German business body calls for European fiscal solidarity

Germany’s main business organisation has called for more “fiscal solidarity” in Europe, in a sign of widening support in Berlin for a bigger German contribution to the post-coronavirus recovery from what is expected to be the continent’s worst recession since the second world war.

The appeal was contained in a paper issued jointly by the heads of the Italian, French and German employers’ federations that calls on the EU to provide an “unprecedented and ambitious” response to the pandemic.

“There must be a strong element of true fiscal solidarity by common resources for those countries most strongly affected,” the paper, seen by the Financial Times, said. It was issued jointly by Germany’s BDI, Medef in France and Italy’s Confindustria.

The wording is unusual because many in Germany’s political and business establishment oppose fiscal burden-sharing between eurozone member states, fearing that German taxpayers will end up having to underwrite the public finances of poorer countries in southern Europe. 

Germany strongly backed the €540bn package of emergency measures agreed by EU leaders late last month and has endorsed the idea of a “recovery fund” designed to fuel the revival of member states’ economies once the anti-coronavirus lockdowns ease.

But there is still deep disagreement within the EU over what form the aid distributed from the fund should take. Some countries, such as France, Italy and Spain, advocate direct grants to stricken economies, rather than just guarantees for private investment projects and loans that will add to their already enormous debt piles.

However, Angela Merkel, the German chancellor, is sceptical about the idea of grants. She told fellow EU leaders at a summit last month that any funds borrowed by the European Commission to finance the recovery must ultimately be paid back.

That view enjoys broad support in Berlin, especially in Ms Merkel’s ruling Christian Democratic Union. Yet concerns are rising in business circles that loans might not be enough, and that some countries will require direct transfers of cash to get back on their feet after the damage done by the lockdowns. 

The thinking is that economic crises in weaker eurozone countries will also have an impact on Germany, which cannot afford to see its key European export markets collapse. “Most of the money we give to other EU member states will come back to us in the form of orders for our companies,” a person close to the BDI said.

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Ms Merkel herself has spoken of the need for solidarity with fellow EU states laid low by the pandemic, telling the Bundestag last month that Germany must be prepared to make higher contributions to the EU budget “in a spirit of solidarity — because we want the economies of all member states to be able to recover”.

In their joint appeal, the BDI, Medef and Confindustria said the recovery fund, which will be set up as part of the EU’s upcoming multiannual financial framework, should “provide a good balance of loans and grants to member states”.

They also called on member states to launch a post-crisis fiscal stimulus, with policies that “support domestic demand once the supply-side disruptions fade”. They said that most European countries would have to spend 5 per cent of their gross domestic product per year, at least until 2023, on a fiscal response, both on a national and European level.

“Getting the European response right in terms of the size, the timing, the type of financing made available and the link to existing or new spending programmes will determine how the European Union can emerge out of this crisis,” they added.

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