France and Germany propose €500B innovation-focussed recovery fund

France and Germany on Monday proposed a €500 billion European recovery fund for the regions and industries hardest-hit by the COVID-19 pandemic, following months of disagreement over the best way to stimulate recovery.

French president Emmanuel Macron and German chancellor Angela Merkel, heads of the EU’s two largest economies, agreed the funds should be provided as grants. Under the proposal, the 27 EU countries would borrow together on financial markets.

The money, according to the Franco-German accord, is to be spent particularly on investment in the EU’s transition to a more green and digital economy, research and innovation, and to bolster preparedness for future epidemics.

"Due to the unusual nature of the crisis we are choosing an unusual path," said Merkel. The proposal is markedly different from the 2008 financial crisis, when governments were required to reimburse loans they received from the EU.

The €500 billion would be on top of the 2021-2027 EU budget, which will be worth close to €1 trillion. The huge grant injection is also intended to allay concerns about the ability of poorer EU member countries to support their industries through the crisis, while bigger countries offer massive financial assistance for national champions.

“This is big news,” tweeted Irish economist and broadcaster, David McWilliams. “EU given the green light to be brave and courageous and assertive in economic policy. Plus Germany mutualising debts. That’s new.”

Ireland’s prime minister Leo Varadkar called the plan a “financial diuretic”. European Commission president Ursula von der Leyen said the proposal "acknowledges the scope and the size of the economic challenge that Europe faces.” She will use the proposal as the basis of an EU recovery plan that will be presented to countries on May 27.

Health push

In addition to promoting a green recovery and increased digitisation, the Macron-Merkel plan calls for a greater push on “strategic health sovereignty” for Europe.

It proposes to “increase European capacities on research and development” for vaccines and treatments, with the goal of developing and manufacturing a coronavirus vaccine within the EU.

The EU would also keep common strategic stocks of drugs and medical products, such as protective equipment and testing kits, while “encouraging production” of these products on the continent.

EU states would coordinate procurement policies for future vaccines and treatments, “in order to speak with one voice with the pharmaceutical industry”.

The proposal also calls for a new “EU health task force” within the European Centre for Disease Prevention and Control, with a mandate to develop “prevention and reaction plans” against future epidemics.

Fiscal conservatives

The Macron-Merkel announcement follows weeks of disagreement over how best to rescue budgets left in tatters by the virus that has killed over 160,000 people in Europe.

Southern European countries and France and Ireland, had favoured grants, but the governments of the more fiscally conservative countries Germany and the Netherlands had rejected this, preferring the economic stimulus to come via loans. A first package of loans of up to €540 billion to struggling economies had already been agreed by the EU countries in early April.

The new fund will need agreement by the other 25 member states, although joint German-French accords usually pave the way for broader EU action.

Still, it will be a hard deal to swallow for the so-called “frugal” northern EU countries, including the Dutch, the Finns and the Austrians.

The concern for these countries is that the proposal would set a precedent for bailing out weaker EU countries, and eventually mean higher national contributions based on the size of each economy or some new taxes, or a combination of both.

The early signs are that Austria would take some convincing to come on board. "Our position remains unchanged. We are ready to help most affected countries with loans," Austrian chancellor Sebastian Kurz tweeted on Monday evening.