Germany and France are trying to save the European Union
On Monday, Germany and France presented an initiative aimed at saving the European Union from the worst crisis in its history. Overcoming deep national divisions that have stalled progress on a pandemic recovery fund.
After the talks via videoconference, the German Chancellor Angela Merkel and French President Emmanuel Macron proposed the creation of a € 500bn ($ 543bn) recovery fund to help the EU countries and sectors hardest hit by the coronavirus pandemic.
Merkel said the crisis threatens the cohesion of the European Union. According to her, the initiative of the two leading European economies is aimed at promoting consensus among all 27 EU member states..
«To support a sustainable recovery that will accelerate growth in the EU, Germany and France are proposing an ambitious, temporary and targeted recovery fund», – said Merkel.
Europe’s ability to recover from its worst economic shock since the Great Depression has been jeopardized by old geopolitical tensions.
Disagreements between member countries slowed down the process of creating a recovery fund, which the European Commission hoped could raise at least € 1 trillion ($ 1.1 trillion) to restore the regional economy.
Charles Michelle, President of the European Council of National Leaders of the EU, called for the package to be put into effect by June 1. But on May 6, the commission was unable to present its final proposal..
Disagreements over whether the fund should provide loans or grants to the hardest hit countries, such as Italy and Spain, have stalled the process. Grants or direct remittances imply a certain amount of burden on all EU members, which has long been opposed by states such as the Netherlands, Austria and Germany..
Merkel and Macron confirmed that in accordance with their proposal, the European Commission will borrow money to stimulate the EU economy and channel funds through the EU budget to the most affected regions and sectors..
«Given the exceptional nature of the Covid-19 pandemic for economies in the EU, France and Germany are proposing to allow the European Commission to fund such recovery support by borrowing in markets on behalf of the EU», – explained Merkel.
Macron said the EU recovery fund will benefit from the support of the European Central Bank. While the fund had to be repaid over time, the burden does not fall solely on those who need help the most..
«These 500 billion euros must be repaid», – said Macron. But «not beneficiaries», he added.
Analysts say the deal has made progress after weeks of disagreement that risk fueling anti-European sentiment in countries like Italy, hit by the pandemic. By offering grants rather than long-term loans at low interest rates, some of this political negativity can be removed.
«While the recipients of the funds will have to shoulder their share of the additional contributions to the EU budget to service the EU debt, their net payments will be less than the total amount of grants they will receive», – written by the chief economist Berenberg Holger Schmiding in research note.
But the Franco-German initiative still needs to be turned into a formal proposal from the European Commission and agreed by all 27 EU member states, possibly at a summit on June 18.
«While it will not be easy to convince the governments of the Netherlands, Denmark and Sweden to support this idea, we expect the Franco-German proposal to become the basis for an agreement in the end.», – added Schmiding.
The European Commission warned earlier this month that the European Union’s economy will contract a record 7.5% this year, and the fall could be even sharper in 19 countries that use the euro.
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This is a much sharper downturn than the region experienced in the aftermath of the 2008 global financial crisis, and a more pessimistic outlook than the International Monetary Fund‘s forecast in April..
President of the European Commission Ursula von der Leyen welcomed «constructive proposal from France and Germany».
EU Council President Michel called it «a step in the right direction» for the EU.
«I applaud the efforts of Germany and France to find a common understanding about the recovery fund, ”Michel wrote. – I call on all 27 member states to work in a spirit of compromise as soon as the European Commission makes a proposal».
EU officials have warned that damage could be even greater than predicted if the pandemic is more severe and prolonged than currently assumed.
EU leaders have already taken urgent bailout measures worth at least € 500bn ($ 538bn) – a package that includes payroll subsidies to prevent layoffs and loans to businesses.