Angela Merkel and Emmanuel Macron (LaPresse)

Frugal Four Present Counter-Proposals to Franco-German EU Rescue Plan

Following German Chancellor Angela Merkel and French President Emmanuel Macron’s presentation of their plan for the European Union to overcome the economic impact of COVID-19, Austria, Sweden, Denmark and the Netherlands have now created their own vision of a recovery plan, which carries a simple message: loans in lieu of grants.

What Are the Specifics of the Frugal Four’s Plan?

The aforementioned states are in favour of a one-off emergency fund to strengthen the EU’s economy. Payments must be used for the reconstruction, the ecological restructuring of the EU and the future resilience of the health sector and the economy. Moreover, the funding ought to be subject to a two-year limitation.

Most importantly, the plan strictly opposes shared debts, for example, in the form of eurobonds, and a subsequent increase in the EU’s budget as a result of the latter. Austria, Sweden, Denmark and the Netherlands — all net contributors to the EU — refer in their plan to the fact that national budgets had already been heavily burdened due to the COVID-19 crisis, while more funds still needed to be invested.

The solution hence needed to be a “modernized EU budget as a starting point”. The final spending framework of COVID-19 aid ought to be determined “by a new prioritization” of spending areas in the EU budget. Aid that contributed less to economic recovery should, therefore, be saved.

The Merkel-Macron Plan

Just the previous Monday, Chancellor Merkel and President Macron presented a €500 billion concept for a recovery plan for the post-pandemic. According to the Franco-German model, the money ought to be taken up by the EU Commission in the form of loans on the capital market and distributed as non-repayable grants via the EU budget, to support particularly hard-hit countries.

However, especially Austria’s Chancellor Sebastian Kurz had been opposing the Franco-German model over the previous week, and called for a time limit on the funds, to avoid the COVID-19 aid package becoming a “debt union through the back door.”

The plan of the four states, thus, provides for the EU Commission to raise the money for the emergency fund on the financial markets and to pass it on to the member states as affordable loans in lieu of Franco-German grants.

Finding Consensus Amid the Confusion

EU Commission president Ursula von der Leyen now faces the difficult task of designing a model that is capable of reaching a consensus. She will present a new proposal for EU finances from 2021 to the end of 2027 next Wednesday, which should also include a recovery plan for the economy badly hit by the corona pandemic.

Von der Leyen is aiming for a volume of at least €1 trillion in her “reconstruction instrument,” relying on a mixture of grants and loans. In this way, the Commission seeks to prevent the member states from drifting apart economically.

In addition to a concept for a reconstruction fund, it is also expected that funds from the multi-year financial framework will be used to boost the economy. A working paper by the EU Commission, for example, proposes to invest €20 billion in a program over the next two years that will encourage consumers to buy clean new cars. Besides, there could be €40 to €60 billion for investments in emission-free drives as well as additional funds for electric charging stations and petrol stations for alternative fuels.

As far as the reconstruction fund is concerned, von der Leyen had recently shown a clear preference for the Franco-German approach. The latter goes in the direction of the proposal the Commission is working on, she said. EU Council President Charles Michel also spoke of a step in the right direction and called for a willingness to compromise from all 27 EU countries.

It will be interesting to see which elements of whose proposal will become part of Von der Leyen’s consensus idea. The issue, meanwhile, is apparent. The Austria connection has categorically ruled out any form of shared debt. However, if mainly the Merkel-Macron model prevails, it will carry significant connotation for the rest, who have long believed that it is France and especially Berlin all along that set the European Union’s policy direction for the rest of the member states.