If the Franco-German plan for a 500 billion-euro recovery fund isn’t watered down, it could move the euro zone a bit closer to a fiscal union.
Throughout the pandemic, euro zone governments have lagged behind the European Central Bank in charting a path out of the economic crisis. Germany and France have suddenly decided they want to lead the way…
he Franco-German proposal would see the Commission raising the money on the financial markets and then distributing it in the form of grants. This would be a remarkable change for the EU, whose response so far has been that each country should take on more debt individually. In Merkel’s and Macron’s plan, each member of the bloc will contribute depending on its share of the EU budget, which in turn hinges on the relative size of national incomes. But the Commission would disburse the money as it saw fit. Essentially, this clears the way for fiscal transfers from financially secure countries to those less fortunate — and is a tacit admission that Europe needs to make a statement about all being in it together on Covid-19.
The difference with the continent’s other emergency instruments is striking. The European Stability Mechanism, the euro zone’s rescue fund, has offered loans in the past to countries in crisis in exchange for a package of austerity and structural reforms. The pandemic has pushed Europe’s leaders to vastly improve the ESM’s lending terms and to let it offer money for the strengthening of national health systems without the usual conditions. However, these are still loans, meaning they’ll have to be paid back eventually.
With their new proposal, Germany and France appear to have crossed the Rubicon on sharing the financial pain from the pandemic. The shift by the Germans from their usually conservative position is all the more noteworthy, and the financial markets certainly see it that way. Italy would be a clear beneficiary of the fund. Its 10-year bond yields dropped by nearly 20 basis points on the news, to 1.67%.