Covid-19: France and Germany propose €500 billion EU recovery fund

In a joint video conference, Macron and Merkel called for the creation of a 500-billion-euro ($543 billion) recovery fund able to offer grants to the countries and regions hardest hit by the coronavirus crisis.

The leaders of France and Germany also said they were proposing to authorise the European Commission to borrow money on financial markets in the European Union's name, while at the same time respecting EU treaties.

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The two biggest EU countries, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow the money on behalf of the whole EU and spend it as an additional top-up to the 2021-2027 EU budget that is already close to 1 trillion euros over that period.

Macron said this was the first time France and Germany agreed to let the EU raise debt jointly, calling this a "major step foward". He insisted that money from the recovery fund would be made available in the form of grants and not loans. 

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"That's a real change in philosophy," the French president said. "I believe this is a very deep transformation and that's what the European Union and the single market needed to remain coherent. It's what the euro zone needs to remain united."

Still, grants from the proposed recovery fund will have strings attached — they are to be "based on a clear commitment from Member States to follow sound economic policies and an ambitious reform agenda," according to the Franco-German proposal.

Merkel said that in all, EU member states and the bloc's executive would mobilise a combined sum of three trillion euros to cushion the economic impact of the coronavirus pandemic.

Europe is just beginning to emerge from lockdowns put in place to slow the spread of the coronavirus, which has taken a huge bite out of national economies. But divisions among EU members on how to craft an overall response have hampered comprehensive action so far.

Macron said on Monday that the Franco-German initiative was the fruit of extensive talks with other EU member states, including Italy and the Netherlands, which have been at loggerheads in recent weeks.

The recovery debate has again exposed the bloc's divide between northern countries leery of exploding budget deficits, and hard-hit southern countries like Italy and Spain that are desperate for more spending.

"We will consider proposals and ideas like the French and Germans have done. Eventually there must be a proposal from the European Commission and that will be the starting point for the discussions," said Stephan Schrover, a spokesman for Dutch Prime Minister Mark Rutte.

The eurozone economy overall is forecast to contract by a whopping 7.7 percent this year, but the damage could be worse in Italy and Greece, which could see their economies shrink by nearly 10 percent, prompting a cascade of bankruptcies and job losses.

The European Commission is to present its own proposal for a Recovery Fund linked to the EU's next long-term budget on May 27 and said it welcomed the initiative from Paris and Berlin.

"It acknowledges the scope and the size of 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," Commission head Ursula von der Leyen said, commenting on th Franco-German proposal.

"This goes in the direction of the proposal the Commission is working on which will also take into account the views of all member States and the European Parliament," she said.

The European Parliament has called in a resolution for governments to assign new, dedicated revenue streams to the EU budget so that it can pay back the money the Commission would borrow to pay for the grants.

Among possible new revenue sources for the EU budget, the parliament has listed a plastics tax, a digital tax, a financial transactions tax and a levy on goods imported into the EU from countries that have lower CO2 emissions standards than the EU.

The European Central Bank has also promised to do "whatever is necessary" to help weather the crisis, including a 750-billion-euro scheme to buy government bonds for cash-strapped nations.

The bank's head Christine Lagarde welcomed the plan unveiled by Macron and Merkel on Monday, saying it would bring much-needed relief to the worst-hit EU countries.

"The Franco-German proposals are ambitious, targeted and welcome," Lagarde said in a joint interview with four European newspapers.

The proposals "open the way for long-term borrowing by the European Commission and above all allow significant direct budgetary aid to the member states worst affected by the crisis," Lagarde told newspapers Les Echos, Handelsblatt, Corriere della Sera and El Mundo.

(FRANCE 24 with REUTERS, AFP)