Merkel and Macron Propose E.U. Coronavirus Aid Fund

BRUSSELS — Faced with economic calamity and the threat of the coronavirus further fracturing the European Union, Chancellor Angela Merkel of Germany on Monday broke with decades of German economic orthodoxy and agreed to back the idea of collective European debt to help those countries that have been hit hardest by the pandemic.

If the other member states agree to the plan, it would be a major step toward a more unified Europe, and a sign that the pandemic might actually bring the bloc closer together instead of splintering it.

Ms. Merkel joined with President Emmanuel Macron of France to propose borrowing 500 billion euros, or $545 billion, for a common recovery fund. Its repayment would be the financial responsibility of the entire bloc, but it would primarily benefit the poorer south, which has been hit hardest by the virus.

Such a joint approach to borrowing has long been resisted by Germany and other member states in the north, and that reluctance has proved an obstacle to further European integration.

In recent years, the European Union has been battered by a series of challenges that have shaken its foundations, from the migrant crisis to the exit of Britain from the bloc. Now, the pandemic is further dividing it, prompting border closures within the bloc and severely damaging the economies of member states.

Southern states have been turning to Brussels for help and pushing better-off countries like Germany and the Netherlands for less selfishness and greater collective action. Back home in countries like Italy, where many feel abandoned by their neighbors, anti-European and populist sentiment has spiked markedly.

In the face of this emergency, Mr. Macron said, Europe’s two big powers have agreed to try to patch the deepening cracks and pull the bloc together with “a real common strategy to supplement our European budget.”

“This is a major step,’’ he said.

Mujtaba Rahman, chief European analyst for the Eurasia Group, said, “It’s a European revolution — if it goes through,”

For the first time, Mr. Rahman said, Europe will be able to “raise money and transfer it directly to the countries, regions and industries most in need, without further impairing their economic situation by increasing their debt.’’

Although the proposal represents a significant shift in German thinking, Ms. Merkel described it as a “one-off effort,’’ with Germany agreeing to a plan whereby the European Commission, using its excellent credit rating, would borrow money for the fund. The debt would be paid back over time through the joint European Union budget, which is financed by a set formula by member states.

“We are experiencing the biggest crisis in our history,’’ Ms. Merkel said in a joint video news conference with Mr. Macron. “It is time to fight back. Germany and France are fighting together for the European idea.”

She added: “Because of the unusual nature of the crisis we are choosing an unusual path.’’

For Ms. Merkel, the proposal holds political risks at home, where it might bolster the far-right Alternative for Germany party, founded on a euroskeptic platform. That party is just beginning to stir back to life as the country reopens.

But the move might also be the only way to salvage a deeply divided currency union and the chancellor’s legacy on European unity.

The proposal must be agreed to by the other 25 member states of the bloc, some of which have flatly rejected collective indebtedness in the past. Austria has already suggested that it and countries like the Netherlands want to help the afflicted states only with loans, not grants, as called for in Monday’s proposal.

“There is still work to do,” Mr. Macron acknowledged. “But it is a profoundly unprecedented step.”

Details of the plan were scare on Monday, but the leaders said that the money would be provided to the sectors of the economy and the regions the worst affected by the virus. That would include countries like Italy and Spain, whose borrowing costs are much higher than countries like Germany.

Those receiving the funds would not be responsible for repaying them, Mr. Macron said. That would be the responsibility of the European Union as a whole through its joint budget.

Both Ms. Merkel and Mr. Macron underscored that all the member states of the bloc must agree to the proposal, with the specifics of the plan to be worked out by the European Commission.

But traditionally, any joint French-German agreement carries enormous weight inside the bloc, since they are the largest economies, and have even more influence now that Britain has left.

Criticism, if not outright opposition, is likely to emerge from the Netherlands, Finland, Sweden or Austria, considered fiscal hawks. In the past, they have often hidden behind Germany in opposing collective European bonds.

The bold move by France and Germany was an attempt to resolve a deadlock faced by the commission and its president, Ursula von der Leyen, who has been struggling to come up with a European recovery fund that would get consensus. The commission said last week that it was unlikely to have a proposal ready for member states until May 27.

Mr. Macron, in a rare moment of modesty, noted that the commission would soon make its own proposals and said, “We hope that the French-German deal will help.’’

Ms. von der Leyen said in a statement that she welcomed “the constructive proposal made by France and Germany” because it “puts the emphasis on the need to work on a solution with the European budget at its core.”

But then she added a sharp word of caution and asserted her role, saying: “This goes in the direction of the proposal the commission is working on, which will also take into account the views of all member states and the European Parliament.”

Mr. Macron called the Franco-German proposal “a real change in philosophy.”

“We are proposing to do at the European Union level what we are doing at the national level,” he said, adding: “I think that it is a very deep transformation, and it is what the European Union and the single market need to keep their coherence. It is what the eurozone needs to keep its unity.”

Analysts agreed that the proposal, if accepted, could represent a breakthrough.

“I think it’s quite significant,’’ said Guntram Wolff, a German economist who heads Bruegel, a Brussels think tank. “It is borrowing that will be repaid through the E.U. budget, and so it is the first genuine creation of long-term E.U. fiscal debt.’

Henrik Enderlein, president and professor of political economy at the Hertie School of Governance in Berlin, said in a Twitter post that the proposal indicated that collective European debt, a long-held “taboo,” for German politicians, “could become reality.”

This, Mr. Enderlein said, could signal a “Hamiltonian moment” for Europe. The federal assumption of state debt engineered by Alexander Hamilton played a crucial role in forming a collective identity for the United States in its early days.

“What matters most today,’’ Enderlein went on, “is that France and Germany have agreed that in a crisis the E.U. can issue its own debt at a large scale. The political signal here is that the E.U. is more than a grouping of nation states and has its own federal identity.’’

Aurelien Breeden contributed reporting from Paris, and Katrin Bennhold and Christopher Schuetze from Berlin.

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