France and Germany buddy up on spending plans

France and Germany jointly presented their national plans under the EU’s pandemic recovery package, in a show of unity of Europe’s strongest bilateral link.

“It was important for us to do this presentation together, as Germany and France have been working hand in hand since the beginning of the crisis,” said French Economy Minister Bruno Le Maire at a press conference Tuesday with his German counterpart Olaf Scholz.

The two countries’ joint pitch for a debt-fueled pot of money to rescue Europe’s pandemic-battered economies led to EU leaders agreeing to issue over €800 billion in joint debt for the first time. The fund, whose centerpiece Recovery and Resilience Facility will disburse up to €338 billion in grants and €386 billion in cheap loans to EU countries, is expected to start paying out this summer, subject to approval of the national plans by both the Commission and the Council. 

“When France and Germany want, Europe can,” Le Maire quipped. 

France, Germany, Italy and Spain will submit their plans to the Commission jointly on Wednesday, Le Maire said, urging the EU executive to clear them “as soon as possible so they can be approved by the Council by the end of July at the latest,” and for the first tranche of payments to flow “before the end of the summer.” 

The Commission has two months to assess the plans and make a funding proposal to the Council, which must sign off on it by a qualified majority vote within one month. Countries are then eligible to receive 13 percent of their allocated resources, with the rest being unlocked over the years up to 2026 subject to achievement of planned investments and reforms.

Neither France nor Germany requested access to the loans portion of the fund, as expected, due to their high credit rating allowing them to borrow capital on similar or better terms than the Commission. The French recovery plan amounts to a total of €100 billion, with €39.4 billion being financed by EU grants and the rest by national borrowing. France has however requested €41 billion in grants, more than its shared allocation under the regulation, a spokeswoman for the finance ministry confirmed without specifying the reason.

The German plan amounts to a total €28 billion expenditure, with the government topping up €25.6 billion EU grants with its own funds.

France expects its plan to increase economic growth by 4 percentage points over the period 2020-2025 and create approximately 240,000 jobs by 2022. Germany expects its GDP growth to be 2 percentage points higher in the long term compared to a baseline scenario, and for employment to improve by half a percentage point.

France and Germany plan to spend 50 percent and 40 percent, respectively, of the funds on climate-related investments — “well beyond the ambitious targets [37 percent] set by the EU,” as Germany’s Scholz put it.  

In France, the largest chunk of green investments will be allocated to infrastructure and mobility, some €7 billion. The airline sector will receive approximately €1.5 billion, while support for the rail sector amounts to €4 billion.  

In Germany, investments in decarbonizing transport and electric mobility will amount to €5.5 billion, with another €3.3 billion on developing hydrogen technology. 

Both countries are also investing heavily in digital by spending over 50 percent (Germany) and 25 percent (France) on projects including a new Important Project of Common European Interest on microelectronics, financed by Berlin for €1.5 billion, and a focus on “technological sovereignty” by France, costed at €3.2 billion. The Commission’s requirement is to spend at least 20 percent on digital investments.

Other large expenditure items include €7.7 billion for research, health and territorial cohesion in France, and €3 billion for hospitals in Germany.

Addressing structural issues through substantial reforms is another in-built condition of the Recovery and Resilience Facility, meant to make large-scale transfers under the fund more politically palatable for countries, including the Netherlands, Austria, Finland and Sweden, that have been skeptical of joint debt liability. All countries are required to address “all or a significant subset” of issues contained in so-called Country Specific Recommendations, or annual to-do lists that Brussels compiles for EU governments every year.

France in its plan included three key reforms: a reform of the unemployment insurance system, a climate law, and changes to the country’s public expenditure rules.

“We are not introducing reforms for the benefit of the European Commission — we’re introducing reforms for the benefit of French citizens,” said Le Maire.

The French plan provides no timeline for an upcoming but controversial pensions reform presented in December 2019 by the Macron administration, another key ask from Brussels. The reform is described as “essential” but discussions about it will only restart “as soon as the improvement of the health and economic situation will make it possible,” according to the plan.

The pension reform “is not a prerequisite from the EU. But I continue to think it is indispensable when the time comes,” Le Maire explained. 

The German plan lists a reform to remove barriers to investments and to modernize the public administration. However, a reform of the taxation system to move fiscal burden away from labor, as well as of the country’s pension system — both requested by Brussels — do not feature in the plan. 

Pushing back on criticism that the German plan lacked ambitious reforms, Germany’s Scholz said: “We are doing very ambitious reforms in the European Semester, as others will do … so you see we are on track.”

Want more analysis from POLITICO? POLITICO Pro is our premium intelligence service for professionals. From financial services to trade, technology, cybersecurity and more, Pro delivers real time intelligence, deep insight and breaking scoops you need to keep one step ahead. Email [email protected] to request a complimentary trial.