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.”