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Dolores Utrilla
19th May 2020
Banking & Finance Covid-19 Institutional law

Insight: “A way out of the crisis? The Franco-German proposal for a 500 billion-euro European Recovery Fund”

The question of whether reinforced support to the EU Member States that have most severely been affected by the coronavirus outbreak should take the form of grants or loans has caused a fierce political controversy between northern and southern Member States. The issue is a crucial one for the sustainability of the EU itself, since grants presuppose increased solidarity by the less affected countries, whilst loans would increase the debts of Member States with economies already weak before the pandemic, thereby widening the gap between the strongest and weakest economies in the common market. Over the last few weeks, successive negotiation rounds have stalled, with the Member States’ positions split into two blocks: those in favour of loans (headed by Germany, the Netherlands, and Austria) and those in favour of debt mutualisation (France, Spain, and Italy, among others).

A way forward seems to have opened up now. In an unprecedented joint initiative, yesterday German Chancellor Angela Merkel and French President Emmanuel Macron presented a proposal for a European Recovery Fund, with an approximate budget of 500 billion euros, to be distributed in the form of grants among the EU Member States that have most severely been affected by the COVID-19 outbreak, with repayments made from the EU’s overall budget. The plan would involve the EU borrowing money in financial markets to help sectors and regions that are particularly affected by the pandemic. Additionally, the joint proposal includes suggestions for fostering the development of an ‘EU Health strategy’, accelerating the Green Deal and digitisation, strengthening the economic and industrial resilience and sovereignty of the EU, and giving new impetus to the internal market.

The Franco-German proposal consists of allowing the European Commission to finance economic recovery support by raising funds on the markets on behalf of the EU, ‘subject to a legal basis that fully respects the EU Treaty and budgetary framework as well as the rights of national parliaments’. It will be a complementary derogation, anchored in the EU’s Own Resources Decision, with a clearly defined scope and time limit and linked to a binding repayment schedule beyond the current Multiannual Financial Framework, via the EU budget.

This is a highly significant compromise between the German position, initially opposed to the idea of nations sharing debt, and the French prior proposals, which sought a fund of a trillion euros. According to Merkel and Macron’s joint statement yesterday, ‘Germany and France are fully committed to their responsibility for the EU and together we will help pave the way out of the crisis’.

President of the European Commission Ursula von der Leyen has welcomed the Franco-German proposal and stressed that it is in line with the one the EU executive is working on. In this regard, the Commission has issued a statement recalling the convenience of basing the economic recovery strategy on three different pillars that operate together. These pillars are: (i) the immediate measures already adopted to enable Member States to support the economy, in the form mainly of the flexible State Aid framework and the triggering of the escape clause of the Stability and Growth Pact, as well as the support provided by the ECB and the EIB; (ii) the 540 billion euros of loans in various forms that are the heart of the Eurogroup’s response, including the Commission’s SURE Programme; and (iii) the Multiannual Financial Framework topped up by the Recovery Instrument, which was presented to the European Parliament last week and that the Commission will adopt soon.

European Central Bank President Christine Lagarde has also welcomed the proposal. In an interview yesterday, President Lagarde stated that this initiative is proof of the spirit of solidarity and responsibility that the EU needs to overcome the ongoing crisis, and stressed that there cannot be greater financial solidarity unless there is also greater coordination of decision-making at the European level.

Now, it remains to be seen whether Member States of the Eurozone and their parliaments agree on the proposal. Austrian Chancellor Sebastian Kurz has already announced that his country remains opposed to the idea of grants, and Dutch Finance Ministry spokesman Jaap Oosterveer said the Ministry was studying the plan and had no immediate comment. On the other side, Italian Prime Minister Guiseppe Conte and Spanish President Pedro Sánchez welcomed the Franco-German proposal as an important first step in the right direction and in the line of their previous proposals. Although the partnership of France and Germany is a major step towards EU-wide consensus, the issue of burden-sharing remains controversial among many Member States.


Dolores Utrilla is Associate Professor at the University of Castilla-La Mancha and Assistant Editor at EU Law Live.


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