The Cost of Integration

Franco-German EU "Recovery Fund" agreement under criticism. German business circles urge stabilization of the Union.

BERLIN/PARIS/ROME (Own report) - The Franco-German agreement on the EU's "Recovery Fund" to strengthen the economy in the Corona crisis is being met with criticism from two sides. Whereas several EU net contributors are unwilling to accept the allocation of payments from the fund as grants to those countries hardest hit by the pandemic; Italian Prime Minister Giuseppe Conte points out that the proposed payments are most likely not enough to help Italy to overcome the crisis. German Chancellor Angela Merkel reduced French President Emmanuel Macron's proposed amount of resources in the fund, from his €1.5 trillion, down to €500 billion. Observers consider that allocating the resources as grants is almost without alternative given Berlin's refusal to agree to issue "Corona bonds" and the German Constitutional Court's ruling on the ECB. Influential German business circles warn that Germany and the EU could lag behind China and the USA, if the EU is not quickly stabilized.

The Franco-German Agreement

Last Monday's Franco-German agreement on a "recovery fund" has been occasionally referred to as Chancellor Merkel's "volte-face."[1] In fact, Merkel has deviated from the previous German position that EU support in the fight against the Corona crisis should only be provided in the form of loans, but under no circumstances as non-refundable grants. Berlin no longer opposes the latter. Angela Merkel and French President Emmanuel Macron have spoken in favor of Brussels' providing resources from the €500 billion Recovery Fund as grants. To finance the fund, the EU should issue bonds for the first time. Their repayment is only planned for the years after 2027, when the second EU budget following the current one begins. The payments should be extended over a protracted period - some speak of several decades - and should be made jointly by all EU members and the shares could be calculated according to the ratio that determines the individual members' contribution to the EU budget.[2]

Caught in a Dead-End

Germany has finally agreed to provide the resources as grants, because Berlin has found itself caught in a dead-end with its previous crisis policy. Providing financial aid exclusively as loans would be risky. In the fight against the Corona crisis, all countries concerned are obliged to shoulder massive debts. The total debts of some countries in the southern euro zone will reach dangerous levels. If additional EU loans would be added, the debt burden could easily become unbearable and require a debt cut, which, of course, creditors - including German banks - would certainly want to avoid at all costs: The Deutsche Bank alone is involved in Italy with nearly €30 billion. In addition, a key element in the previous struggle against the Corona crisis has come under heavy pressure following the recent ruling of Germany's Constitutional Court. The court based in Karlsruhe has put the bond-buying by the European Central Bank (ECB) into question.[3] The ECB is explicitly still refusing to yield to German pressure and restrict its bond buying, which has become an indispensable means of balancing serious structural imbalances within the Eurozone. Following the ruling in Karlsruhe, however, this instrument has become uncertain and its sustainability, therefore limited.

Political Pressure

In addition to the growing lack of economic alternatives, political pressure is also escalating. Already at the beginning of the Corona crisis, with its initial ban on the export of medical protective gear, and its adamant refusal to agree to the issuance of "Corona bonds" the German government had provoked massive resentment in the southern euro countries, a resentment which spread even to traditionally EU-loyal sectors of the political elite. ( reported.[4]) Then the demand that the Southern European countries most seriously affected by the pandemic accept credits from the EU crisis European Stability Mechanism (ESM) fund had provoked even more hostile reactions. During the euro crisis, these ESM credits were linked to strict austerity obligations, which in its total effect had led to budget cuts also in the health system, now having fateful consequences in fighting the Covid-19 pandemic. Most recently, angry protests were provoked by Germany's Constitutional Court's ECB ruling, in which the court in Karlsruhe claims a higher jurisdiction, than that of the European Court of Justice (ECJ) - a claim that otherwise would have provoked sharp rebuke, had courts in other EU member countries, for example in Poland or Hungary would have laid claim to the same sovereignty.[5] German concessions to the Recovery Fund were unavoidable, "if they wished to avoid risking a serious political crisis, to accompany the continent's inevitable economic crisis," as is now being admitted even by commentators who clearly oppose the Franco-German proposal.[6]

