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German Chancellor Angela Merkel and French President Emmanuel Macron announce their support for the recovery fund Blondet Eliot/ABACA

Explainer: Why is Germany suddenly backing the EU recovery fund?

Experts say the scale of the crisis and a German constitutional court ruling might have something to do with it.

AFTER WEEKS OF contentious negotiations, there is hope that the €500 billion European Union pandemic recovery fund will become a reality now that France and Germany agree about its structure.

Although probably very few politicians would have phrased it this way, Taoiseach Leo Varadkar described the proposed fund as “a financial diuretic to give the Union a boost. Good news for Europe and Ireland too”.

Not even in the depths of the last Eurozone crisis did the EU agree to issue mutual debt.

If the deal is passed by the 27 members of the EU — and that is by no means guaranteed — it will mark a significant development, not just in the bloc’s response to the crisis but also in its political and economic development.

The plan would give the European Commission unprecedented powers to borrow money on global markets, a ‘crossing the Rubicon’ moment, says Ronan McCrea, professor of constitutional and European law at University College London.

How did it come about?

Previously, Paris and Berlin had been on opposite sides of an argument about whether the money should be funnelled through grants or loans.

Wary of the domestic political consequences of being seen to hand out money to poorer southern countries, German chancellor Angela Merkel originally sided with the ‘Frugal Four’ — the Netherlands, Austria, Denmark and Sweden — arguing for loans that had to be eventually paid back by individual member states. 

France backed Spanish and Italian calls for non-repayable grants or “real budgetary transfers”, as French president Emmanuel Macron put it, to support the lower-income countries, some of those worst-hit by the pandemic. 

Last night, those calls were answered when France and Germany announced that they had reached agreement on a proposal.

Speaking after the announcement, Merkel said, “In terms of how this money is used, it is obvious that the countries that were the worst affected by this crisis are the countries that will profit the most from these funds.”

So what changed?

Experts believe that two main factors influenced Merkel’s about-turn: the scale of the coronavirus crisis and the recent ruling of the German constitutional court on the EU’s flagship bond-buying programme.

As early as March, Merkel had been describing the pandemic as the worst crisis her country and Europe has faced since the Second World War. 

Gavin Barrett, professor of European constitutional and economic law at University College Dublin explains that Germany has a “huge interest” in protecting the single market.

In the post-war period, its agenda on the global stage, he says, has been “dominated by its place in Europe” and conditioned by how much it has benefited from the single market.

He says that the pandemic poses clear threats to the single market because individual member states have “taken the levers off state aid”.

“The main danger of the crisis at the moment is that you have a nationalised response to it.

“What happens with state aid is that particular countries help their particular champions. In other words, Germany helps German businesses, France helps fund some French businesses, and so on. 

“In that regard, the larger member states have much more capacity. Of all of the state aid that’s been approved by the Commission at the moment, 51% of it has been given by Germany alone. The problem is, then there’s a danger then of actually breaking up the single market. So you need a European response, essentially. And I think Germany can see that too.”

Professor McCrea agrees. 

Although he says that Merkel’s pathology when it comes to European crises is to very often “do the minimum necessary at the very last moment”, he thinks that economists often “underestimate the absolute commitment to the European Union and the eurozone by most European governments”.

What’s this about the German constitutional court?

As we are about to find out during the negotiation process between member states on the €500 billion fund, ‘fiscal unity’ or ‘integration’ is a political quagmire. 

Northern states are reluctant to shoulder the burden of lower-income southern states, and eastern countries are concerned that EU grant funding will be diverted away from them.

In response to the last economic crisis, the European Central Bank embarked on a €2 trillion ‘quantitative easing’ programme, designed to flush investor money out of bonds and into the real economy.  

The goal was to prop up prices in the face of the lingering deflationary effects of the ‘Great Recession’.

This monetary policy was adopted instead of a large-scale fiscal response like the one that France and Germany are now proposing to deal with the fallout of Covid-19.

“The history of the eurozone since 2008 has been a failure to take the steps that were necessary and then, in return, over-reliance on monetary policy and pushing the powers of the European Central Bank to their absolute limit,” says McCrea.

This strategy, he believes, risks “coming unstuck” because of the German constitutional court, which, in April, ruled that the ECB had failed to legally justify its flagship bond-buying scheme.

The judgment could open the door to further legal challenges and in a worst-case scenario force the German central bank to withdraw from the programme. It has also cast a pall of doubt over the ECB’s latest bond-buying scheme, unveiled in March as a remedy for the current crisis.

This, McCrea believes, may have been a factor in Germany’s decision to support the €500 billion recovery fund, which he says could strengthen the case for further integration over the coming years.

He says, “It’s not the end of the story because the amount, €500 billion, which sounds big, is 1% of European GDP. So it’s not huge.

“But the principle has been broken. If this gets through then a Rubicon of principle will have been crossed — the EU will be issuing debt.

“The eurozone needs integration in a whole load of areas over the next number of years if it’s going to survive. So I think this is going to be an ongoing story. This is not the end.”

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    Mute Crispy Brown
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    May 19th 2020, 7:49 PM

    Great sitting around watching two foreign powers dictating our future. Sooner it crumbles the better.

