Recovery Fund and European debt. Germany and France showing the way

Mattia Ceracchi
Credit: da Pixabay/Capri23auto

A decisive turning point in the European economic response to the Covid-19 crisis, a major step forward on the road to greater European integration and solidarity and, potentially, an historic moment towards the fiscal and political unification of the Old Continent. The initiative presented by Angela Merkel and Emmanuel Macron on 18 May, which outlines the short, medium and long term measures to respond to the economic consequences of the pandemic crisis and support recovery in the coming years, offers several levels of reading, but yet any possible interpretation cannot ignore a novelty in its historical significance. For the first time, Germany has dropped its opposition to the creation of common European debt on a large scale, which will be used to finance common spending by transferring money to single countries according to crisis needs.


France and Germany have drawn up the main features of the so-called Recovery Fund, which was decided upon at the European Council on 23 April. The Fund is aimed at preparing and supporting European economic recovery.

Berlin and Paris have proposed the creation of a €500 billion Fund, “ambitious, temporary and targeted”, to be set up under the Multiannual Financial Framework 2021-27, particularly by boosting a frontloaded MFF during its first years. Given the exceptional nature of the challenge that the Covid-19 pandemic is placing on the European economy, France and Germany would like to establish the Recovery Fund by allowing the Commission – here the double innovative nature of the proposal – to borrow money on the financial markets on behalf of the Union and distribute it to Member States through grants.

Therefore, Paris and Berlin propose – in line with a plan the Commission has been working on for weeks – that the Recovery Fund should be included in the long-term European budget. The Fund will finance the sectors and regions most affected by the crisis ” on the basis of EU budget programmes and in line with European priorities”. It will therefore aim to reinforce the “resilience, convergence and competitiveness” of European economies and increase investment to support the green transition and digital transformation by strengthening the research and innovation capacities of the EU. The Recovery Fund, as reported by the Franco-German document, should be geared towards meeting the challenges of the pandemic crisis and its consequences,  have a clearly specified deadline and provide for a binding repayment plan in the years to come.

Paris and Berlin recall that the Fund will complement the economic support measures already adopted at national levels and the € 540 billion package of measures approved by the European Council,  “based on a clear commitment of Member States to follow sound economic policies and an ambitious reform agenda”. France and Germany are pressing for a swift agreement on the MFF, specifying that negotiations in the coming months will build on the progress made up to February, and intend to work to ensure that the Recovery Fund can be activated “as soon as possible”.


Most observers agree that the Franco-German proposal on the Recovery Fund is a step forward on the path to greater European integration and, at the same time, they are cautious in considering the initiative to be the decisive turning point towards Europe’s fiscal and political unification.

According to the German economist Henrik Enderlein, the Paris and Berlin proposal may have marked a Hamiltonian moment for the European Union. The reference is to the compromise that Alexander Hamilton, US Secretary of the Treasury, helped to achieve in 1790, making the American states accept new national capital in exchange for the federal government taking over the war debts of the single states. Although the Franco-German proposal for the Recovery Fund has its weak points (first of all, the limited size of the fund), what matters most, according to Enderlein, is that Berlin and Paris agreed that during a crisis the Union could issue debt on a large scale. A “purely European” debt used to finance common expenses and transfer money to Member States according to the crisis needs. This is European fiscal policy and there is no national court that can veto it, thus,  Germany and France  are reaffirming that the EU can have its own federal identity and not just be a grouping of individual nation states.

The move of Paris and Berlin is not exactly a Hamiltonian moment, according to the Financial Times Editorial Board as the Franco-German proposal does not involve a permanent system of complete debt mutualisation and does not specify how the money borrowed by the Commission on the financial markets will be repaid. Nevertheless, the initiative represents an enormous advance in the quest for solidarity among EU countries, sending an unequivocal signal that the Franco-German axis is able to assert its political weight in favour of innovative and extraordinary measures and help the most vulnerable countries for the sake of European unity.

The Franco-German initiative is, above all, Angela Merkel’s milestone moment, Paul Taylor wrote in Politico. History does not often offer a second chance, writes Taylor, and “crossing the Rubicon of common borrowing”, Merkel took an enormous risk at home, challenging the high priests of fiscal and monetary orthodoxy in Frankfurt and Karlsruhe. But she secured her place in the pantheon of post-war German statesmen, finally realizing, like her predecessors, that a viable and stable Europe based on a social market economy is in Germany’s supreme national interest.


Although the Franco-German proposal is undoubtedly the decisive turning point in Europe’s response to the Covid-19 crisis, the definition of the Recovery Fund will have to adhere to the timeframe and rules of traditional European decision-making. The next move will be for the Commission to take on board the initiative of Berlin and Paris, to follow-up on the talks with national capitals in recent weeks and to put on the table on 27 May the new proposal for a common budget and recovery fund.

President Ursula Von der Leyen welcomed the Franco-German initiative, but her deputy Valdis Dombrovskis suddenly pointed out that the Commission’s proposal will not be a mere copy and paste of Merkel and Macron’s proposal. The move was welcomed by Italy and Spain, with both Giuseppe Conte and Pedro Sanchez calling the move “a first step in the right direction”, but was strongly opposed by the so-called frugal countries (Austria, Denmark, the Netherlands and Sweden), which immediately reiterated their opposition to the plan and, in particular, to the mechanism that Berlin and Paris suggested for the distribution of funding (grants). From 27 May onwards, the positions of the individual states will be voiced and debated officially. It will be up to the President of the European Council, Charles Michel, to reach a common agreement, involving the unanimous vote of the Council to approve the European budget and the recovery fund. Writing a new page in European history requires the consensus of all the Member States. None excluded.

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