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Germany breaks taboo in effort to get EU through pandemic

FRANKFURT – Germany’s agreement to share debt with other EU countries to finance an economic recovery plan is being greeted as a political breakththrough and an overdue sign of unity in the face of the worst downturn the bloc has ever seen.

Chancellor Angela Merkel broke with her country’s longstanding opposition to shared borrowing with other EU member countries. The proposal made with French President Emmanuel Macron is limited in scale and duration, which could help her sell it to skeptics back home.

The 500 billion euros ($550 billion) fund would make outright grants to help countries through the recession, going beyond an earlier rescue package based on loans that would have to be paid back someday. By endorsing common borrowing and direct cash help, the Merkel-Macron deal is being viewed by some as a step toward stronger EU financial links, as the 27-country union faces challenges not just from the virus crisis, but from populist forces in member countries Hungary and Poland.

France, whose president had pushed hard for the fund proposal announced Monday, exulted. “It’s a historic breakthrough,” said Finance Minister Bruno Le Maire on Tuesday. “We will be able to support the economic recovery in the countries most hit by the virus.”

“The second consequence is political: France and Germany affirm loud and clear their determination to see solidarity among European Union members placed at the heart of the European construction,” he said, calling it “a historical step for the whole European Union.”

Macron and Merkel suggested that the fund would send money starting in 2021 to the areas hardest hit by the virus outbreak and target sectors that are priorities for EU economic policy such as digitalization and fighting climate change.

The fund would be a one-off part of the EU’s budget and take advantage of EU institutions’ ability to borrow at extremely low interest rates for long periods. It adds to a 540 billion-euro package agreed among finance ministers from the 19 EU countries that use the euro. That included loans from the eurozone bailout fund that would have to be repaid.

Since the proposal is only for a limited one-time fund during a crisis, it would represent incremental change. But some were seeing it as potentially the harbinger of more EU central spending.

“Crucially, these funds would be passed on to member states as grants rather than loans and according to need, implying a fiscal transfer between countries,” wrote Andrew Kenningham, chief Europe economist at Capital Economic in an email. “But there is a lot of opposition to such a change, not least within Germany itself, so that is far from certain. And in the meantime, fiscal transfers will be small compared to the cost of the virus.”

The proposal remains a proposal, and key elements such as joint borrowing have been resisted by northern European countries such as Austria, Finland and the Netherlands. Until Monday, opponents also tended to include Germany, although Merkel had kept her comments vague on exactly how the recovery fund was to be funded.

The fund touches on broad issues of European integration and underlines the union’s lack of a central financial authority like those that exist at the national level. Germany, which has run a string of budget surpluses in recent years, has long resisted anything that smacks of its taxpayers being on the hook for the spending in less fiscally solid countries such as Italy.

The EU countries already borrow together in a limited way through their development bank and bailout fund, but that money is for loans, not given as grants. The EU already spends money on economic development projects in member states through a budget that amounts to about 1% of GDP, leaving the vast bulk of government spending at the national level.

It is not clear how the northern European opposition would be reconciled, or how the French-German proposals would be incorporated into the recovery plan being developed by the European Union’s executive Commission and due to be sketched out May 27. Commission spokesman Eric Mamer said Tuesday that the French-German proposal “goes in the direction we are heading in” but that the commission would not “copy-paste” the proposal onto its own.

Nonetheless, as the two biggest countries in the EU, Germany and France are regarded as the chief political motor in the EU when they decide to work together.

Austrian Chancellor Sebastian Kurz said his country would submit a counterproposal along with the Netherlands, Denmark and Sweden that would be based on loans, not grants, and avoid common borrowing. Such opposition means that the French and German ideas could be watered down in the final version, which would have to be approved by all 27 member governments.

Reluctance by Germany and other countries during weeks of debate about sharing the burden of the economic recovery from the pandemic - which was no European country’s fault - provoked angry responses in heavily indebted Italy. Economists have expressed concern that Italy will come out of the crisis with even more debt and could face a financial crisis that would destabilize the wider region.

“Whether the recovery fund – if and when it is finally agreed – will help to dispel this impression and thus curtail the tail risk that a disaffected Italy may turn more euro-sceptic over time remains to be seen,” said Holger Schmieding, chief economist at private bank Berenberg. “But egged on by France, Germany is now taking the political risks sufficiently serious.’

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Associated Press writers Angela Charlton in Paris, Lorne Cook in Brussels and Jari Tanner in Helsinki contributed to this report.