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ONE FOR THE BOOKS

Because of Covid-19, France and Germany just made EU history

Angela Merkel walks by a television screen featuring Emmanuel Macron.
Kay Nietfeld/Pool via REUTERS
The history books could remember this pandemic as a watershed moment for the future of European integration.
  • Annabelle Timsit
By Annabelle Timsit

Geopolitics reporter

European Union

The leaders of Germany and France took a step this week towards a form of integration that has for decades eluded the European Union. It may well save the bloc, and its common currency, from an untimely demise—and it’s all thanks to the Covid-19 pandemic.

In a joint press conference on Monday (May 18), Angela Merkel and Emmanuel Macron proposed a €500 billion ($549 billion) “recovery fund” that would distribute grants to the hardest-hit regions and sectors of the EU. That’s a lot of money—enough, in fact, to give roughly €1,000 to every man, woman, and child in the EU.

Under this plan, the European Commission could borrow money on capital markets on behalf of the 27 EU member states against the security of the union’s next seven-year budget, to be paid back sometime after 2027. This means that all EU states will raise debt jointly.

The proposal needs the unanimous support of EU members to pass, and it’s already facing opposition. But it brings the euro zone closer to a “fiscal union,” and will generate investment in green technologies and research, which are top strategic priorities. What it represents, experts say, is the political will to fund the European endeavor and avoid the mistakes made after the 2008 financial crisis that led to the Eurozone debt crisis.

“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 unit for European economic policy at the Hans-Böckler Foundation, a research group backed by the Confederation of German Trade Unions.

A German turnaround

The series of events that led Angela Merkel to that podium in the German Chancellery on Monday, announcing a historical bailout (link in French) whose very nature she has rebelled against for years, is extraordinary.

It starts with a pandemic, which wiped out the euro zone’s already fragile economic recovery. Overly-leveraged southern countries—tragically, some of the worst-hit by the pandemic—were unable to raise funds for large-scale emergency support spending, echoing what happened after 2008. Underscoring the risks to the EU, Macron emphasized the need for “financial transfers and solidarity, if only so that Europe holds on,” in an interview with the Financial Times in April (paywall).

Adding to the pressure, on May 5, in a courtroom in the German city of Karlsruhe, the judges of the Constitutional Court ruled in a case first filed four years ago that the European Central Bank’s public assets purchases program was outside its mandate. These types of ECB programs have been the glue that’s kept the euro zone together, by making sure that smaller European countries are able to get access to funding and avoid default. The German court ruling was a serious challenge to the ECB’s authority on monetary policy and, with it, the EU’s authority over national courts.

Historically, the German government has also been a roadblock to closer fiscal ties in Europe. The country has always rejected the idea, supported by southern European countries and France, of mutualizing debt to support struggling EU members. Alongside Austria, Sweden, the Netherlands, and Denmark—a group of fiscally conservative countries known as “the frugals”—Germany never wanted to be on the hook for southern European overspending.

But in a speech in late April, when it became clear that this pandemic would last a long time, and that some euro-zone countries might not survive it, Merkel endorsed the idea of an ambitious recovery fund financed through joint debt, telling lawmakers, “Europe is not Europe if it’s not there for each other in times of undeserved hardship.” (It probably helped that she is not running for a fifth term.)

The German Constitutional Court’s ruling finally brought Germany from the side of the “frugals” to the side of France, Spain, Italy. “It’s a little revolution for German-Europe policy,” said Jonathan Hackenbroich, a policy fellow for economic statecraft at the European Center on Foreign Relations (ECFR).

Uphill battle

The road that got Germany on board with the EU recovery fund was long and difficult, and it doesn’t end here. The European Commission still has to present its own proposal (paywall) for a recovery fund on May 27. The “frugals,” led by Austrian chancellor Sebastian Kurz and Dutch prime minister Mark Rutte, favor issuing loans, not grants, and have committed to presenting a counter-proposal to the Franco-German initiative in the coming days. The leaders of Hungary and Poland are also clamoring for their countries to receive more aid than their coronavirus-stricken neighbors.

This endeavor might show that “Franco-German agreement isn’t enough anymore,” said Hackenbroich. “The whole beauty of the Franco-German duo was that they are very different, especially on economic policy, but when they found a compromise, it would work for most of Europe with some tweaks here and there.” Since the recovery fund is pegged to the 2021-2027 budget, which is still being negotiated and requires unanimous consent, a country could break ranks and derail the project. But while there’s been opposition to the proposal, that doesn’t mean it won’t happen.

“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, the German macroeconomist. “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.”

Still, Luis Garicano, a European parliamentarian from Spain and vice president of the Renew Europe group, worries about the proposal getting watered down in negotiations with 25 other member states. The solution, he argues, is for Germany and France to say that that, if they can’t make a deal with everyone, “then they are going to make a deal with the countries that want the deal. And once that’s on the table, then everybody falls in line.”

What this means for the EU

When Peter Chase, a senior fellow at the German Marshall Fund of the United States, read the Franco-German proposal for an EU recovery fund, his first thought was “finally, they get it: If they want Europe to do things, they’ve got to give Europe resources.”

It’s hard to overstate how significant this move is for a union that has historically been content with a conservative and bureaucratic status quo. It comes at a difficult time, as populist and far-right parties, with their strident nationalism and euroscepticism, gain power across the continent. They’ve largely come out against this proposal, which makes sense, given that most are opposed to expanding the EU’s mandate.

There’s also a lot of bitterness in Italy, Spain, and Greece, about the decade of austerity that followed the debt crisis. Even this proposal could boost support for far-right parties, according to ECFR’s Hackenbroich, because it comes with conditions—notably “a clear commitment from member states to follow sound economic policies and an ambitious reform agenda.” And that, he said, could “remind people…[of] the euro crisis, having the EU tell them how to save money.”

There are still some questions surrounding the recovery fund, especially how the loans will be paid back and how the money will be distributed. It also stops short of the permanent debt mutualization structure some supporters of a strong fiscal union have called for. But proponents say it’s necessary and in line with European ambitions. For example, the proposal emphasizes that member states should invest the money in green and digital projects, as well as research and innovation. That’s in line with the goals the EU set out for itself before the pandemic hit, including the European Green New Deal, which aims to make Europe carbon-neutral by 2050.

“I feel substantially more optimistic about the prospects of Europe” because of this proposal, said the Spanish MEP Garicano, who argues 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,” he said.

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