Unanimous agreement by the EU 27 on a very welcome €500 billion Franco-German coronavirus recovery fund proposal will not be easy to achieve when EU leaders meet on May 27th. Austria, on behalf of the "frugal four", has already expressed doubts.
But the European Commission, working on reshaping its own currently deadlocked multiannual budget (MFF), has strongly welcomed the proposal, in which it and its budget will play a central part. Ireland, which has also recently been pressing the case for “coronabonds” and the mutualisation of debt between member states in the face of the pandemic’s economic tsunami, will certainly want to row in. And rightly so.
The French and Germans are proposing to allow the commission borrow €500 billion to be spent as part of the MFF in grants to member states and sectors most affected by the pandemic. To allow the commission to turbo-boost the EU budget, the two countries propose a temporary doubling, to 2 per cent of EU gross national income, of the union’s “own resources”, the legal ceiling on the amount the EU can spend in a year. The fact that the money will be distributed as grants and not loans marks a major concession on Chancellor Angela Merkel’s part, and the proposals are an important break with German economic orthodoxy. The chancellor has again demonstrated a courageous willingness to lead Europe from the front, as she did in opening the German borders to refugees in 2015.
So-called eurobonds
Berlin has resisted calls for so-called eurobonds for years – both Merkel and French president Emmanuel Macron avoided describing their proposal in those terms – concerned that common debt instruments, "mutualised debt", would leave Germany holding the bag for other countries' spending, a "moral hazard" allowing profligate member states to escape the consequences of fiscal ill-discipline .
And while embracing economic union, particularly its monetary dimension, Berlin has explicitly rejected the idea of turning the EU into a social union, specifically a “transfer union”, in which the richer states pour resources into the poorer to level the economic and social playing field. To a degree the EU already does this through its structural funds, but we are talking about a different order of magnitude.
“Extraordinary circumstances call for extraordinary measures,” Merkel said on Monday. They do. And the Franco-German proposal is potentially as important politically as it is economically, a concrete expression of EU solidarity that many citizens currently find wanting. It can be a turning of a page in the union’s history, which some are comparing already to a “Hamilton moment” – the moment when Andrew Hamilton and the federal government assumed the debt incurred by the states during the American Revolutionary War.