Financed by “borrowing from the market in the name of the EU”, the fund will flow to the “worst hit sectors and regions” in the 27-member bloc.
Countries benefiting from the financing would not have to repay the sum, said France's President Emmanuel Macron.
“What is sure is that these €500 billion will not be repaid by the beneficiaries,” he said at a joint video news conference with Chancellor Angela Merkel.
“We are convinced that it is not only fair but also necessary to now make available the funds… that we will then gradually repay through several future European budgets,” said Merkel.
The borrowing would not amount to the so-called “coronabonds” sought by Italy and Spain because it would be made and repaid under the framework of EU budgets, rather than a direct mutualisation of debt by member states.
But it nevertheless marks a major shift by Germany, which has until now rebuffed talk of common borrowing.
Germany, the Netherlands and other rich countries had long seen coronabonds as an attempt by the indebted south to unfairly take advantage of the north's fiscal discipline.
But Merkel said the seriousness of the crisis meant that “solidarity” must be the order of the day.
“The aim is to ensure that Europe comes out of the crisis more cohesive and with more solidarity,” said Merkel, calling the proposal “courageous”.
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EU chief Ursula von der Leyen on Monday hailed the plan proposed by France and Germany to relaunch the
“I welcome the constructive proposal made by France and Germany,” said Von der Leyen who is head of the European Commission, the EU's executive arm that would implement the plan.
“It acknowledges the scope and the size of the economic challenge that Europe faces,” she said.
“This goes in the direction of the proposal the commission is working on which will also take into account the views of all member states and the European Parliament,” Von der Leyen said.
The joint stance by France and Germany is significant as it will put pressure on the EU's more frugal minded member states to contribute the extra money needed to pay for the plan.
The €500 billion will come in addition to the EU's normal spending plans for 2021 through 2027, which are currently under negotiation.
Europe has seen some of the worst effects of the pandemic, with highly indebted countries such as Italy and Spain calling for help from richer partners such as Germany and the Netherlands.
Those countries are reluctant to get into a major borrowing scheme with their southern partners that are seen as overspending and reluctant to implement necessary economic reforms.
“It is going to take willingness to reach an agreement and everyone is going to have to shift their positions,” a European official said on condition of anonymity.
The latest statements by German Chancellor Angela Merkel “will help”, the source added.