(Bloomberg Opinion) -- 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.
Chancellor Angela Merkel and President Emmanuel Macron have tabled a joint plan that includes, among other items, a shared 500 billion-euro ($543 billion) “recovery fund” for the EU. Berlin and Paris are front-running the European Commission, which is meant to present its own proposal for the fund next week. The two leaders are sending a clear signal to the more hawkish euro area members — such as the Netherlands and Austria — that the worst-affected nations need more than financial wizardry to get through this emergency.
The 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%.
There are many details that still need to be ironed out. For a start, while Germany and France are the EU’s dominant members, they still need to bring everyone else on board. The Dutch and the Austrians are traditionally opposed to the idea of grants, since they fear the money would be misspent. The inevitable negotiations may reduce the size and scope of these transfers, or demand stricter conditions from recipients.
However, if the EU does accept this plan without watering it down too much, the proposal would have significant long-term implications. The “recovery fund” is being presented as an extraordinary, one-off facility. However, it could be the seed for a larger EU budget, based not just on individual contributions from member states but also on new EU-wide taxes. If that happened, the euro zone would move somewhat closer to a “fiscal union,” which is needed to put it on a more solid footing.
The onus will ultimately be on the weaker member states such as Italy and Spain, and on how they use any money. Throughout the pandemic, they have made the case for more European help, arguing that the virus was no one’s fault. As France and Germany promote the cause of more grants, individual governments must show they can allocate their funds intelligently, helping those most in need while boosting the growth potential of their economies. Solidarity won’t last long without responsibility.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
©2020 Bloomberg L.P.
