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Did Angela Merkel Just Make a U-Turn in Her European Policy?

Andreas Kluth

(Bloomberg Opinion) -- If it pans out, it could be a breakthrough in the otherwise sorry tale of the European Union’s response to the Covid-19 pandemic. Germany and France, the bloc’s two largest countries, are jointly proposing a generous “European recovery fund.” It’s to be administered through the EU’s budget, financed by EU-issued debt and funneled to the regions worst hit by the coronavirus, including Italy and Spain.  

Whether German Chancellor Angela Merkel and French President Emmanuel Macron can convince all the other 25 national leaders to go along with their idea remains to be seen. But for Germany in particular, even this first step already amounts to a dramatic change. A country that has consistently rejected any notion of a European “transfer union” or “mutualized borrowing” is now pushing for a soft and temporary form of both. How did this change come about? And how different is the direction really?

Merkel, in her fifteenth year in power, may be riding high in the polls at home for managing the Covid-19 outbreak relatively well. But she’s come under a lot of pressure in the EU of late. Especially in Italy and Spain, politicians and voters feel “the north” hasn’t been forthcoming in helping the south, where the medical and economic devastation is greatest.

Merkel and the whole German establishment have been genuinely shaken by polls showing the Italians turning into Euroskeptics, and by the specter of the EU as such becoming irrelevant or even failing outright. Post-war Germany’s foreign policy is premised on both transatlantic and European integration. With the U.S.-German relationship already threatening to unravel, the prospect of a dissolving EU strikes almost existential fears in Berlin.

Nonetheless, Merkel personally and her compatriots generally remain as reluctant as ever to assume the mantle of European leader, or “hegemon.” But she has clearly decided that Germany must at least be seen to assume its traditional position again as co-rider of the Franco-German “tandem” that’s pulled Europe forward in fits and starts since the 1950s.

By the time SARS-CoV-2 was spreading to Europe, this Franco-German relationship had in effect broken down. Macron had too many times proposed bold new measures to reform the euro area, only for Merkel to feign support, then stand by idly as fiscally hawkish member states such as Austria and the Netherlands gave Macron the cold shoulder. He no longer even bothered to hide his frustration with Merkel.

But in this hour of crisis, the pair have decided to give their relationship another go. He’ll of course be paying close attention what Merkel does next, and Merkel knows it. Macron expects her to spend her considerable political capital leaning on the remaining member states to accept the proposed recovery fund.

First, there’s countries such as Hungary and Poland that used to be behind the Iron Curtain and are today the largest beneficiaries of the existing EU budget, and therefore not keen on seeing more of the pot go to southern countries. These eastern members basically have to be bought in, with promises that the new fund won’t jeopardize their takes.

Then there are the usual suspects in the north, including Austria, Denmark, Sweden and the Netherlands. Like the Germans, they are fiscally conservative and philosophically opposed to mutual debt and transfers within Europe. They’re especially aghast at the idea that the new fund should give out grants rather than loans. A counter-proposal from this group is on its way.

What could tilt the European balance one way or the other is therefore how the debate develops in the largest country, Germany. After all, German politicians on the center-right agree with the northern skeptics. Thus conservative factions within Merkel’s Christian Democratic Union have already signaled their opposition. “They’re our Dutch,” as Christian Odendahl, a German think-tanker, puts it.

But the overall German debate is tilting in favor of Merkel and Macron. Senior Christian Democrats in parliament have come out in support. So have Armin Laschet and Friedrich Merz, the two leading candidates to become the CDU’s next party boss and thus possibly chancellor. The backing of Merz, a die-hard fiscal hawk, is especially surprising, and thus telling.

One factor that nudged the change in consensus is a shock ruling by Germany’s constitutional court this month. It sharply circumscribed Germany’s ability to participate in the European Central Bank’s bond-buying programs to stimulate the euro area’s economy. In effect, the court has called a halt to the ECB’s creeping mission drift, or what I’ve called “treaty change on the down low.” The politicos in Berlin understood it as a signal that they must now do their part to save Europe with proper democratic legislation.

This recovery fund could be the first step in such a reform. As is her wont, however, Merkel has skillfully disguised it as anything but that, to make it easier for opponents to get behind the plan. To the extent that the fund involves joint EU debt, for example, it’s being sold as a less radical move than the “coronabonds” that southern Europeans have been clamoring for, and Germans dreading.

Thus, in the Franco-German plan, it’s the European Commission that would do the borrowing, and member states would be liable only up to their share in the EU budget — in Germany’s case, about one-fifth, or 100 billion euros ($109 billion) of the total. And funds wouldn’t just be handed over to countries at their discretion. They’d be disbursed according to the EU’s budget rules, with earmarks for specific projects. Above all, as Merkel keeps emphasizing, the whole idea is meant to be a one-time exception in extraordinary times.

All this suggests that Germany’s shift isn’t a “U-turn” and certainly not the “Hamiltonian moment” that would turn the EU from a bloc of sovereign states into a United States of Europe. Merkel is still Merkel, which means she will inch forward in the smallest possible increments. But she and Germany are now inching in a different, more European, direction. For a country so large, this is historic.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He's the author of "Hannibal and Me."

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