Can Franco-German Financial Solidarity Reset the EU?

Can Franco-German Financial Solidarity Reset the EU?

On 19 May, German Chancellor Angela Merkel and French President Emmanuel Macron shook hands on a €500 billion recovery fund designed to kick start the economies of the countries hardest hit by the coronavirus pandemic. Described by Eurogroup chief Mario Centeno as “a great step towards a fiscal union and a properly functioning currency union”, the proposed EU-funded grants will be distributed by the European Commission via its normal budget, to be repaid over time by the EU itself.

While that scheme still requires the approval of all 27 member states, the European Commission released its own parallel proposal for a European recovery plan later in May. The Commission’s proposal includes a €750 billion “Next Generation EU” instrument to go along with its €1.1 trillion Multiannual Financial Framework (MFF) for 2021-2027.

The Franco-German initiative, for its part, is an important signal of EU solidarity amid the current crisis and could ring in the emergence of a closer union. The bloc has faced existential challenges since the Covid-19 crisis began, especially in Southern Europe where the virus’s impact has been felt most keenly. This North-South divide has boosted anti-EU rhetoric in some countries, with Italy especially experiencing a rise in support for anti-EU parties as the pandemic took hold.

Earlier discussions over the creation of “corona bonds” didn’t play well with famously frugal Germany and the Netherlands, and was quickly side-lined. But although the scope of the recovery fund may be less generous that some had hoped, the provision of help in the form of grants – not loans – will reassure many, and rightly so.

Creating solidarity among EU members

The crisis could, in fact, act as a driver towards an ever-closer Union: an opportunity, rather than a cause for division. In that sense, the fund offers two important signals. First and foremost, Berlin has made an unprecedented concession by dropping its insistence on frugality. This is likely due to leaders recognizing the pandemic presents the same challenge to all governments, regardless of their approach to fiscal prudence. Merkel admitted as much, commenting that “extraordinary circumstances call for extraordinary measures”. This sentiment was echoed by the French president when he described the crisis as requiring an “efficient, collective and above all European” response.

Furthermore, the €500 billion have been earmarked for initiatives that will ultimately benefit every EU country, like digitalization and the green transition, as well as for strengthening the competitiveness of European economies. The focus on digitalization is particularly important, given the Union is trailing most parts of the world in that area, as reflected in its slow progress towards adopting the new wireless standard 5G.

Towards faster implementation

This level of inaction has led to fears EU countries could lose their edge in the global manufacturing market, as new tech — Big Data, AI and 5G — from Asia and the US becomes ever more dominant. Indeed, European Commission Vice-President Margrethe Vestager is pressing ministers to expedite the roll-out of 5G despite the challenges presented by the coronavirus, after a number of countries including Spain, Austria, and Poland suspended spectrum frequency auctions. The Brussels-set goal to launch 5G services across all member states by the end of this year is now at risk of failing.

Amid the struggle of member states to advance significantly in this field, the pandemic has only more blatantly exposed Europe’s shortfalls. Yet it’s here the Franco-German cash injection could do a lot of good across the bloc. It would provide crucial direction in the way the money is spent and enable governments to press ahead without having to worry too much about costs. In effect, the fund is a means to optimise all government expenditure to ensure services can be delivered as efficiently and effectively as possible, independently from the haggling that has hampered 5G implementation on the national level.

Restarting Europe

Yet it’s crucial leaders to keep the pressure on. There’s little doubt progress in this advanced tech space opens many doors. 5G enables the development of a host of disruptive technologies, all of which increase European global competitiveness and create opportunities for new industries to thrive across the EU.

Such prospects can’t be ignored by economies facing a dual challenge of depressed activity because of the virus, and possible extensive restructuring of former mainstay industries. However, achieving this requires enabling action on a European level, including investment, to allow for adequate scaling across the Single Market. 5G-based technologies could thus also be the long sought-for means to smoothen the gap between less technologically developed member states and regions across the EU.

The cumulative effect could well be a stronger Union. Providing even access to 5G and associated technologies demonstrates the value of EU membership to its citizens, especially in a post-Covid world increasingly reliant on the digital economy. Greater European cohesion and solidarity would also help address the long-term risk factors which have weighed on Europe’s collective transition to a digital economy, including both Brexit and the conflict between the American and Chinese governments over Huawei’s presence in EU markets.

Sink or swim?

It’s clear the EU will need to assume a more proactive role and move closer together, focusing on supporting member states to reduce costs and improve the quality of services via the digital transformation of its traditional sectors. Other priorities include strategic skills and knowledge transfer programmes, greater market alignment – as with the pan-European GDPR directive – and the creation of innovation hubs that develop talent and bring together capital.

Whether a single Franco-German initiative can put all of this in motion remains to be seen, but it would be foolish to dismiss the power of symbolism – especially if positive results were to follow. Europe has an enviable academic culture, a sophisticated research network and a skilled workforce primed for further innovation. With Paris and Berlin taking this step, there’s no better time to maintain momentum, boost confidence in the EU and ultimately build a better Union.

Image credit: Russian Federation/Wikimedia Commons

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