Vulcan Insight: France and Germany propose €500 Billion Eurobonds

May 21, 2020 |

German Chancellor Angela Merkel and French President Emmanuel Macron presented a joint initiative for a €500 billion coronavirus Recovery Fund to kickstart Europe’s economic recovery. In a surprise move for the German Chancellor, however, the fund is to be financed through mutual debt, i.e. Eurobonds.

The proposal is a u-turn by Germany which had been one of the most ardent opponents of any mutualisation of national debt at the EU-level over fears that it may be called upon should another Member State fail to keep its creditor commitments.

During the height of the financial crisis the concept of “Eurobonds” had been proposed as a means of giving southern European countries protection and assistance in the face of international financial markets. Germany’s senior political class, including Merkel and now-Commission President Ursula von der Leyen, strongly opposed any such concepts. Even as recently as April, when Italy called for common bonds to tackle coronavirus, Germany voiced its opposition.

However, with the depth of the economic crisis threatening the foundations of the EU and its Single Market, and political pressure from southern European countries, further fiscal and political integration emerged as the only way out of the crisis. No doubt, the recent ruling by the German Constitutional Court on the limits of ECB action in the absence of political action informed her decision.

Under the Franco-German proposal, the €500 billion-worth of bonds would be additional to the MFF, EU’s long-term budget. The Commission is to present a revised MFF proposal on 28 May and would be backed by Member States’ national MFF contributions. As such, national Governments would only be responsible for repaying their own contributions and would not be legally liable should another fail to repay their debts. Moreover, Member States would only be allowed to repay new, recovery-related debt and not use it to settle pre-crisis debt obligations. Europe’s two economic powerhouses also intend to tie the Fund’s spending to strong commitments to investing in digitising and greening Europe’s societies and industries.

While the modalities of the plan are yet to be further discussed at the EU-level with the Commission and other Governments, the plan foresees the Commission managing the distribution of the funds, in the form of non-repayable grants rather than loans, through the regular MFF process.

The promise of “free” money, however, faces strong opposition in Vienna, The Hague and Copenhagen, with the three countries set to publish a counterproposal in the coming days that will heavily focus on the need for loans and structural reforms to make southern European economies more resilient to economic shocks.

Compliments of Vulcan Consulting – a member of the EACCNY.