Finance: Research, Policy and Anecdotes

I do not think one can overestimate the importance of this week’s joint German-French initiative for a 500 billion Euro post-pandemic recovery fund for the EU.  While not called Coronabonds, it is very much in their spirit: the European Commission would borrow money on the capital markets to distribute in the form of grants to countries most affected by the crisis; thus common liability for debt to address a common shock . As before (during the refugee crisis), Angela Merkel has risen to the challenge and provided leadership on a topic where there is far from an agreement within her own party and within the EU. She made a clear case that post-pandemic reconstruction is beyond the capacity of nation-states and requires a European effort, expressing in political terms, what many of us economists (including yours truly) have argued in recent weeks.  The economic, political and moral case for a joint European reconstruction effort is simply too strong to be ignored. It will be for historians to disentangle how we actually got there, but the ruling of the German Constitutional Court might have put additional pressure on the German government to take this step. As I wrote last week, it has become increasingly clear that leaving the burden of crisis resolution to the ECB is no longer politically feasible. In this sense, this ruling might actually have provided a positive impetus.  

Her finance minister Olaf Scholz went one step further and referred to this as the Hamiltonian moment in Europe. To remind us: Alexander Hamilton, first Secretary of the Treasury of the US secured in 1790 that the US federal government assumed the debt incurred by the US states during the War of Independence, thus laying the foundation for federal taxation and a strong federal government in the United States, effectively turning a lose political union into a fiscal union. And while it is clear that the current initiative might be the beginning of a long and slow process, one can take comfort from US history, where the process towards a stronger role of the federal vis-à-vis state governments also was a long one.

The history of European integration does not always follow a straight line, often taking a step back after two steps forward. So, it is not clear quite yet how fast and how far this Franco-German initiative will take us, but it is clear that an important step has been taken and it will be hard to close the door that has been opened. For federalist Europeans like me this is certainly an important step, to be celebrated with cautious optimism.

20. May, 2020