Written by: Nikki-Lee Birdsey
Germany and France have proposed a European Recovery Fund worth 500 billion euros to help economic recovery in the Eurozone.
This proposal was put forth by German Chancellor Angela Merkel, in her final term in office, and French President Emmanuel Macron. What is significant about this proposal is that the funds will be distributed in grants, not loans. Some analysts are calling this the biggest relief package in Europe since the Marshall Plan in 1948, which helped rebuild the continent after World War Two.
This announcement follows more stimulus spending in the United States to combat the economic downturn as a result of the coronavirus pandemic.
Mrs Merkel seems to have reversed her position somewhat, which was initially hesitant at the notion that countries will share debt. The European Commission would raise money by borrowing on the markets, which would be repaid from the EU’s overall budget over 20 or so years.
The grants would be aimed at industries that are heavily hit by the Covid-19 pandemic, such as airlines and hospitality. The proposal was welcomed by European Commission President Ursula von der Leyen. Additionally, the European Central Bank President Christine Lagarde said the plan was “ambitious, targeted and welcomed”. The plan will have the approval of hard-hit countries like Italy and Spain, who have pushed for aide to be in the form of grants and not loans.
The EU Commission will be putting forth its own response package proposal on May 27. All indications point to the EU Commission proposing relief in the form of loans, not grants.
Will the Merkel-Macron Proposal Be Enough?
Analysts have mixed views on whether the proposal will be enough to usher in a robust European recovery. Austrian Chancellor Sebastian Kurz has voiced his opposition to the proposal, insisting that the relief package come in the form of loans and not grants. Austria, along with Denmark, Sweden and the Netherlands, have all expressed their concerns about the relief package. They are against taking on mutual debt with countries with high sovereign debt, claiming it is too great a risk to their taxpayers. Germany took this position in 2011 during the Great Financial Crisis, and so Merkel’s turnaround marks a significant shift.
As it stands now, it’s unclear whether the proposal will be passed as it requires the consent of all 27 member countries of the European bloc and the European Parliament.
Analysts have also pointed out that positivity in the markets may be more contingent upon a successful vaccine, rather than more monetary policy. It could also be months before any relief package comes into effect.
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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.