Facing a potentially ruinous recession caused by the coronavirus, the European Union seemingly drew inspiration from an unlikely figure: Alexander Hamilton.
Some of the political bloc’s biggest nations — France, Italy, and Spain — are projected to contract by around 10 percent this year alone. That means widespread job losses, the decimation of industries, hungry families, and millions perhaps more vulnerable to Covid-19.
To stave off such a calamity, the EU’s 27 leaders have for the last five days been haggling over the contours of a rescue package. Early on Tuesday morning in Brussels, they announced a dramatic deal — one that potentially signals a major shift in European politics.
The $857 billion stimulus will be split into roughly two parts: About $446 billion will be directly given as grants (meaning the recipients won’t have to pay any interest whatsoever) to the bloc’s hardest-hit states; the remaining funds will be offered as loans to countries that may not require as much assistance. Instead of having member states send their money directly to the union’s executive body to disburse — as it has in past decades — the European Commission will borrow from investors and lenders.
That’s why some dub this agreement “Europe’s Hamiltonian Moment.” As history buffs and fans of the hit musical might know, the first treasury secretary worried Virginia wouldn’t absorb New York’s debts after the Revolutionary War. As a fix, he had the US government take on the debts of all of America’s 13 states, bringing them closer into a fiscal union.
Something similar happened Tuesday morning. EU countries have historically been reluctant to take on the debts of their fellow member states, most famously when Germany didn’t want to lend to Greece during the eurozone crisis of the late 2000s. But now, “Brussels has the authority to borrow for the EU as a whole in response to the coronavirus-induced economic crisis,” said Rachel Wellhausen, an international political economy expert at the University of Texas at Austin.
That’s a noteworthy change, analysts say, though it may not be as dramatic as those who want to draw a parallel with Hamilton’s vision claim.
“This is not yet a Hamiltonian moment, but the fact that EU member states agree to borrow money in the markets to support European recovery and economic transition is a key signal,” Daniela Schwarzer, the director of the German Council on Foreign Relations, told me. The “decisions pave the way towards a deeper fiscal union,” she said.
It’s no wonder, then, that the EU’s leaders sound downright giddy about the agreement. “This is a good deal. This is a strong deal. And most importantly, this is the right deal for Europe, right now,” European Council President Charles Michel, leader of the bloc’s major decision-making body, said in a Tuesday statement.
Still, the pact has significant drawbacks and hurdles the union needs to overcome. First, Wellhausen warns it’s “unlikely this EU deal is big enough to really solve even the coronavirus-specific crisis.” That means it’s unlikely EU countries will bounce back to pre-coronavirus economies, but they may weather the oncoming storm.
What’s more, it’s still unclear how the EU will pay back investors or how member states will raise enough funds to refill the bloc’s coffers. And getting Poland and Hungary to approve the deal meant caving on measures tying funding to rule-of-law benchmarks, which may keep the accord from sailing through the European Parliament when it comes up for a vote.
The stimulus package, then, may end up more significant for what it represents than what it actually does to help individual economies that are suffering. “It is institutional evolution,” said Nicolas Véron, a Europe-based senior fellow with the Peterson Institute for International Economics.
The room where it happened
Striking a deal of this magnitude was never guaranteed, and it required two key compromises along the way.
Europe’s two most important leaders — German Chancellor Angela Merkel and French President Emmanuel Macron — along with the EU’s top officials pushed for a large economic rescue package. In May, European Commission President Ursula von der Leyen recommended about $575 billion be made available for no-interest grants to the continent’s heavily impacted countries like Italy and Spain.
But the sum received strong pushback from some member states, namely a five-nation group known as the “frugals”: the Netherlands, Sweden, Austria, Denmark, and Finland. Their main concern was a lack of visibility into how the severely affected countries would spend the grants.
Dutch Prime Minister Mark Rutte, referred to by critics as “Dr. Superstrict” or “Mr. No,” had long been critical about centralizing too much power in Brussels. He became the face of the frugals for pushing for the final deal to include an oversight mechanism and a lower grant total.
Rutte and his cohort’s opposition wasn’t popular with many other countries, though, and their demands had prolonged negotiations that were originally scheduled to last just two days. Hungarian Prime Minister Viktor Orbán, a hardline nationalist many say has essentially become a dictator, was so upset by the delay that he openly lambasted Rutte as someone who ruled similarly to Hungary’s past communist leaders.
But Rutte and the frugals succeeded. Simply put, the deal allows for any nation to call out another for poorly spending their grant from the $446 billion pot, and could even put a stop to their use of the funds. However, the European Commission will get the final say on each individual case, not the accusing country.
Getting that put into the final deal was seen as a big win for the Rutte-led frugals. “This is most definitely a compromise in which we can see [Rutte’s] fingerprints all over the place,” Adriaan Schout, a senior research fellow at the Dutch Clingendael think tank, told the Associated Press on Tuesday.
