A Federal Europe? Germany & France Back EU-Wide Debt

People are served at a restaurant terrace in Prague last Monday. (AP Photo/Petr David Josek)

(CN) — In what may mark a significant deepening of European integration, Germany and France agreed to bail out businesses and regions hit hard by the pandemic by setting up a $547 billion European Union-backed recovery fund to help stabilize Europe’s economy and keep the bloc from falling into dangerous discord.

The proposal is a U-turn for Germany, Europe’s financial and industrial powerhouse, because it backs the contentious idea of borrowing funds by the EU as a whole. To many observers, this is a game-changer and a step toward making the EU even more of a centralized federal state.

French President Emmanuel Macron and German Chancellor Angela Merkel announced the proposal for the recovery fund late Monday.

“More than ever, we need to benefit from the strength of acting together as Europeans and to join our forces in ways we have not used before,” the Franco-German agreement states. “We, France and Germany, are fully committed to live up to our responsibility for the EU and we will help pave the way out of the crisis.”

The leaders of Europe’s two biggest economies also called on the EU to be better prepared for health care crises by making sure it can make the medicines, vaccines and medical equipment it needs instead of relying on outside nations.

But it’s the economic recovery fund that is seen as a pivotal moment in European politics.

“A new chapter for Europe,” said the main headline of the Frankfurter Allgemeine Zeitung newspaper, a leading German newspaper.

Some commentators likened Merkel’s backing of joint debt to the pivotal changes pushed by Alexander Hamilton to take on states’ debts through a federal bank in the early years of the United States. The EU has a central bank, but individual countries are responsible for their own budgets and debts. Debt-sharing is not envisioned in EU treaties. Germans were told when the country adopted the euro currency in the 1990s that they would not end up taking on debt from other countries.

Under the new proposal, hard-hit regions and businesses would be eligible for recovery grants under this onetime recovery fund. The proposal says the fund would be used to foster modernization in Europe by bolstering green initiatives and making Europe more technologically advanced.

The plan, if approved by all EU members, may ease tensions that have been raging between northern and southern countries over how to deal with the economic damages caused by the pandemic. Along with much of the world, Europe is struggling with a steep economic downturn. There are concerns the crisis may even lead to the unraveling of the EU, a unique but uneasy transnational union of 27 European nations.

Southern countries like Italy and Spain, which are saddled with heavy debts and cannot borrow at low interest rates on international money markets, have been calling for the EU to band together in helping hard-hit areas.

But the idea of collective debt is anathema for some Europeans, especially for many Germans, Dutch, Austrians and Scandinavians, who say they should not bear responsibility for the debt racked up by other nations. Richer northern European countries accuse their southern neighbors of fiscal irresponsibility and worry that collective debt will lead to further spending; southern countries argue their economies have been weakened since the EU moved to adopt the euro currency.

Merkel characterized the deal as a “short-term” response to the crisis.

“Due to the unusual nature of the crisis we are choosing an unusual path,” Merkel said, according to Deutsche Welle, a German news broadcaster.

Merkel’s 180-degree turn on joint debt was met with mixed reactions.

Austrian Chancellor Sebastian Kurz rejected the proposal, saying he remained opposed to such an EU-wide borrowing scheme. He wants to issue loans but not grants. The Netherlands, Denmark and Sweden also are reportedly against the Franco-German plan.

The plan will need unanimous support from EU states, but Merkel’s backing may force others to go along with her. The proposal links the recovery fund to the EU’s seven-year budget, which is up for renewal.

The pandemic struck in the midst of contentious negotiations over the EU budget. The budget has become even more of a divisive topic due to a gap in funding with the exit of the United Kingdom from the EU. Typically, EU states send the equivalent of about 1% of their gross domestic product to fund the EU budget, which pays for things such as salaries of EU bureaucrats and politicians, border control force, farm subsidies and projects to improve infrastructure in less developed parts of Europe.

Still, the Franco-German agreement was viewed as a pivotal moment.

“We may have experienced a Hamilton moment,” Henrik Enderlein, an economist in Berlin, said in a newspaper column.

Many in Europe say the bloc needs to share debt to save the union from collapsing. Italy is the country that presents the biggest risk for the EU because its public debts are expected to far exceed 130% of its gross domestic product, leaving Italy at risk of defaulting on loans. Italy is struggling economically under strict spending limits set by EU deficit rules, creating a lot of resentment in Italy against the EU.

“For the time being, this Hamilton theory is rather wishful thinking,” a columnist at the Frankfurter Allgemeine Zeitung newspaper wrote. The columnist said it was far from certain whether the proposal will be backed by other EU states.

Still, the winds in Europe may be shifting toward deeper integration as the bloc looks toward a future without the U.K. and where it is caught in the middle of an escalating conflict between China and the United States. Increasingly, the EU is talking about its own sovereignty and its leaders say that fusing resources is needed to meet the challenges ahead.

Georgina Wright, a senior researcher at the London-based think tank Institute for Government, said the agreement proves EU leaders are prepared to do whatever it takes to preserve the bloc.

“I’ve been skeptical of those arguing that the EU’s handling of Covid shows that it is on the brink,” she said on Twitter.


Courthouse News reporter Cain Burdeau is based in the European Union.

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