Franco-German plan for European recovery will face compromises

When France and Germany announced a plan to raise €500bn (£448bn) on financial markets to fund a European coronavirus recovery plan, leaders sought to underscore the magnitude of the moment.

The French president, Emmanuel Macron, hailed “a real change of philosophy”, with the plan for the European commission to borrow money on behalf of the entire EU and issue grants to the most stricken industries and regions. Angela Merkel, the German chancellor, declared: “The nation state has no future standing alone,” and the German finance minister, Olaf Scholz, evoked the legacy of the US founding father Alexander Hamilton, who helped to transform the US into a true political unit with his scheme for the national government to take on debts accrued by individual states.

The head of the commission, Ursula von der Leyen, will on Wednesday seek to turn what was billed as a revolution and long-overdue constitutional moment for the EU into a detailed plan that commands the support of 25 other member states. Her paper is expected to fall into two parts: a revamped EU budget for 2021-27 that fills the €10bn-a-year Brexit hole, as well as a recovery plan to pull Europe’s economies out of what is forecast to be the worst collapse since the 1930s Great Depression. Spending will be heavily tilted to the European green deal, the pre-coronavirus plan to tackle the climate emergency, as well as boosting digital technology and research.

Dalia Grybauskaitė, the president of Lithuania between 2009 and 2019, said the Merkel-Macron plan was an “unavoidable step” for the EU given the scale of the economic shock. “We are going closer to fiscal union and that means deeper European integration,” she told the Guardian.

While Alexander Stubb, a former prime minister of Finland, isn’t wholly convinced by comparisons with Hamilton – “I have a feeling that some people are basing their view a little bit too much on the play and not on the reality” – he described the Franco-German plan as “a very significant initiative” and “symbolically very important to portray solidarity”.

The joint statement by Merkel and Macron came as a surprise in Germany even to the chancellor’s party colleagues, many of whom had eyed Von der Leyen’s initial proposal for a corona recovery fund with suspicion.

But Merkel has had three domestic factors playing in her favour: her government’s handling of the pandemic has led to popularity ratings for her and her government rising to historic highs, while the party most vocally opposed to any form of pan-European burden-sharing, the far-right AfD, has been riven by infighting.

Finally, the chances of resistance to the Franco-German proposal from within her own CDU party have been considerably reduced by delegates not being able to meet in person. CDU meetings were held online during the lockdown, minimising room for plotting in dark corners.

Not all Merkel watchers believe that the recovery fund amounts to a policy U-turn, and within her party Merkel’s allies have been quick to emphasise to fiscal conservatives that the recovery fund would retain a characteristically CDU signature, with bonds that are time-limited and tied to specific projects.

Jana Puglierin, who heads the Berlin offices of the European Council on Foreign Relations, said that if there was a moment that would have changed Merkel’s mind about accepting more burden-sharing, it would have been 5 May, when Germany’s constitutional court in Karlsruhe questioned the legality of the European Central Bank’s bond-buying programme.

“The German government has form when it comes to tolerating policies it rhetorically opposes,” said Puglierin. “The Karlsruhe ruling made something impossible for Germany that it had long tolerated […] There was a sudden pressure to come up with an alternative.”

Germany’s conversion to joint European debt means the EU’s four largest nations are now united on a core economic principle. Italy’s prime minister, Giuseppe Conte, however, facing a steep 9.5% drop in output this year, has complained that the amount falls short of what is needed to keep the European economy afloat. Spain’s prime minister, Pedro Sánchez, who has previously called for a €1.5tn recovery plan, described it cautiously as “a positive step in the right direction”.

Luis Garicano, an economics professor who represents the Spanish centrist Ciudadanos party in the European parliament, says he worries that the Merkel-Macron plan will become “hopelessly damaged” in the long hours of negotiations between EU leaders. “That is the risk as it goes through all the negotiations, that this clear recognisable plan becomes this messy Christmas tree construction.”

Merkel and Macron had barely left their respective podiums before a warning shot was fired by the EU’s self-styled “frugal four” nations, via Austria’s chancellor, Sebastian Kurz. Austria, Denmark, the Netherlands and Sweden revealed their own plan at the weekend, calling for a recovery fund based on loans “not leading to any mutualisation of debt”.

Meanwhile, there are worries among beneficiaries of EU funds that money will be redirected south rather than east. The Czech prime minister, Andrej Babiš, told national media it would be “unfair to be penalised for being successful”, referring to the low number of coronavirus cases in his country.

These opening gambits raise the prospect of another euro stalemate, yet Grybauskaitė, a veteran of EU crisis summits, is confident there will be a compromise. She said there had been an important change since February, when leaders had failed to agree a seven-year budget. “Germany agreed to pay a large amount of money to save the European economy. That’s as simple as it is … How can you block it?”

Stubb, who served as his country’s finance minister during many bailout meetings, also expects a compromise that neither fully satisfies north, south or east, nor matches the original Franco-German proposal. For him, it’s a classic European story, following the arc of crisis, chaos and ending in “suboptimal solutions” – another messy end for a union that is neither the utopia of its admirers nor the dystopia of critics.

“This will be a good solution but of course it will be suboptimal because by definition that is what European decisions are.”