Moritz Schularick is a professor of economics at the University of Bonn and a fellow at the Institute for New Economic Thinking.
NEW YORK — Is this the European Union’s “Hamilton moment,” a watershed in the bloc’s march toward something resembling a nation? Or is it just another European mini-step that falls short of being transformative despite all the rhetorical fanfare?
There’s no denying the European Commission’s proposed coronavirus recovery fund is significant, both economically and politically. The Franco-German proposal that is the basis for the plan has unleashed a dynamic that seemed unconceivable a few weeks ago. For the first time in the history of the union, Brussels will become an important player in the European economic game.
The proposed €750 billion Next Generation EU fund, to be financed by borrowing, amounts to 4 percent to 5 percent of the EU’s gross domestic product. That makes it almost identical in size to the roughly $800 billion American Recovery and Reinvestment Act, U.S. President Barack Obama’s fiscal response to the 2008 financial crisis.
Details remain to be hammered out and, importantly, the EU’s national governments have yet to agree to finance the proposal. But the reactions in European capitals, including in the “frugal four” states, have generally been supportive. Financial markets have cheered, and with good reason.
This is the stuff that nations are made of. Few things are as powerful politically as a shared narrative of solidarity in the face of adversity.
The technocratic nature of European integration means the bloc has lacked a history of standing together when it counted most. The aftermath of the 2008 crisis was marked by mutual distrust and disappointment. This time is different. What’s on the table now helps build a joint track record for unity.
Moreover, if the plan survives in anywhere close to its current form, a precedent will have been established. The next time the EU is confronted with a crisis that hits parts of the bloc differently, there will be a playbook to cushion the impact.
The economic arguments for Europe-wide stabilization policy were always strong. But now there is a political and legal blueprint for their implementation too.
The Commission’s plan also means that additional revenues will have to be found to service the union’s debt. Over time, this could lead to a greater transfer of taxation and other resources to the EU. With this dynamic in place, Brussels will increasingly look like a normal central government.
But is this really the Continent’s Hamilton moment? Everything depends on what happens next. This is the first time that the EU has the chance to play such an important economic role for the entire Continent. But historical analogies can only be stretched up to a point. Nations evolve, rather than explode, into being.
On closer inspection, it is clear that the U.S. fiscal constitution cannot be reduced to a single decision. Hamilton’s Funding Act of 1790 unified war-time debts. Fifty years later the debt crisis of the 1840s clarified the financial relations between the center and the states by establishing the no bailout principle.
From there, it took nearly another century until the expansion of the federal government under President Franklin D. Roosevelt’s New Deal turned Washington into a meaningful economic player in the U.S. economy. In reality, the much-debated Hamilton “moment” needed a century and a half to produce the modern fiscal constitution of the U.S.
In some respects, the EU has a head start. Its financial constitution today is already more advanced than the original Hamiltonian set-up of 1790. The U.S. did not have a central bank until 1913. And for the first 20 years of its existence, the Federal Reserve was a central bank without a banking union.
Federal deposit insurance in the U.S. only came into existence in the 1930s. Europe already has a central bank that is working well. A banking union with deposit insurance is in the making.
Where we go from here will depend on the success of the Commission’s proposal. The pressure will be on the European institutions to demonstrate that it makes sense to put Brussels in charge of economic stabilization.
Success was the glue that gave legitimacy to the evolving U.S. fiscal constitution. Had the U.S. stumbled along the way, the “Hamiltonian moment” would not be part of our vocabulary today.
If the EU’s experiment with debt-financed stabilization policy turns out well, the momentum toward integration will accelerate further.
It’s up to Brussels to demonstrate the advantages of European economic policy: Spend the money fast, but spend it wisely.
Click Here: cheap all stars rugby jersey