During a press conference on May 18, French President Emmanuel Macron and German Chancellor Angela Merkel announced action that may at long last financially unite the eurozone with a proposed 500 billion euro recovery fund, which would distribute grants to the hardest-hit regions and sectors of the EU. Similar proposals for “coronabonds” have been floated by the especially hard-hit Southern European states, and until now, vetoed by the wealthier northern nations – Germany included. With this proposal, reckoned as a “game changer” by Macron, every man, woman, and child in the EU could potentially receive approximately 1,000 euros apiece.
This initiative would allow the European Commission to borrow money on the capital markets on behalf of all EU states against the security of the EU’s next seven-year budget. Repayment would be set for after 2027. In other words, the EU would raise debt jointly for the first time, bringing the eurozone closer to true fiscal union. It also represents a commitment to European solidarity; a stark departure from the lukewarm support offered after the sovereign debt crisis nearly a decade ago, and that thanks to austerity hampered growth and recovery for a decade, helping empower the growth of eurosceptic movements. The fund’s proposal needs unanimous support to pass, but opposition still remains from Austria, Denmark, Sweden and the Netherlands, which have been nicknamed the “Frugal Four”.
It is, nonetheless, a huge turn-around move for normally fiscally cautious Germany, whose chancellor has opposed similar proposals for years. But between the twin pressures of coping with COVID-19 and the recent ruling of the German Constitutional Court that the European Central Bank’s public assets purchases program was outside its mandate, Germany at long last has moved away from its conservative position. “When people write the histories of European integration in a few years’ time, it will be seen as a watershed,” said Andrew Watt, head of the unit for European economic policy at the Hans-Böckler Foundation. Underscoring Germany’s commitment to financial solidarity, Merkel said in a speech in April that “Europe is not Europe if it’s not there for each other in times of undeserved hardship.”
The proposal establishes four pillars, which include boosting overall healthcare, speeding up the green and digital transitions, getting tougher about screening Chinese and other non-EU investment in strategic sectors such as energy and ports, and the actual recovery fund itself. Southern European states, Italy and Spain, immediately supported the initiative, which while some distance from the oft-proposed “coronabonds”, is still a major step closer. When the news broke, markets rose while Italian borrowing costs fell – and French media had a field day. “I feel substantially more optimistic about the prospects of Europe” because of this proposal said Spanish MEP Luis Garicano, who notes that “if Macron and Merkel manage to get this plan through, it will have changed completely the narrative of Europe’s role in this crisis…I think this is something we will be proud of.”
European Commission President Ursula von der Leyen welcomed the proposal, saying in a statement that 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.” Later, when unveiling the European Commission’s version to the European Parliament, von der Leyen said, “Things we take for granted are being questioned. None of that can be fixed by any single country alone…This is about all of us and it is way bigger than any of us.”
The European Commission presented its own proposal for the recovery fund, named Next Generation EU, on May 27. The Frugal Four, under the leadership of Austrian Chancellor Sebastian Kurz and Dutch Prime Minister Mark Rutte, favour an alternative setup that relies on issuing loans, not grants. Meanwhile, Hungary and Poland are clamouring for larger shares of the payout than their neighbours, which is an additional factor that could threaten their needed votes to get this proposal passed. Nationalist and eurosceptic leaders across Europe have also come out against the proposal, opposing the expansion of the EU mandate it requires – including commitments from Member States to follow sound economic policies and join in on an ambitious reform agenda.
However the pressure that the pandemic poses on EU member nations might work in favour of the Franco-German joint proposal. “The Frugals, on paper, have a fairly strong position in the sense that this whole thing is located within the European Union budget,” said Watt. “In practice, though, none of them want to go down in the history books as the country that, faced with a pandemic, after all these countries have gone through, let them starve.”
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A Bailout, But Make It Green
An important aspect earmarked in the corona recovery fund proposal is the substantial green recovery package called the Just Transition Fund, which is set to pour resources into green sectors such as home energy efficiency and green heating, renewable energy, clean cars and car charging ports. Under this proposal, up to 60 billion euros will be invested in zero-emissions trains and the production of clean hydrogen, and over 1 million “green jobs” will be created, including options to help phase workers out of polluting industries and retrain them in new roles. A border tax on carbon-intensive industrial imports will also potentially raise over 14 billion euros, and provide nations that trade with Europe the opportunity to switch to more carbon-neutral options.
Increasing monies for the Just Transition Fund by more than five-fold is a measure meant to curb protest from coal-reliant states like Poland and Romania, who have resisted previous green measures and will now receive a larger investment to make the transition to clean energy sources.
The European Commission said in a statement that “public investments in the recovery should respect the green oath to ‘do no harm’.” But environmental activists worry that there are no hard guarantees against the money earmarked for the transition being funneled away into less planet-friendly projects, especially as the COVID-19 crisis has seen polluting industries lobbying hard for bailouts. In addition, the crisis has spurred part of the EU to lift climate conditions on aspects of its budget that have been stuck in limbo for three years – and the proportion of the overall budget assigned for climate-related projects remains stuck at 25 percent, despite many wishing to raise it.
Conditions of Distribution
Even if the proposal successfully passes, it remains to be seen if the fund will distribute monies effectively to where they are most needed. There are often strings attached to recovery funds – something Southern European nations know too well. Meanwhile, Europe already has nearly half a trillion euros in available funds for pandemic relief under the European Stability Mechanism, but tapping that money usually comes with strict conditions pertaining to economic policy, budget management, and reform. Greece suffered harshly over the last decade under just such conditions. Spain, Portugal, Italy, and Greece distrust the funds from the European Stability Mechanism for this precise reason, and Greece has outright refused to make use of pandemic funds that have onerous conditions due to the stigma. “Conditionality has become a very bitter pill, especially for Greece,” said Eileen Keller, an expert on European economic integration at the German-French Institute.
The Franco-German proposal does come with conditions and notes that access to the recovery fund “will be based on a clear commitment of Member States to follow sound economic policies and an ambitious reform agenda.” What that exactly entails has not yet been made clear. “We will see in the negotiations what conditions they attach to the grants — it won’t be a totally free lunch,” said J.H.H. Weiler, an expert on the European Union at New York University Law School.
The biggest difference between the existing mechanism and the Franco-German proposal lies in the strength offered in joint debt. Under the proposal, Member States receiving the funds – primarily Spain and Italy – would not need to repay the cash. Liability for the debt would be added to the EU budget, to which Member State contributions vary according to the size and prosperity of their relative economies.
This would provide a major boon to Southern European countries, many of which were hit especially hard with the coronavirus and face a steep road to recovery – one that many had only just reached after years of austerity. The move also stands in stark opposition to the EU’s initial lack of solidarity at the start of the pandemic, when Brussels was sluggish to supply countries such as Italy with much-needed medical supplies.
The clash between Germany’s courts and the European Central Bank, which circumvented the latter’s power, is also likely to have ramifications downstream. While it has prompted Merkel to join hands with Macron, it has also caused unease in Italy and Spain, where the ECB plays a crucial funding role. Head of the European Central Bank, Christine Lagarde, warned last week that the bloc’s collective GDP is likely to shrink by between 8 to 12 percent this year. Lagarde is likely to use a meeting with the ECB board this week to expand their 750 billion euro Pandemic Emergency Purchase Programme (PEPP), which has been important for many struggling European economies during the lockdown.