Europe, Europe, Europe

A rampant escalation of political tensions in the EU would, from Berlin's perspective, be currently more disastrous than the Corona crisis threatening a setback for Germany and the European Union in global power struggles. The CEO of the Siemens Group, Joe Kaeser predicts that "the USA and China will probably emerge reinforced" from this crisis: Due to the pandemic, the USA "will promote digitalization at a much faster pace," and to the advantage of the large US internet corporations. The People's Republic of China, on the other hand, has been able to gain control of the pandemic much faster than Germany and the EU. "China's companies are already engaged in major projects, while we are still discussing, how the interrupted supply lines can be reestablished."[7] Particularly dangerous for the German economy, he says, is the fact that the USA is working toward decoupling from China. Siemens generates 20 percent of its sales in the United States, and already 12 percent in the People's Republic of China. In this conflict, German industry is in danger of being ground between the mill stones of the two world powers. The only way out is a reinforcement of the EU. Kaeser calls for "Europe, Europe, Europe - governments can choose in which order."

Cheap Billions

In light of the exacerbation of the situation, Merkel has made unavoidable concessions to achieve the Recovery Fund. Of course these are minimal concessions. Well-connected observers insist that the measure would be introduced under the EU Treaty's Article 122 - which explicitly refers to exceptional circumstances.[8] Therefore, these measures, under no circumstances, can be repeated. In addition, the chancellor has brought France's original demand that the Recovery Fund contain, if possible, €1.5 trillion, but at least €1 trillion, down to €500 billion. Beginning in 2028, at the earliest and stretched over decades, Germany will have to repay €135 billion. That is expensive, however, still cheap for maintaining the EU's single market, which, according to a Bertelsmann Foundation analysis, permits Germany around €88 billion in additional income growth annually.[9] The question of the introduction of the Corona bonds, that may have possibly provided long-term assistance to the southern euro countries, which Germany persists in opposing, has completely disappeared from the discussion.[10]

"Merely a Step"

Even though it is still uncertain whether the Franco-German Recovery Fund agreement can be implemented in the EU - Austria, the Netherlands, Denmark and Sweden are the main opponents to grants rather than loans - Italy's Prime Minister Giuseppe Conte points out that the step being made is insufficient to help his country overcome the Corona crisis. According to Italian media, Rome can possibly hope for €80 - €100 billion from the fund. For this, it will have to pay €55 billion to the EU calculated in accordance with the usual budgetary ratio. The net grant would therefore be from €25 - €45 billion. The most recent estimates see Italy confronting a more than 10 percent drop in its GDP - more than €180 billion. The Franco-German proposal for the recovery fund, declared Conte on Wednesday, is a significant "step" toward a response to the pandemic, but only that: "If we are to overcome this crisis together much more needs to be done."[11] Otherwise, this crisis "will jeopardize the entire European project." The EU will "suffer a severe blow, marginalizing our economic and political position in the world."


[1] Hendrik Kafsack: Eine 180-Grad-Wende. Frankfurter Allgemeine Zeitung 19.05.2020.

[2] Hendrik Kafsack: Auf dünner Rechtsgrundlage. Frankfurter Allgemeine Zeitung 20.05.2020.

[3] See also Wer das Recht spricht.

[4] See also EU Solidarity (II) and Germany First.

[5] See also Wer das Recht spricht.

[6] Gerald Braunberger: Ein Epochenbruch. Frankfurter Allgemeine Zeitung 20.05.2020.

[7] Andreas Rinke: Kaeser - China und USA gehen gestärkt aus Corona-Krise. 20.05.2020.

[8] Andreas Rinke: Jonglieren mit Billionen - EU muss Budget zügig festzurren. 19.05.2020.

[9] Giordano Mion, Dominic Ponattu: Ökonomische Effekte des EU-Binnenmarktes in Europas Ländern und Regionen. Herausgegeben von der Bertelsmann Stiftung. Gütersloh 2019. See also Germany First (II).

[10] See also Germany First (III).

[11] Giuseppe Conte: Italian PM: Franco-German recovery deal is not enough. 20.05.2020.