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    Mute SC
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    May 19th 2020, 8:00 PM

    @Crispy Brown: Germany hasn’t gone on a murderous spree in 75 years. Possibly due to the EU letting them have their way without violence. All the same I’m glad not to be gassed to death or burnt alive or shot in the head for not working hard enough!

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    Mute John
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    May 19th 2020, 8:11 PM

    @Crispy Brown: As it says in the article, all 27 states have to agree to any measures.

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    Mute Gavin Conran
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    May 19th 2020, 8:13 PM

    @Crispy Brown: We are free to reject any free grants to our businesses and do our own thing. So what should we do instead do you reckon?

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    Mute Jack Inman
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    May 19th 2020, 11:11 PM

    @John: and Ireland as a ner beneficiary will be the first to puah it’s head in the trough. Especially when you factor in it’s economic response thus far has in real terms been up to 80% less than the DE FR IT ES UK states.
    Waiting for that cheap money to roll in…..at the cost of further fiscal integration me thinks

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    Mute Gav
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    May 19th 2020, 11:50 PM

    @SC: wow, you don’t fudge do you?

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    Mute Eddie Michael
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    May 19th 2020, 7:16 PM

    Bypass the banks and loan to business directly. The banks just want to pump up their books .

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    Mute James Brady
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    May 19th 2020, 8:06 PM

    @Eddie Michael: Direct issue of centralised grants is not a great idea, banks have experience of due diligence & the infrastructure in place to assess each business. Better to use them, but constrain them to issue loans at lower rates, like the SBCI scheme here.

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    Mute Michael Wall
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    May 19th 2020, 10:00 PM

    @James Brady: yes. Their due diligence lead to a global economic meltdown.

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    Mute Dino
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    May 19th 2020, 11:51 PM

    @James Brady: sbci scheme still means sme are borrowing at far higher costs than our European competitors

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    Mute Vinylman_Teaboy
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    May 20th 2020, 2:07 PM

    @Eddie Michael: bypass all the extracting bureaucrats and simply issue it to every adult member of the public directly and equally with the only condition being that it must be spent on the purchase of national products or services within a set timeframe.

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    Mute kevin mc cormack
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    May 19th 2020, 7:22 PM

    500 billion is not nearly enough, big trouble ahead

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    Mute den o sullivan
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    May 19th 2020, 7:31 PM

    E. U is just moving around deck chairs on the titanic EU has been a fiasco since the crash now virus some one should put out its misery

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    Mute Niall Bourke
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    May 19th 2020, 7:10 PM

    Because the European Courts reminded them they are way outside the law with their preferred option and the fact the German Courts made a ruling that went against the law does not mean they can do what they want.
    Ok, I only read the headline but that’s the answer.

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    Mute 8-Bit-Relic
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    May 19th 2020, 7:12 PM

    @Niall Bourke: Ah well… they chipped in 51 %. A simple ‘Danke’ would be sufficient

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    Mute Niall Bourke
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    May 19th 2020, 7:22 PM

    @8-Bit-Relic: If Jimmy Saville chipped in 51% of the cost of a children’s home should he call the shots?
    Either way, if they had not have their wings clipped everyone would have a sore bottom.

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    Mute Gordon Comstock
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    May 19th 2020, 7:25 PM

    @Niall Bourke: how do you figure they’ve had their wings clipped? The Germans could still exit the bond program, which will effectively kill the program. Hopefully they do.

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    Mute Darren Byrne
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    May 19th 2020, 7:29 PM

    @Gordon Comstock: He’s talking about nazis ignore

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    Mute 8-Bit-Relic
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    May 19th 2020, 7:39 PM

    @Niall Bourke: Geez, you really hate free money, do you? It’s a grant. We are in a lucky situation that the EU rules allow us to receive these funds without an extra burden.

    Be grateful it’s either that or austerity.

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    Mute Hans Vos
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    May 19th 2020, 7:50 PM

    @8-Bit-Relic: It’s only a proposal. The northern States have to agree also.

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    Mute Niall Bourke
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    May 19th 2020, 8:28 PM

    @8-Bit-Relic: I’ll take all the free money that is going but you must admit they only went for option b when the European Courts stopped them changing the rules to suit themselves. As for austerity, they’ve tried that already.

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    Mute Niall Bourke
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    May 19th 2020, 8:34 PM

    @Gordon Comstock: The German Courts ruled against Europe’s Courts regarding their bond buying scheme. The German solution to fronting up to the economic problems was very different to Europes. When they ruled against it the European Court clipped their wings and told them to back down. That they did.

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    Mute 8-Bit-Relic
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    May 19th 2020, 8:59 PM

    @Niall Bourke: Still they don’t have to chip the amount. They can drop if they like. The Germans aren’t solely to blame for the previous austerity. The Irish government couldn’t handle money when they had it and weren’t expecting any crisis and asked for a loan. If you ask for a loan you make a promise to pay it back. The fault is between Ireland, Germany and the regulator evenly shared.

    But yes, if we don’t get a grant we get new austerity.

    Just be glad that we have someone to ‘bail us out’.

