The EU's 500 billion euro coronavirus bailout plan could be a big step towards a federal Europe

• France and Germany have proposed a massive EU rescue plan worth 500 billion euros to fund the bloc's recovery from the Covid-19 pandemic.
• The plan would represent a huge outright transfer of money from richer countries in northern Europe to poorer ones, and the funds would not need to be repaid.
• It could reshape the future of Europe, representing a centralisation of Brussels power which some member states have long been pushing for, and which others remain deeply sceptical of.

Standing alone, with Emmanuel Macron beamed in beside her on television, Angela Merkel held a press conference in May at which the pair made a proposal so radical it could determine the fate of the European Union.

The Franco-German proposal was a 500 billion euro ($555 billion) coronavirus rescue fund, raised from the financial markets and guaranteed by the EU budget, to fund the bloc's recovery from the COVID-19 pandemic. Countries worst-affected by the crisis would receive billions of euros in direct cash transfers. There would be few strings attached. It would not need to be repaid. A further 250 billion euros would be made available in the form loans, the EU Commission has since suggested.

It is difficult to understate just how radical and transformative the proposal is. Economically, the plan would represent a huge outright transfer of money from richer, more frugal countries in Northern Europe — led by France and Germany — to poorer states in Southern Europe. Italy would receive the biggest chunk of money, and Spain the second largest.

Politically, it is seismic. Merkel and Macron, who have never seen eye-to-eye on EU integration, have emerged as a unified front. Germany has abandoned its decades-long refusal to allow any government borrowing to support struggling EU members, instead adopting an arms-wide embrace of collective debt (it is not a coincidence that she is not seeking re-election next year.)

Merkel, with one eye on her domestic audience, has insisted the plan is a "one-off" rather than a step towards further federalisation of Europe. But there is a growing consensus that its significance is such that it could permanently alter the nature of the EU, pushing it several steps closer to a federal union of states.

"I don't know what [Merkel] meant when she referred to the "one-off" solution," said Fernando Nelli Ferocci, a former European Commissioner who is currently the president of Istituto Affari Internazionali, an Italian international relations think-tank.

"Of course the fund will be temporary and targeted, it's been said very clearly," he told Business Insider. "But nevertheless, the proposal as it is formulated is very normative."

"Even though only focused on the recovery fund, I think it's in a sense an important step forward in an advancement — at least from a political conception point of view — towards a deepening and completing of the governance of the Eurozone."

Coronavirus has changed everything. Every country in the Eurozone can now expect to enter a recession this year, and there is a growing acknowledgement that radical action — and a lot of money — will be needed to secure the bloc's future.

It represents a potential centralisation of Brussels power which some member states have long been pushing for, and which others remain deeply sceptical of, with power significantly more focused in Brussels.

Creating a space in the EU budget to raise debt and pay it to member countries in grants is a "big shift" which could push the EU system towards something more closely resembling the United States than the current European Union, according to Andrew Watt, head of the European economic policy unit at the Macroeconomic Policy Institute.

"That's looking more like a traditional set up like you would have in the US, with European characteristics of course," he told Business Insider.

"You're setting up the precedent and to some extent the mechanisms for achieving that. Then it's just a question of the political will and necessity to do that."

Such a radical plan will inevitably face restistance and could be watered down. Debt-sharing, especially on this scale, is still a taboo among the richer northern European states, led by Austria, Sweden, and Denmark, who typically favour loans instead of grants.

Mark Rutte, the Dutch prime minister, has already insisted that any recovery funds "should consist of loans" and indicated a struggle ahead this week when he adopted a tough stance, warning that countries would have to introduce significant fiscal reforms as a condition of receiving any grants.

"We have set out our position clearly: countries that are bailed out will have to say what they will do to make sure this situation does not arise again," he said.

Austrian Chancellor Sebastian Kurz has also indicated his firm opposition to the plans in their current form. "We say a clear Yes to corona emergency aid, but what we reject is a debt union through the back door," he said earlier this month.

Ultimately, however, the member states are unlikely to wield enough influence to stop the plan from going ahead.

The "frugals" may yet try to negotiate down the volume of funds available, make a bigger proportion available as loans rather than grants, or attach conditions to the grants. Countries — especially smaller ones — do not typically like blocking such big policy proposals which have wide support from other member states.

Merkel, for her part, says she has been spurred into action by a bombshell ruling in May at Germany's constitutional court, which challenged the European Central Bank's bond-buying scheme — the method which the EU used to try and power growth after the 2008 financial crisis.

Whatever the reason, the proposal may well not be the "one-off" that Merkel promises.

"Once you've established this principle — that you create a space in the EU budget and you authorise the [European] Commission to raise debt on the markets in the name of the EU as a whole, then you pay down that debt via the EU budget, that's a bit of a different ball game," Watt said.

"It's perfectly reasonable to say this is a one-off thing. But once you set up that mechanism, and cross that rubicon, it's a blueprint that could be used for other things — for the whole decarbonisation agenda, or for when the next economic crisis hits."