The State of the Union: How Striving for A

The State of the Union: How striving for a

Hamiltonian ideal could divide Europe

Ed Biggins June 2020 The State of the Union

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This discussion paper is written by Ed Biggins, the Head of Research at IDRN. Ed holds a Bachelor’s with Honours in Politics and International Relations from Lancaster University and a Masters in International Relations from The University of Sheffield. His areas of interest include international political philosophy and historical diplomacy.

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The State of the Union

The State of the Union: How striving for a Hamiltonian ideal could divide Europe

Summary

• The Franco-German recovery proposal laid the groundwork for the European Commission’s ‘Next Generation EU’ project - worth €750bn - with unprecedented amounts to be made available in grants • The proposed EC recovery plan has been welcomed by Italy, Spain and Portugal, but has faced resistance from the ‘frugal four’ of Austria, the Netherlands, Denmark and Sweden • Proponents of the proposal have described this as Europe’s ‘Hamiltonian moment’ despite Alexander Hamilton’s influential role in creating the factionalism in US politics • The proposal will benefit many millions of people and help the EU achieve the goals set out in the Green Deal, but further attempts to unite the member states could end in populist calls for separatism

The Franco-German Compromise

Since the beginning of the Covid-19 outbreak, Europe has been heavily impacted, both by the health crisis and the economic consequences of industry shutdowns and government furlough schemes. Of course, the effects have ranged in severity between economies and nations, and between late April and early May France spearheaded a nine-country coalition campaigning for the EU to create ‘Corona-bonds’ to help the most in need, especially Spain and Italy. For a time, little consensus could be found as the two giants of European fiscal and economic policy, France and Germany, locked horns on the role and invasiveness of the EU in such a time as this. However, with pressure from both French President Emmanuel

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Macron and Germany’s finance minister, Olaf Scholz, as well as increasing death tolls and rising national debts, German Chancellor Angela Merkel eventually compromised. On the 18 May, the Franco-German recovery plan was announced. At its heart lay a fund worth €500 billion to be financed by borrowing from capital markets and paid off, unusually, by the EU as a union, and not by the individual member states. Under the proposal individual governments’ liabilities would be limited to guarantees equivalent to their contribution to the EU budget, with Germany’s 27% share making it liable for €135 billion, and Italy’s 15% corresponding to liabilities of €75 billion. This was an unprecedented proposal on this scale in the EU, as previously such funds would be provided as loans to individual countries, making the borrowing state solely responsible for paying them off. Under this Franco-German proposal, the funds would be provided as grants, without the requirement for individual governments to pay them back as loans.

The Commission’s Proposal

On Wednesday 27 May, European Commission (EC) president Ursula von der Leyen unveiled the EC’s €750 billion recovery fund proposal (European Commission, 2020a), of which around €500 billion would be supplied in grants, similar to the distribution evident in the Franco-German plan, and the other €250 billion in loans. President von der Leyen outlined several added means of revenue creation, including new corporation, digital, and carbon taxes, (Rees, 2020) and described the four pillars (Sanchez Nicholas, 2020) that the fund is aimed at helping, including health protection, economic recovery, environmental and digital transition and industrial sovereignty. Initially, the fund will be used to bolster struggling healthcare sectors, but further down the line the EC hopes that it will also underpin green strategies and transitions for those countries most heavily affected. The package is worth just over 3% of the EU27 GDP and will be financed through the EU’s

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multi-annual financial framework (MFF), to be repaid after 2028 and before 2058. Perhaps predictably, the EC’s new ‘Next Generation EU’ proposal has received mixed responses from the different states within the bloc.

The Union Responds

The new recovery package has been praised by the Spanish and Italian leaders, Pedro Sanchez and Giuseppe Conte, perhaps unsurprisingly with the two countries set to receive the highest values of grants totalling €82 billion and €77 billion, respectively. In some ways, it is crucial for these states that this proposal is accepted, with Italy’s debt levels expected to increase to 150% of GDP this year, making the country’s financial outlook look dire without external support. However, at least four countries currently stand in the way of von der Leyen receiving the unanimous EU27 agreement required for the new MFF budget, including Austria, the Netherlands, Denmark and Sweden. These self-styled ‘frugal four’ states frequently push for more fiscally conservative EU budgets and have been vocal in their disapproval of this recovery package and its over-provision of grants.

