Germany’s Scholz sees recovery fund as more than money

German finance minister talks to POLITICO about the need to look beyond national economies to make an EU that can work for decades to come.

The Franco-German proposal for a €500 billion European pandemic recovery fund has kindled a fierce debate about EU finances.

But the plan is about more than how many euros it contains or how the cash is distributed, according to Germany’s finance minister.

The coronavirus fallout should spur European governments to more closely integrate their economies and cement the EU’s place as a major player on the global stage, Olaf Scholz said in an interview.

“It is not just about money,” Scholz said. “It’s about making Europe stronger and working on better sovereignty of our European Union, which will be absolutely necessary in a world which will be completely different in 20 years.”

Scholz's rallying call came as the European Commission was preparing its own recovery fund proposal to restart the economy via the EU’s next seven-year budget.

For any recovery to work, the German Social Democratic minister warned in the interview Monday that it must focus on the EU as a whole, rather than thinking in terms of national economies.

That’s why German Chancellor Angela Merkel and French President Emmanuel Macron together proposed a European recovery fund of €500 billion to be given as grants — not loans — to governments in need.

“It’s absolutely crucial that we understand that for the recovery program, we should have another view on what is needed,” Scholz said, speaking by phone from his ministerial office in Berlin, which he prefers to working from home.

But the plan faces resistance from Austria, Denmark, the Netherlands and Sweden.

The “frugal four” reject any risk of having to pay for other countries’ recovery spending. They counterproposed a recovery fund only offering loans, which would come with conditions for economic reform, so that each country is responsible for its own recovery costs.

Austria’s prime minister, Sebastian Kurz, took a swipe at the Franco-German proposal the same day it came out. “Our position remains unchanged,” he tweeted. “We are ready to help most affected countries with loans.”

Such opposition represents a serious challenge. Both the Berlin-Paris blueprint and the proposals coming from Brussels involve the Commission raising money by selling bonds on capital markets. The debt issuance will only fly if unanimously backed by EU member countries.

Scholz argued that the free cash must be seen as a counterbalance to loans already being offered under €540 billion worth of economic measures previously approved by finance ministers.

Big picture

Focusing on these details and attaching conditions to the fund’s money distracts from the bigger picture of European unity, Scholz said.

“We are much more interlinked than we were 30, 40 years ago,” the 61-year-old said. “We can see it in the supply chain of European companies.”

Those supply chains are under threat after national lockdowns were introduced to limit the outbreak, which has killed more than 350,000 people worldwide.

Governments have doled out around €2 trillion in state aid to prevent mass bankruptcy and unemployment. But high debt in countries like Italy and Spain has limited the amount of financial firepower that's available to governments.

It shows. German companies have benefited from around half of the state aid provided across the bloc, while 18 percent has gone to Italian firms and only 4.3 percent to Spanish corporates.

Leaving governments to their own devices will have serious knock-on effects for all EU countries, which have bound themselves together in open markets and free trade, according to Scholz.

“It is not really possible to separate the European economy and national economies any more, as was the case a decade ago” when the last crisis hit, the former Hamburg mayor said.

In calling for more integration at EU level, Scholz invoked Alexander Hamilton, one of the founding fathers of the United States. In 1790, he brokered a deal for the nascent federal government to assume states’ debts from the war for independence from Britain.

It’s a process

There are limits to the German's integrationist push.

EU-level debt issuances will be a one-off feat to tackle the pandemic, while the recovery fund should extend no further than 2023, Scholz said.

There’s also no need yet for an EU finance minister to take charge of a eurozone budget, he added — an opinion that leads some think tankers to say talk of a Hamiltonian moment is overstated.

Governments can still push ahead with reforms such as making more use of the eurozone’s bailout fund, the European Stability Mechanism (ESM), Scholz said.

Italy blocked the upgrade in December amid fears that the new body could enforce an automatic restructuring of sovereign debt for eurozone countries seeking bailout money. The ESM itself has sought to remove those concerns. But the deadlock remains.

“We need progress,” Scholz said, calling EU political integration “even more necessary” as the bloc takes on collective debt to recover from the crisis.

He also called for a more integrated approach to generating revenue streams for the EU budget and development aid. The veto that each government holds over tax initiatives from Brussels should go, he added.

“Hamilton understood he could not just solve the problem of the time without getting political progress in the union,” Scholz said. “This is also a moment where we should do some progress.”