The French-German proposal for a €500bn recovery fund to help repair the economic damage from the coronavirus pandemic is an important breakthrough in the quest for solidarity among EU members. Berlin has long resisted French ambitions for greater fiscal burden-sharing, impervious to arguments that the eurozone’s stability is at risk without it. Chancellor Angela Merkel’s support for large transfers rather than loans to hard-hit regions, financed by commonly-issued EU debt, is an important concession commensurate with the gravity of the crisis and the need for a bold response.
Believers in a politically united Europe have long yearned for an irrevocable act of fiscal integration to fill the hole left when the EU’s currency union was formed in 1999 — an equivalent to when Alexander Hamilton and the other US founding fathers agreed the federal authorities should assume the debts of the states.
The agreement between Chancellor Merkel and President Emmanuel Macron is not quite a “Hamiltonian moment”. It does not create a permanent system of fully mutualised debt. It does not spell out how the sums raised are eventually to be repaid, but it leaves no doubt that wealthy creditor states will not be liable for others’ debts. Nor will it be the last word on the matter. The European Commission will present a formal blueprint on May 27. EU heads of government will then have their say. Unanimity among all 27 EU states will be required.
The handful of governments — notably, Austria, Denmark, the Netherlands and Sweden — that are suspicious of the proposal’s design and implications for EU debt-raising and spending policies would do well not to block it or dilute its core features. The lesson of past crises is that inadequate measures sharpen disagreements among governments, stimulate public frustration with the EU and sow doubts in financial markets about the eurozone’s stability.
The French-German initiative stands out from crisis-fighting measures deployed in the sovereign debt and bank turmoil of a decade ago, or adopted earlier in the pandemic. The commission would raise the money on a long-term basis from financial markets, creating a potential precedent for large-scale, centralised borrowing in future crises. Moreover, the initiative sends a positive signal that Germany and France are able to throw their combined political weight behind innovative measures aimed at helping vulnerable countries for the sake of eurozone unity.
In contrast to the emergencies of 2008 to 2015, when EU leaders acted in fits and starts and too often did the bare minimum necessary to ensure the eurozone’s survival, the policy response to the pandemic is proving to be faster and better co-ordinated. Already the EU has made available credit lines under the European Stability Mechanism, its firefighting fund.
It is also setting up a new loan and guarantee scheme at the European Investment Bank, and finalising an EU-wide plan to mitigate unemployment caused by the pandemic. Still more important is the European Central Bank’s readiness to defend the eurozone with expanded bond-buying.
These measures have taken shape in an impressively short space of time. But even if implemented in full, they may not be enough to prevent a future financial crisis. The pandemic is fuelling higher government debts. The German constitutional court is trying to limit the ECB’s freedom of action, and the Franco-German initiative illustrates the limits of what is possible under EU treaty law. Testing times still lie ahead for the EU.