The Danish Foreign Minister, Jeppe Kofod, has said that the current pot of €750 billion was too costly (Rees, 2020), and the Chancellor of Austria, Sebastian Kurz, announced that Austria and the other frugal three would only accept a rescue fund that gave out loans rather than grants (Fleming, 2020). Kurz has also criticised the proposed means of including the fund into the next MFFs, suggesting that it would be better for the EU to reprioritise its current planned budget rather than increasing the headroom to accommodate these grants. Furthermore, even with total consensus from the EU27 for the recovery fund, the ultimate success of the package will be heavily dependent on the way in which the grants and loans are distributed. Many of the Eastern European countries have been hit hard economically but have not suffered from the health crisis as much as Southern Europe,

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and so it will be interesting to see how the EC organises the fund should it be approved. Von der Leyen may have to accept a trade-off to allow more funds to be sent to the most sceptical states in order to gain their approval, but as Guntram Wolff, the Director of Bruegel suggests, if the fund is applied relatively uniformly rather than targeting specific regions, its overall beneficial impact could be blunted (Ibid.).

One worry for the frugal four is that this form of common debt could become a frequent tool to deal with future challenges, potentially leaving the more fiscally conservative Northern countries exposed to the economic decisions of states with more volatile records of public spending. However, as it stands currently, a recovery fund of this scale would be a one-off and individual states will maintain their own individual debts. Furthermore, the EU already operates three support programmes that are funded through capital markets, although these are much smaller in scale and operate on loans rather than grants. Still, there is optimism for the future that this deal, and any precedents that it sets, could have for the strength of the European Union going forward. For example, Mario Centeno, Portugal’s Finance Minister, has said that the fund is “a great step towards a fiscal union and a properly functioning currency union” (Steitz, 2020), and the Centre for European Reform highlighted the significance of this deal as the first pan- European fiscal response to a severe shock (Odendahl & Springford, 2020). President von der Leyen also commented that “the recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future” (European Commission, 2020b). It remains to be seen whether this proposal truly opens the door for the establishment of an EU treasury which could set taxes and issue debt, and whether this would be desirable for the EU once this crisis has passed.

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Hamiltonian Moment?

For those desiring a more tightly knit union, potentially with a federal treasury, the current EC proposal represents a ‘Hamiltonian moment’ for the eurozone, a term first used by Olaf Scholz when supporting the deal (Hall et al., 2020). This refers to the first US Secretary of the Treasury who was the instrumental driving force in the US federal government taking on the debts that the colonies had acquired during the War of Independence. However, whilst Europhiles use the Hamiltonian/Hamilton moment as a sign of hope for a more unified and cooperative EU, I think that the analogy, or in striving to achieve such a scenario for the EU as Hamilton achieved for the US, could have damaging consequences for the future health of the Union.

It could be argued that Hamilton’s proposals and belief in a more centralised federal US government helped to forge the United States into the single nation that it is today, but it also created great fractures in the nascent republic. In Congress, the division between followers of Hamilton and those who believed in state-centred approaches to fiscal policy became more apparent and dividing, and James Madison and Thomas Jefferson were pushed so far as to establish the Democratic-Republican party (Sandy Maisel, 2007). It was opposition to Hamilton’s policies that led the founding fathers of the United States, previously so averse to the idea of factionalism, to create factions and party divisions so deep within the American political system that they are still present today, over two centuries later. I think that whilst the idea of a more closely linked European Union appeals, it would inevitably produce cracks within and between the member states, potentially leading to an increase in anti-European populism and separatist movements. These stresses can already be witnessed with Northern reluctance to economically partner up with southern economies and with growing Euroscepticism, especially evident in Italy. One poll found that over 40% of Italians desired to leave the EU or the eurozone (Vergine, 2020), which

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represents a worrying statistic as Italy was once one of the most pro- European nations.

Union or Division?

