18 May 2020

Berlin buckles on bonds in €500B Franco-German recovery plan

Coronavirus has claimed a new victim — German frugality.

Berlin dropped its longstanding resistance to common European bonds, as Chancellor Angela Merkel and French President Emmanuel Macron agreed to a blueprint for a €500 billion recovery fund to help the countries hardest hit by the pandemic get back on their feet.

Under the plan, the recovery fund would be fully financed by debt issued by the EU and backed by all 27 members. The money would be distributed by the European Commission in the form of grants as part of the bloc’s normal budget and repaid over the long-term by the EU.

While the proposal was welcomed by the European Commission, it would require the approval of all EU member countries — which promises to be a tortured process — to be realized. Countries such as Austria, the Netherlands and Finland, which share German traditions of parsimony, are likely to oppose the plan, or at least try to.

Austrian Chancellor Sebastian Kurz wasted no time in making clear that the hardline frugal faction had not changed its opposition to grants for coronavirus-hit countries.

“The crisis that we are experiencing is unprecedented and it requires a response which is efficient, collective and above all European.” — Emmanuel Macron

“We are ready to help most affected countries with loans,” Kurz tweeted after consulting with his counterparts from Denmark, the Netherlands and Sweden.

Even so, the Franco-German accord marks a major breakthrough.

“Extraordinary circumstances call for extraordinary measures,” Merkel said at a press conference following a video call with Macron during which they sealed their agreement.

Macron struck a similar note.

“The crisis that we are experiencing is unprecedented and it requires a response which is efficient, collective and above all European,” he said. “The virus does not know any borders and has affected all of Europe.”

Berlin has resisted calls for so-called eurobonds for years, amid worries that common debt instruments would leave Germany holding the bag for other countries’ spending.

While those sensitivities haven’t dissipated (both Merkel and Macron avoided the term “eurobond” on Monday), the depth of the political and economic crises triggered by coronavirus appears to have convinced Merkel that Germany had no other choice if it wants to avoid further fissures in the EU.

Political leaders across southern Europe have been demanding more solidarity from Germany and other northern countries for weeks, warning that their populations, which have been walloped by coronavirus, would turn against the EU if more help isn’t forthcoming.

“Germany and France are standing up for Europe,” Merkel said.

Economists who have been pushing Germany to pursue bolder action cheered the plan, in part because it doesn’t rely on leverage or some other financial sleight of hand to inflate the amount of money available to recipients.

“It’s a pretty good proposal,” said Lucas Guttenberg, a former European Central Bank economist who is now the deputy director of the Jacques Delors Centre, a Berlin-based think tank. “It’s very unambiguous. It’s not financial wizardry, it’s straightforward — European bonds for EU expenditure.”

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