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France and Germany to propose €500bn EU recovery fund

France and Germany have agreed to propose creating a €500 billion Recovery Fund that would offer grants to European member states and regions hit hardest by the coronavirus crisis.

In what French President Emmanuel Macron said was a “major step forward”, the two countries said they were also proposing to allow the European Commission to borrow money on financial markets in the European Union’s name, while at the same time respecting EU treaties.

France and Germany had struggled to present a united front in the coronavirus crisis, with France leading a push by mostly southern European countries to convince fiscally conservative countries like Germany to issue joint European debt to help them weather the economic impact.

But the Franco-German deal unveiled today seeks to break the impasse and act as a blueprint for a wider EU agreement.

Whether fiscal hawks like the Netherlands were willing to back the initiative from Paris and Berlin, which notably proposes offering struggling EU countries grants rather than loans, remained unclear.

However the announcement helped to give an extra push to European markets that were already trading higher, as governments relaxed coronavirus lockdowns and investors were willing to bet that the world economy has seen the worst of the pandemic’s impact.

Oil prices surged back above $30 per barrel and gold rose to levels not seen in more than seven years.

Traders also not only brushed off a warning from the head of the Federal Reserve that a full recovery would likely not come until next year, but took the statement as a sign that more central bank stimulus is coming, further fuelling their appetite for stocks.