Nothing is ever what it seems in EU statecraft. The “Hamilton Moment” proclaimed by project enthusiasts this week is a theatrical sleight of hand.
The Rubicon has not been crossed. The €500bn Merkel-Macron plan is not fiscal union. It is not the start of eurobonds or joint and several debt issuance.
It is not a great leap forward in the constitutional structure of the EU that many wish it to be. Nor does it rectify the structural failings of monetary union, nor restore the post-Covid solvency of Italy and Club Med states facing a debt-deflation trap.
The Franco-German plan is an “exceptional one-off effort” to repair storm damage from Covid-19. Once it is over, Europe returns to the status quo ante. There is no federal revolution.
Alexander Hamilton’s First Report on the Public Credit in 1790 led to the absorption of all legacy debts built up by the thirteen colonies in the Revolutionary War, justified because the independence struggle had been a shared enterprise.
Virginia and the rich tobacco states “bailed out” New England, with creditor haircuts along the way. The US Treasury became the undisputed master of debt issuance.
Europe is doing no such thing. It is not pooling the legacy debts racked up over twenty years of under the stormy euro experiment.
There is no plan to wipe the slate clean and ensure equal chances for Club Med, caught in a bad equilibrium as much due to Germany’s “beggar-thy-neighbour” policies (Hartz IV wage suppression) and export mercantilism as to their own mistakes. Nor is Europe creating an EU treasury.
The Merkel Macron plan is real money rather than “dubious multipliers and financial wizardry”, to borrow from the European Parliament this week. It proposes grants rather than loans to regions (and sectors, nota bene) hit hardest by the pandemic.
This is a concession by Berlin but be careful. It was quickly endorsed by strict Ordoliberals and the eurosceptic wing of Angela Merkel’s CDU-CSU coalition. That should be a warning flag. The hardline IFO Institute praised the scheme precisely because it is temporary.
It will be watered down further once the “frugal four” of Austria, Sweden, Denmark, and The Netherlands have had a go at it. “We refuse to finance direct subsidies,” said Austria’s finance minister Gernot Blumel, on cue and doubtless prompting wry smiles in Berlin.
The money will not start flowing until next March. It comes too late to avoid first-stage hysteresis in Southern Europe. The Commission’s own plan next week – closely related – will be stretched to roughly €150bn a year over three years. That is 1pc of the union’s GDP annually. It hardly moves the macro-economic needle in these extreme circumstances.
The Markel-Macron plan is a special outlay. The money is raised through debt issuance under the broad authority of Treaty Article 122, which allows emergency support for a member state “threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control.”
The Recovery Fund is under the control of the Commission and is linked to the next seven-year budget. This makes a Brexit extension even less appetising – even if the Government was prepared to continue swallowing fresh EU laws without a veto – since the Merkel-Macron plan would in effect double annual payments. The British would be on the hook for large sums of money and precious little would come back.
After a few years the Recovery Fund would terminate. Nothing fundamental changes. The French hope to slip through changes that make this more permanent, such as a EU revenue stream from carbon taxes or a Tobin tax on financial trading - copying Hamilton’s federal excise duties. Bonne Chance.
The CDU-CSU hawks will nip that in the bud. The Recovery bonds will expire and will then have to be repaid from future EU budgets, much to the horror of net beneficiaries such as Poland, Hungary, or the Balkans.
The whole venture has to comply with EU Treaty Law and the German Basic Law. Otherwise the crimson judges of the Verfassungsgericht will issue another bombshell ruling. It always comes back to that court house in Karlsruhe.
The joint Franco-German declaration said the grants will be subject to strict conditions. Recipients will be made to jump through hoops and swallow “reforms” dictated by officials in Brussels. It is not the Troika treatment of 2010-2015 but it is not Manna from Heaven either.
Claudio Borghi, Lega chairman of the budget committee in the Italian lower house, says Italy is a net contributor to the EU budget and therefore gains almost nothing from going along. “They present it as if it were a grant but it is really just a gimmick. We pay but they decide how we can spend our own money. That is how the story always ends with these EU funds,” he said.
By the time the aid funding is selected and decisions are made – no doubt after much horse-trading in Brussels – every country will be licking wounds from Covid-19. All have exposed sectors that need help. The 1pc of GDP a year will be spread so widely and thinly that any net transfers will be barely detectable.
The economic shock from Covid-19 has been cruelly asymmetric. The most indebted states have suffered the biggest hits, and have been least able to spend freely to keep their productive systems intact.
Morgan Stanley estimates that GDP will contract by 8.4pc this year in Germany, 10.7pc in France, 12-13pc in Spain and Portugal, 15pc in Italy, even under its base scenario. Under a botched exit and second wave – all too likely since the testing/tracking regimes are not ready – the fall would rise to 22.7pc in Italy and 22.6pc in Spain. The effect on debt dynamics is eye-watering. Jefferies thinks a W-shaped scenario would push Italy’s debt ratio to 183pc.
The Recovery Fund will not kick in this year. It may help slightly in preventing recessionary metastasis in the early 2020s, and shave a fraction off long-term Latin debt ratios. It makes scant difference in the greater scheme of things.
Italy’s debt will not be sustainable at the end of this crisis unless the European Central Bank keeps mopping up its bonds eternally. The ECB cannot do so after being declared ultra vires and a fiscal usurper by Karlruhe two weeks ago.
The Verfassungsgericht has forced Angela Merkel to make a gesture. The joint plan is intended to show fiscal willing – within Treaty law – and shore up the now hopelessly hobbled ECB.
But the demarche is more akin to the states rights philosophy of Thomas Jefferson than the vaulting federalism of Alexander Hamilton.
If the most violent economic shock in three hundred years does not force fiscal union, nothing will.
Historians may instead view this pandemic as Europe’s “Jefferson Moment”: the triumph of a confederal EU and the end of the integrationist dream.