposal, which is also likely to run into strong resistance from fiscal hawks in the bloc such as Austria and the Netherlands.

Ms Merkel expressed cautious optimism that the agreement between Berlin and Paris would win widespread support.

“I believe that if Germany and France send a signal, that’s something which encourages the quest for consensus in Europe,” she added.

So far, EU countries engage in only limited common borrowing, for instance through the European Investment Bank and the union’s bailout fund for crisis-hit governments, the European Stability Mechanism, but require eventual repayment by member states.

By using the financial clout of the whole bloc, bondholders get a high degree of certainty they will be paid back, meaning the EU can borrow on more favourable terms than individual member states, though at the price of collective liability.

The coronavirus crisis has raised concerns that Italy, which already has a debt pile equal to 135% of its annual economic output, could come out of the recession with so much added debt that bond investors would be reluctant to continue financing its debt, which could trigger a financial crisis.

Ms Merkel noted that combined with an earlier stimulus package of 540 billion euros based on loans and guarantees, the EU member states were mustering a trillion euros at the EU level, and a total of 3 trillion euros when combined with the multi-year EU budget and measures agreed at the national level.

The total is equivalent to almost 20% of the EU’S 2019 economic output.

Mr Macron and Ms Merkel agreed that spending from the recovery fund would focus on areas that would benefit most from future investment, including digitalisation, the green economy and pandemic resilience in the health sector.

❝ I believe if Germany and France send a signal, that encourages the quest for consensus in Europe