FRANCO-GERMAN EURO RECOVERY FUND AND ITS IMPLICATIONS

The €500 billion ($547 billion) COVID-19 recovery fund proposed by German Chancellor Angela Merkel and French President Emmanuel Macron has been hailed as a turning point for the European Union – and for good reason.

Beyond its concrete economic implications, the proposal reaffirms a commitment to solidarity by the EU’s two largest economies, thereby setting the stage for genuine progress toward fiscal union, according to Italian economist Lucrezia Reichlin.

Writing for Project Syndicate, Ms. Reichlin said that the basic proposition is straightforward : The EU would borrow in the market at long maturities with an implicit guarantee from the common budget. It would then channel borrowed funds to regions and sectors hardest-hit by the COVID-19 crisis.

She said “here is plenty left to be negotiated, such as where to offer loans versus grants, what kind of conditionality to apply to projects, and the extent to which aggregate fiscal capacity should be increased. Opposition from the so-called Frugal Four – Austria, the Netherlands, Finland, and Sweden – will undoubtedly necessitate some compromise.”

“But, leaving these considerations aside, and while we wait for the proposal due from the European Commission this week, it is important to consider the potential long-term implications for the EU if some version of the Franco-German proposal is implemented.

“In particular, where does this leave the debate about European fiscal capacity, and monetary- and fiscal-policy coordination in the eurozone? Is this a decisive step in that direction – a moment as consequential as the declaration in 2012 by then-European Central Bank President Mario Draghi that the ECB would do “whatever it takes” to save the euro? Or is it a pragmatic response to today’s crisis, which defines the limits of risk-sharing that is possible to achieve, under current conditions?”

Reichlin postulated. #COVID19