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Merkel, Macron back $543 Billion fund for EU crisis recovery

Germany and France agreed to support a 500 billion-euro ($543 billion) fund, backed by debt, to help the European Union weather the worst recession in living memory.

German Chancellor Angela Merkel and French President Emmanuel Macron proposed a plan to distribute the money to member states, with payments based on contributions to the bloc’s budget.

The leaders of the EU’s two biggest economies appeared together in a show of unity on Monday in an effort to bridge deep divisions over the recovery fund, the key tool to help stricken countries bounce back from the coronavirus pandemic.

“When Germany and France take the initiative, then this encourages the opinion-making process across the EU,” Merkel said after a video conference with Macron. “We will have to act European in order to get well out of this crisis,” which she called “biggest challenge in the history of the EU.”

With the prospect of burden sharing becoming more tangible, Italian bonds jumped the most since March with 10-year yields dropping as much as 20 basis points to 1.68%. The risk premium over German bonds, which declined on the news, narrowed to 216 basis points, the lowest level this month.

The euro climbed 0.6% to $1.0887.

Merkel said the funds will be within the framework of the EU’s budget, and the European Commission will have authority to borrow money on capital markets. The money will be handed out based on the needs of member states, while repayments would be pegged to the amounts paid into the bloc’s coffers, Macron said.

The plan marks an historic step toward bolstering EU’s financial power without breaking German taboos over borrowing. While the plan would make member states share liability for the recovery fund, it wouldn’t breach the German constitution because the exposure is limited, according to an official for Merkel’s Christian Democratic party.

“As Germans, we are ready to make a significant contribution to the regions and industries that are particularly hard hit,” said Eckhardt Rehberg, the CDU’s budget spokesman in German parliament. “European assistance is possible without coronabonds or Eurobonds — and thus without debt pooling.”

Backing Needed

Even as Germany and France find common ground, the world’s largest trading bloc is far from reaching an agreement over a package, which still requires backing from the 27 member states. An official in Vienna said the Austrian government remains opposed to any kind of handouts and wants aid to be disbursed as loans.

The European Commission, the bloc’s executive arm, floated a 2 trillion-euro plan last month that would have seen the EU borrow 320 billion euros on capital markets.

Countries are still negotiating what the final recovery mechanism will look like. The latest proposal is due on May 27.

The agreement between France and Germany “acknowledges the scope and the size of the economic challenge that Europe faces,” Commission President Ursula von der Leyen said in a statement.

The biggest obstacles haven’t been the German and French positions, but bridging differences between richer and poorer nations. On the one side, there’s the push led by Spain and Italy for more grants and common borrowing, while on the other side, the Netherlands, Sweden and Denmark want more loans to limit the risk of getting stuck paying the bill.

German Resources

The vast differences in resources was brought into focus after the EU said that Germany accounts for more than half of state aid approved to counter the pandemic’s economic fallout.

Most of the hardest-hit EU countries have been banking on the recovery fund. Draft plans seen by Bloomberg last month suggested the commission’s proposal would include a mix of loans and grants, as well as funds that will be used as guarantees to mobilize private investment, help sound companies replenish capital and invest in strategic sectors.

“The EU must act together, the nation state has no chance if it acts on its own,” said Merkel, indicating that further work to bolster the bloc is still needed. “This is the short response to the crisis, about the long one we will have to discuss.”

Original: BLOOMBERG — With assistance by Viktoria Dendrinou, John Ainger, and Birgit Jennen