France and Germany's $550 billion coronavirus rescue proposal is a 21st century Marshall Plan, but it could be dead before it even gets started

• Germany and France on Monday proposed a European Recovery Fund worth €500 billion ($547 billion) to tackle the economic fallout from the coronavirus pandemic.
• The plan would be the most significant transnational fiscal effort in Europe since the Marshall Plan, which helped rebuild the continent after World War II.
• Designed in particular to help industries worst hit by the virus, like aviation and hospitality, the fund would provide grants that would not have to be paid back, rather than loans.
• However, the fund could be dead before it has even got off the ground, with several countries in the bloc publicly opposed to using grants.
• The European Commission is expected to unveil its own proposal on May 27.

A €500 billion ($574 billion) coronavirus recovery fund proposed this week by France and Germany could be the modern day equivalent of the Marshall Plan — the post-World War II economic package designed to save the European economy — analysts said.

The eurozone's two biggest economies announced a joint proposal Monday, designed especially to tackle sectors most impacted by the coronavirus pandemic.

"We have to act - we have to act European so that we can get out of this crisis well," German Chancellor Angela Merkel said after talks with French President Emmanuel Macron.

The idea is that the funds will be raised and distributed by EU's executive body, the European Commission, and be handed out in the form of grants to sectors like travel and hospitality, which have been ravaged by the pandemic.

Although the European Commission itself has not put forward its own relief plan yet, it is expected to do so next week.

The key difference between the relief package proposed by Berlin and Paris, and the package that will likely be proposed by the European Commission on May 27 is that it advocates giving grants instead of loans. These will later be paid back from the EU Budget, over a longer period of possibly 20 years.

Indeed UBS noted: "What makes the Franco-German proposal significant is the idea that the €500 billion fund (3.6% of EU GDP), borrowed by the EU Commission, would be fully mutualised – i.e. entirely distributed via grants, not loans."

Such a plan would require consent of all 27 EU countries, with some already indicating that they will not back it.

Most analysts cheered the announcement but they had varied opinions on how effective the measure will be.

Grants instead of loans

Mohammed Kazmi, portfolio manager for UBP's Absolute Return Fixed Income team, said in a note Tuesday: "The proposed EU recovery fund by Merkel & Macron is certainly a positive surprise for market participants."

He added: "Significantly, the proposal brings to the table the idea of debt mutualisation for the region, in which funds would be provided as grants, rather than loans."

Andreas Billmeier, sovereign research analyst at Western Asset, likened the proposal to the Marshall Plan, the American initiative passed in 1948 for foreign aid to Europe.

"We view the French-German proposal as a very significant step forward in the European institutional architecture. If adopted as outlined, the grant-based recovery fund will be of similar importance as the Marshall Plan was for the receiving countries in the late 1940s/early 1950s."

The Marshall Plan provided a then-unprecedented $15 billion of funding from the US to bail out European economies that were ravaged by the war, and help them rebuild the infrastructure that had been destroyed during the fighting.

Read more: GOLDMAN SACHS: Buy these 21 cheap under-the-radar stocks that offer market-beating growth potential right now.

The proposal could be dead before it gets going

Most analysts said some countries in the bloc like Denmark and Austria are opposed to giving grants, and would like the scheme to involve giving loans instead.

"The Austrian chancellor, Sebastian Kurz, said that he and his Dutch, Danish and Swedish counterparts were only prepared to accept a recovery fund based on loans," UBS noted.

"Our position remains unchanged. We are ready to help most affected countries with loans," Kurz tweeted Monday after the plan was unveiled. He added that his position is shared by the leaders of Sweden, Denmark, and the Netherlands.

Naeem Aslam, chief market analyst at Markets.com, said: "Countries like Denmark do not agree with the package. We are still not there, it is going to take some time."

He said the deal is a "decent sized-package" and doesn't expect the figure to increase after this but he expects European stock markets to be more concerned about progress on a vaccine than on the relief fund over the next few months.

Read more: Small companies are the biggest post-coronavirus battleground on Wall Street. 4 of the world's best fund managers share their strategies for the space - and the single stocks they love.

"Markets have moved away from the fiscal stance, a lot has been done in terms of monetary policy. Focus is likely to be on the vaccine," Aslam added.

But UBS said: "Obviously, all national governments and parliaments would have to agree to this proposal — which implies a significant risk that the Franco-German proposal will be vetoed or watered down."

The EU Commission is expected to propose its own blue print on May 27, but it could be months before any stimulus package is approved and enacted.

UBS said it only expects a deal to be sealed in the second half of the year.

"We would expect EU Finance Minister to take the discussion forward and then hand over to EU leaders, who might discuss the Recovery Plan and the EU 2021-27 budget at their summit on 18/19 June; but a final deal might only be sealed in the second half of the year," UBS said.

The Franco-German proposal is the latest enoromous stimulus package suggested in major economies to help stave off the worst of the economic pain of the coronavirus. In the US, a $2 trillion fiscal stimulus package has already been rolled out, and on Friday, the House of Representatives voted to approve a second set of stimulus measures worth $3 trillion proposed by Democratic leader Nancy Pelosi.

The bill, which still requires Senate approval, is highly contentious, with numerous Democrats voting against it, and Republican Senate Majority Leader Mitch McConnell describing it as "a parade of absurdities," according to the Wall Street Journal.

Read the original article on Business Insider