In a major shift from her previous opposition to the idea of EU nations sharing debt, German Chancellor Angela Merkel has agreed with French President Emmanuel Macron to establish a European recovery fund.
Under the agreement, the two leaders are proposing €500 billion be distributed to EU countries that have been hardest hit by Covid-19.
This represents a softening of Merkel's long-held opposition to the idea of collective debt by the EU. The German Chancellor is cautious and thoughtful and had always rejected this type of idea on the basis that the EU should not become a debt union, where Europe's debts become common debt.
Angela Merkel's primary concern, and rightly so, is that sharing debt among EU nations opens the door to Germany taking on more and more of the debts of other EU countries.
However, the new recovery fund will be provided as grants and funded by money borrowed on the markets by the European Commission, which would be repaid gradually from the EU's overall budget.
Grants from the fund are also expected to be used by members to finance investment in a greener future.
This is a welcome development for southern EU countries like Spain and Italy, that were promoting the cause of solidarity through sharing debt that all members of the bloc will help pay off.
EU institutions have given their support to the idea with European Commission President Ursula von der Leyen saying that the proposal is an acknowledgement of the scope and the size of the economic challenge facing Europe.
And European Central Bank (ECB) President Christine Lagarde describing it as ambitious, targeted and welcome.
Although Germany and France are the two most important countries when it comes to setting the EU's agenda and direction, other members of the bloc still have to agree with the proposal.
There already seems to be some resistance from the Austrian Chancellor Sebastian Kurz, who would rather see loans than grants given to members requiring assistance. However, it is unlikely that the proposal will not eventually win unanimous approval.
What does this mean for the market?
It is very welcoming for EUR bulls, which are already boosted at present, by growing risk appetite in the market this week so far. Given this tone from Germany, it is encouraging, given their known hard stance on such collective funding. The risks to the downside for the Euro could be minimizing, with markets shrugging off the concerns over the German court ruling on ECB stimulus earlier in the month.
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