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    Mute Niall Bourke
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    May 19th 2020, 9:09 PM

    @8-Bit-Relic: I take you back to my initial statement. They went with this because they got bitch slapped by The European Court. In one word am I wrong? Answer yes or no.
    Can I ask, are you German or are you in some way tied to Germany? You just seem to have a very strong leaning toward them. Even your take the money or it’s austerity for you again comment has a sniff of German arrogance about it. I could be way off the mark but I’m interested to know.
    Anyway, I made a statement. I was challenged on it. I backed up my statement and I think I was correct in what I said.

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    Mute 8-Bit-Relic
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    May 19th 2020, 10:36 PM

    @Niall Bourke: I grew up in Germany indeed.

    I agree that Germany lost a court case.

    However, Germany doesn’t have to put money into it and I’m happy that we are getting help here.

    However, reading your comments especially the one about Jimmy Savile it’s quite curious that you are the one ‘sniffing arrogance’.

    However, since the budget will be this year off by 30 bn Euros what would you think is going to happen if we won’t receive this grant?

    The last austerity costed plenty of lives, homes and much more suffered. I’m kind of afraid to live through that again.

    Which other option beside austerity would you see? I miss any announcement about any financing plan. It really looks like that Leo put all his hopes in that one deal.

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    Mute Niall Bourke
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    May 20th 2020, 7:42 AM

    @8-Bit-Relic: My Jimmy Saville comment does not show arrogance. Perhaps it was lost in translation. It was used as a comparison. You commented that because Germany chipped in most money they should call the shots. I used the comparison as it’s pretty clear that any money he threw at a problem would not guarantee him power over a situation.
    You challenged my answer to the question the headline asked and after all this you agree with me. It wasn’t really necessary to engage if we both agree that I was right.

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    Mute 8-Bit-Relic
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    May 20th 2020, 8:26 AM

    @Niall Bourke: The Jimmy Savile comment was perceived as responded. Mentioning child abuse is never a good comparison.

    I have commented that if you borrow money you would need to pay it back and not having Germany calling shots.

    I challenged you on an alternative financing model. This government seemed to have put all eggs in a not yet approved grant.

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    Mute Niall Bourke
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    May 20th 2020, 9:59 AM

    @8-Bit-Relic: @8-Bit-Relic: Perceived as responded? You incorrectly perceived thus incorrectly responded. The comparison stands. If you perceive it as never a good comparison that is your opinion. I am quite happy with it. I never said the financing model was bad. I never said we need an alternative. Germany were forced to drop their alternative because they got a proper slap from Europe.
    I will draw you back to my initial statement and the fact it is true. Why is Germany suddenly backing the EU recovery fund? You’ve agreed my answer was correct. Thank you.

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    Mute 8-Bit-Relic
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    May 20th 2020, 10:14 AM

    @Niall Bourke: and that response isn’t far off that impression either…

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    Mute Niall Bourke
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    May 20th 2020, 1:22 PM

    @8-Bit-Relic: Is this the last word Olympics? Tell you what, I’ll leave the discussion now. You acknowledged I was right so I’m delighted with that. I will leave the last word to you.

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    Mute David cotter
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    May 19th 2020, 7:30 PM

    Every time I see Angela….I get a little hot under the dollar….she’s magnificent……

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    Mute Jack Inman
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    May 19th 2020, 11:20 PM

    Finding the Anti German and especially anti Dutch rhetoric incredible. Granted it has availed of hundreds of billions and millions of jobs saved owing to the undervalued Euro and free trade agreement which, is in stark contrast to its EU contributions but, Ireland has been a huge net beneficiary……something that may change when thr next EU budget is ratified. Why should Germany and Netherlands who have no issue funding themselves at sustainable market rates not expect the other pigs in the trough to fiscally change?

    Pretty simple lads….if you don’t want to avail of lower bond yields you need fund yourself. Which we can’t. Fact

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    Mute tuco
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    May 19th 2020, 11:49 PM

    The italian economy is bust.countries to the east of Germany are EU skeptics.there will be big referendums coming up down the line.either the EU 27 vote for more better EU integration with massive changes or else the eu 27 vote to split up.

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    Mute Robert Clifford
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    May 19th 2020, 7:48 PM

    Then they need to tell the Dutch, Austrians, Swedes and Danes to keep their snouts out of proceedings.

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    Mute family guy
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    May 19th 2020, 7:18 PM

    EU cut them a good deal obviously

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    Mute Adam J
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    May 20th 2020, 11:37 AM

    Time for the EU to reverse some of its powers, return it to what it was once made for, trade! The United States of Europe is an idea that has failed.

    This 500bn fund/debt will be saddled upon us along with the current IMF payments, Ireland can’t afford it, IMF really needs to think about cancelling the previous debt, otherwise Ireland could be in ruins

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    Mute Vinylman_Teaboy
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    May 20th 2020, 2:18 PM
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    Mute Steve Saunders
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    May 19th 2020, 7:46 PM

    500 billion might not be enough. As the Coronavirus and it’s effects on now struggling EU economies continues, the well might need to be dipped into for much more money.

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