- On 18 May Germany and France proposed a €500bn recovery fund financed by debt issued by the European Commission.
- It was a historic change of position for Berlin: until then, each country financed itself by issuing its own debt.
- It anticipated years of European funds tied to the green and digital transition; it pays to identify which of your own investments fit.
On 18 May 2020 Germany and France proposed a €500bn recovery fund, financed by debt issued by the European Commission. The initiative, driven by the two largest countries in the euro area, represented a historic change of position by Berlin, until then reluctant to let the EU borrow jointly. That both countries agreed on a proposal gave it a political weight that an isolated initiative would not have had.
The proposal was not yet a decision: it had to be negotiated with the other member states, whose positions were not identical. But it set the course of the discussion and gave a clear signal to markets, governments and companies that Europe was considering a shared response to the crisis.
An unprecedented proposal
Until then, each European country financed itself by issuing its own debt. The Franco-German proposal envisaged the European Commission, on behalf of the EU as a whole, issuing debt to finance a recovery fund. That Berlin accepted the idea represented a historic change of position. That it was even raised showed how far the crisis was altering Europe’s political balances.
The difference is substantial. When a state borrows alone, the market demands an interest rate according to its own solvency, and the more indebted countries pay more. A joint issue spreads the responsibility among all members and, in principle, allows the money to reach those who need it most on better terms. That is why the proposal was read as a step towards greater fiscal integration. A common fund can also help bring the financing conditions of companies in different countries closer together.
Grants, not just loans
For the hardest-hit countries, Spain among them, the proposal opened the door to grants and not just loans. The difference matters: a loan must be repaid and adds to the recipient country’s debt, whereas a grant is aid that is not directly repaid. That eased the financial burden of the recovery. For a country with already high debt, that difference weighs heavily on the sustainability of its accounts.
Even so, a grant is not free money in the strict sense: someone has to repay the debt issued, and that responsibility is shared among member countries over the years. For a citizen or a company, this means that the discussion was not only technical but political and fiscal, and that its details would have lasting consequences. Following the negotiation, with its nuances, helps avoid mistaking an announcement for a final decision.
What it anticipated for companies
For companies, it anticipated years of European funds tied to the green and digital transition. Projects that best fit European priorities, such as energy efficiency, digitalisation or sustainability, would be the most favoured. It was worth starting to identify which of one’s own investments could meet those criteria. European priorities pointed to where to direct investment effort, beyond the immediate availability of the money.
Preparing does not require waiting for calls for applications to open. One can start by putting in order the projects one had in mind, estimating their cost and timetable, and checking what documentation and co-financing capacity would be needed. When the programmes take shape, whoever has the groundwork done will be better placed than whoever must start from scratch. It is also worth knowing how much own or bank financing they would require, because aid rarely covers the whole of a project.
A political proposal is not yet aid, but it shows where the money will go.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