The EU is faced with great challenges ahead. If the EC’s President von der Leyen can secure the unanimous consensus of the EU27 and pass the recovery package, millions of European citizens will benefit and it will represent an encouraging sign of European intraunion solidarity, a relationship which was partially damaged following the Financial Crisis of 2008-09. It is not difficult to imagine this occurring, especially as the frugal four are missing their usual supporter on the EU stage: Germany. The recovery package also performs cross-institutional and environmental aid, relieving the stress on the European Central Bank who were looking likely to run out of money for their pandemic emergency purchase programme (PEPP) prior to injecting an additional €600 billion into the bond-buying programme on 4 June (Arnold, 2020); and in guaranteeing that at least a quarter of the fund will be designated for climate-friendly and sustainable expenditure (Simon, 2020).

However, it also remains to be seen whether the EC or certain states within the union will push for a further deepening of economic and political ties between the EU or eurozone member states, akin to a Hamiltonian moment. Whilst it will not be possible to completely emulate the work of the US Secretary of the Treasury due to the difference between EU and eurozone members, a similar pattern could emerge whereby the tighter the union tries to hold its member states, the more they, and their populations, desire to slip away. This recovery package represents a huge opportunity for the EU, although only the future will be able to tell whether it represents a true Hamiltonian moment and whether it, or future packages produced in its likeness, will further unite or divide this European union.

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References

Arnold, M. (2020) ECB boosts bond-buying stimulus package by €600bn, The Financial Times, 4 June. Available at: https://www.ft.com/content/c59ab92d-e614-4284-a028-46ee3bcf92f9 [Accessed 04/06/2020].

European Commission. (2020a) Europe's moment: Repair and Prepare for the Next Generation. Brussels: European Commission.

European Commission. (2020b) Press release: Europe’s moment: Repair and prepare for the next generation, European Commission, 27 May. Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940 [Accessed 04/06/2020].

Fleming, S. (2020) Is the Franco-German recovery plan a game-changer? The Financial Times, 19 May. Available at: https://www.ft.com/content/22f0ab8b-0884-4fb0-a5be-d99193d236bf [Accessed 03/06/2020].

Hall, B., Flemming, S., Chazan, G. (2020) Is the Franco-German plan Europe’s ‘Hamiltonian’ moment? The Financial Times, 21 May. Available at: https://www.ft.com/content/2735a3f1-bc58-477c-9315-c98129d12852 [Accessed 03/06/2020].

Odendahl, C., Springford, J. (2020) The Recovery Fund faces a tricky passage, Centre for European Reform, 29 May. Available at: https://www.cer.eu/publications/archive/bulletin-article/2020/recovery- fund-faces-tricky-passage [Accessed 03/06/2020].

Rees, T. (2020) Europe pieces together €750bn plan as Berlin ditches the frugal four, The Telegraph, 30 May. Available at: https://www.telegraph.co.uk/business/2020/05/30/europe-pieces- together-750bn-plan-berlin-ditches-frugal-four/ [Accessed 03/06/2020].

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Sanchez Nicholas, E. (2020) Macron and Merkel propose €500bn EU recovery fund, EU Observer, 19 May. Available at: https://euobserver.com/coronavirus/148405 [Accessed 03/06/2020].

Sandy Maisel, L. (2007) American Political Parties and Elections. Oxford: Oxford University Press.

Simon, F. (2020) EU €750 billion Covid recovery fund comes with green conditions, Climate Change News, 27 May. Available at: https://www.climatechangenews.com/2020/05/27/eu-e750-billion-covid- recovery-fund-comes-green-conditions/ [Accessed 04/06/2020].

Steitz, C. (2020) Franco-German 500 billion euro recovery fund step towards EU fiscal union: Centeno, Reuters, 24 May. Available at: https://uk.reuters.com/article/us-france-germany/franco-german-500- billion-euro-recovery-fund-step-towards-eu-fiscal-union-centeno- idUKKBN2300HC [Accessed 03/06/2020].

Vergine, S. (2020) Coronavirus: Are Italians losing faith in the EU? BBC News, 17 May. Available at: https://www.bbc.co.uk/news/world-europe-52666870 [Accessed 03/06/2020].

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