EU leaders could be getting close to agreeing upon a fiscal package that may rescue the troubled eurozone from the economic effects of the coronavirus. French President Emmanuel Macron and German Chancellor Angela Merkel are proposing a €500 billion European recovery fund to be distributed to EU nations worst affected by COVID-19.

Considering Germany was hesitant at first to contribute toward a eurozone bailout, the agreement Merkel has come to with her French counterpart represents a fundamental shift in her position.

A Huge Victory for France, Spain and Italy

Macron believes that this is the right step toward ensuring that the eurozone remains united. Merkel proposed that the money for the fund be raised by the European Commission (EC) borrowing on the markets, which would be repaid gradually from the EU’s budget.

The proposed recovery fund would also provide grants to help finance the bloc’s investment in a greener future, which shows that the two EU leaders intend to ensure that Europe’s recovery is a green one.

This is a huge victory for France, Spain and Italy, three EU states which have consistently argued that the bloc needs to display more solidarity by sharing its debt. Arguably, though, the EU’s two most powerful nations attempted to demonstrate to their voters that their leaders can take decisive action when necessary — and for different reasons.

Are Macron and Merkel Focused on Approval Ratings?

Macron’s re-election bid is less than two years away. For him, this represents a huge foreign policy victory as he forced the Germans into accepting the need for grants as opposed to loans. Nonetheless, the French President still had to concede that German taxpayers would never accept a fund worth trillions of Euros.

Equally, Merkel’s term in office is ending, and she wanted to ensure that her final days were not spent presiding over the EU’s demise.

Though both leaders’ actions might have scored them points at home, it remains yet to be seen whether this fund will rescue the eurozone in the longer term.

Much of Europe’s economy remains in lockdown and until many employees return to work, that will be the crucial factor that will determine Europe’s economic prospects. The fund is designed to prevent jobs and businesses from disappearing once the lockdown ends.

Divisions Over the Recovery Fund Remain

Furthermore, some EU leaders remain opposed to the fund, which needs to be approved by the bloc’s 27 member states at the European Council’s meeting next month. Austrian Chancellor Sebastian Kurz is pushing for loans as opposed to grants. The Dutch Government in particular is anxious about any move that could institutionalize debt-sharing and unconditional grants, arguing that there is a ‘moral hazard’ in bailing out member states that have failed to prepare for economic difficulties.

Even the French President admitted that a Franco-German agreement does not mean all 27 member states have agreed to it as well.

The EC is also expected to announce its own plan next week, and it will be interesting to see how they propose to deal with the economic consequences of COVID-19.

Can EU leaders Agree to Further Integration?

As Milton Friedman and Martin Feldstein warned in 1999, the eurozone cannot succeed without a monetary union. Any money that the EU pumps into the single currency will only provide short-term relief and its survival will depend upon what happens in the next two years.

The future prospects of nations like France, Italy and Spain are grim as their economies have not fully recovered from the 2008 recession. They also have no monetary or exchange rate to jump-start their own economies. Italy’s poor public finances have restricted it to a €25 billion fiscal stimulus that equals 1 percent of its GDP.

The Franco-German package must be accompanied by serious institutional reform if EU leaders are serious about ensuring that the eurozone survives, otherwise southern European nations will remain in permanent stagnation and may even one day quit the single currency. But the EU’s biggest challenge will be to persuade its 27 member states to support further integration, and given the bloc’s recent history, even that looks unlikely.

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