Merkel, Macron, and von der Leyen were also pressured from a different direction by Poland and Hungary, two nations that have for several years been steadily sliding away from the union’s democratic principles. Initial drafts of the agreement included a mechanism that would restrict countries in the bloc from receiving the economic relief if they failed to meet certain basic standards around rule of law and democracy at home.
Leaders from both countries balked at such a provision, knowing full well the EU couldn’t strike a deal unless all 27 nations agreed to it, and they ultimately got their way. The final document signed Tuesday was toothless on democratic issues, merely noting that “The European Council underlines the importance of the respect of the rule of law.”
Some experts didn’t really fault Europe’s leaders for making such compromises in the interest of moving forward, given the scale and immediacy of the economic crisis and the reality that forgoing a pact would have little to no impact on the state of democracy in Poland and Hungary. “It’s highly debatable how much the EU could actually do about it,” Véron, the Peterson senior fellow, told me.
Kathleen McNamara, an EU expert at Georgetown University, also said the final product was a “very good deal” considering “this is an entity that is intensely politicized.”
“What’s the alternative?” she asked rhetorically.
Celebrations, though, would be premature. The European Parliament, the union’s legislative body, still has to pass the measure. Some experts say the weak democratic language may lead to its defeat, which could mean the EU has to go back to square one with a spiraling economic disaster even closer.
But von der Leyen, for her part, is content with the pact as it is. “Europe as a whole has now a big chance to come out stronger from the crisis,” she said on Tuesday. “We have taken a historic step we all can be proud of.”
Just how historic, though, depends on how closely the EU follows its new path.
Will Europe throw away its shot?
This deal represents a substantial change in the way the bloc handles economic disasters.
During the 2008 eurozone crisis, several of Europe’s less-wealthy countries, particularly Greece, amassed large amounts of public debt and yawning deficits and needed serious economic help.
Few wanted the European Union to manage the crisis centrally from Brussels, fearing it would give the body too much power. So Germany and several other wealthier European nations aimed to fix the problem themselves without involving the EU. Basically, they provided relief as long as Greece agreed to aggressive reforms and austerity measures, keeping spending low so as to recoup what was lost over time.
But as Lehigh University trade and EU expert Mary Anne Madeira recounts, it didn’t go so well.
“At that time, Germany and other wealthy northern states insisted on austerity, and these measures prolonged Europe’s recovery from the crisis and increased tensions between the northern states and the hard-hit southern states,” she told me.
It backfired even further: Greece wound up in another economic crisis in 2015, despite making extensive reforms, and Merkel suffered massive political costs during the whole ordeal.
After that fiasco, it’s not surprising Merkel — the top advocate for keeping Brussels far away from the recovery efforts — changed her tune this time around. “Merkel’s willingness in the present crisis to take on collective, EU-level debt in order to provide grants to those same hard-hit southern states is an incredibly important statement of solidarity and indicator of Germany’s commitment to European integration,” Madeira said.
“Symbolically, it marks a critical shift in Germany’s willingness to allow the EU to jointly borrow money,” she added.
But it’s more than just a symbolic gesture. Georgetown’s McNamara told me that “collectivizing the debt allows [the EU] to get funds from markets in a way it never has before.” That means the bloc may soon embark on a whole new way of dealing with a major economic crisis, providing investors with a safe, long-term investment for the coming decades.
Not all the details of this new path are worked out yet. The EU’s leaders want to pay back all debts by 2058, but how the organization will repay the borrowed money is anyone’s guess.
One idea is for member states, which contribute money to the EU’s budget, to give Brussels their revenue from collected climate-related taxes. Another option, proposed in the text of the agreement, is a “digital levy” on tech companies that work in member states.
Experts are waiting to see what the bloc ultimately decides. “We will hopefully see progress on EU tax policy and new resources for the EU budget at a later point in time, at the latest when the issue of reimbursement of the money the Commission borrows with EU bonds becomes salient,” said Schwarzer, the German Council on Foreign Relations chief.
Until then, though, there is cautious excitement about the new, Hamiltonian-like path the EU has taken. Merkel, Macron, and others insist it’s a singular emergency measure, one that was absolutely required with so many countries in such dire economic straits. Soon, they say, the EU will go back to resisting further fiscal assimilation.
“Europe has shown it is able to break new ground in a special situation. Exceptional situations require exceptional measures,” Merkel said during a Tuesday news conference.
But Madeira expects Europe over time will get its Hamiltonian job done. “The history of the EU reveals a pattern in which crises serve as catalysts for deeper integration,” she told me. “If this plan succeeds in mitigating a deep recession in Europe, I think it will indeed be used as a blueprint for future EU fiscal policies, if not permanently then at least in times of crisis.”