Although Germany’s nightmare of eurobonds has been averted, the concessions and the commitments Berlin has made to further aid are historic. However, solidarity carries a substantial risk for Germany.

What Happened?

The negotiations between the EU heads of state that were needed in order to facilitate a package and thus marginalize the economic consequences of the COVID-19 crisis were intense. Ultimately, the heads of states concurred upon the €540 billion that the Eurogroup had previously established. However, considering the circumstances of the European Union, and indeed the world currently finds itself in, it appears inconceivable that the sum can be sufficient.

Over the next years, every member state will cast aside its primary concern of the supranational European Union and focus on itself first and foremost, the nation-state. As a result, what is going to follow will likely overshadow the at times controversial negotiations between Central and Southern Europe. Particularly Italy, Spain, and France are currently suffering the most and were thus, as Italy’s head of government Giuseppe Conte said, “in the front row” for help.

Unprecedented European Economic Stimulus

Besides the now agreed upon aid package, the heads of states and governments also agreed that there should be an unprecedented European economic stimulus package for the reconstruction of the severely damaged economy. A large part of the funding for it is intended to be generated via a “European Recovery Fund” in excess of €1500 billion. It is a staggering amount that eclipses the EU’s budget for the next seven years combined (1,082 billion).

However, many key questions relating to this fund are still unanswered, and considerable disagreement between the Member States on many points remain. As a result, the EU Commission was asked to prepare a detailed proposal for the fund by mid-May.

Germany’s Big Risk

The risk for Germany, meanwhile, is not diminishing, despite the proposal for joint liability of debts via eurobonds has been rejected for the time being. The current agreements still result in substantial liability for Berlin.

For example, the currently adopted €540 billion package provides that loans are to be granted to the states that request them, with liability risks for Germany varying — depending on the instrument and organization — since Germany has different shares in each of the European institutions. If Spain, for instance, receives a loan via the ESM, Germany would guarantee almost 27 percent of the loan amount. If a Spanish, or any European company applies for a European Investment Bank loan under the agreement, Germany guarantees at least 16 percent of it.

The now discussed Recovery Fund also begs considerable risks for Berlin. With ways of financing remaining unclear, the different option to deposit the fund all carry their own risk. For example, one option on the table is via member states’ contributions. In this scenario, Germany would have to conduct payments for its share of the EU budget – which amounts to 25 percent, despite 26 other members.

Questions Remain

The exact amount of future deposits and loans remains unclear, however, because the volume of the fund is not yet known, despite the repeatedly reported €1.5 trillion, one point seems certain: If debtors do not repay the loans granted by the fund, Germany would inevitably lose billions of euros. With the likely result of raining taxes to mitigate any losses.

Meanwhile, eurobonds have still not wholly disappeared from the discussion. If the €540 billion package that has now been decided is insufficient to avert the economic crisis, the demand for eurobonds will become louder again.

For Germany, meanwhile, its solidarity is alive and well. However, Berlin has learned its lesson from the past — keyword “Greece” — and thus continues to consider joint debts to be inappropriate. Despite the risks for its own economy and potential failed payments, Germany has again demonstrated its leadership role in Europe. Not by dictating the agenda, but by the example it sets, and the willingness to once again putting the union first – any dissent on the “how” notwithstanding.

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