Jean Monnet once predicted that: “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” Amid the coronavirus pandemic, the crisis foundry has re-opened for business, masks and social distancing required.
In the early hours of 21 July, after intense negotiations, Europe’s leaders announced a €750bn coronavirus relief package, including €390bn of direct grants to member states. French president Emmanuel Macron called it an “historic moment for Europe” as Commission president Ursula von der Leyen and European Council president Charles Michel shared a celebratory elbow-bump.
Indeed, the two top Eurocrats had plenty to bump elbows about. The agreement is a decisive victory for the European Commission and marks the first major step towards further integration after more than a decade of setbacks, from the rejection of the EU Constitution in 2005 to the financial and sovereign debt crises, the rise of Eurosceptic populism and Brexit. The pandemic has brought about a profound reversal of fortune for Brussels and put the integrationists back in the driver’s seat.
The main headline of the plan, spearheaded by the Commission and backed by France and Germany, is the issuance of commonly-held EU debt to finance direct grants to member states hardest hit by the Covid-induced recession. For the first time, the Commission will issue its own bonds, backed by the creditworthiness of Germany and other economically sound members.
The new package helps avert another general European economic crisis, as the coronavirus pandemic plunges Europe’s economy into recession. Mediterranean countries with heavy debts and weaker economies would otherwise bear the brunt of the recession without the ability to cushion the blow through monetary stimulus, threatening a repeat of the Eurozone crisis that nearly tore the EU apart, potentially dragging in the rest of Europe.
The €750bn agreement is particularly significant because it gives the Commission two new tools previously beyond its powers: bonds and bailouts. Debt issuance is typically reserved as a sovereign function of states, and the EU has until now been forbidden from financing its operations through borrowing, a key check to prevent it from usurping sovereign authority.
Moreover, northern European countries led by Germany have long resisted direct fiscal transfers by the EU, ever worried about being left to foot the bill for their less fiscally prudent neighbours. A clause against such transfers was explicitly written into the Maastricht Treaty for that reason.
Observers have been quick to declare a ‘Hamiltonian moment’ for Europe, drawing comparisons between the new transfer agreement and Alexander Hamilton’s federalisation of American state debts to cement the union. Such declarations are premature.
For one, the package does not include any Hamiltonian mutualisation of EU states’ existing debts, merely debt-financed grants to help fund economic recovery. It is more akin to a shared credit card with an expiration date than a federal debt takeover.
Secondly, the new plan does not levy EU-wide direct taxes. To support a true fiscal union capable of effectively backstopping the euro, the Commission would likely need the power to levy some taxes of its own beyond customs and harmonized VAT. Power over direct taxation continues to be reserved for sovereign states.
Meanwhile, a proposal to make access to some EU budget spending conditional on adherence to liberal democratic norms was defeated at the behest of the Hungarian delegation. European leaders have long acknowledged that a common fiscal authority would require democratic legitimacy and accountability, lest Europeans be taxed without representation. The creeping tolerance for illiberal governance within the European bloc suggests political convergence is headed in the opposite direction.
Furthermore, there is still considerable opposition to a closer transfer union within the EU, and that opposition was manifest in the negotiations. The so-called ‘frugal four’ countries – Austria, the Netherlands, Sweden and Denmark – pushed back against the direct grants in the Commission’s original proposal. In their non-paper released ahead of the negotiations, they argued for a one-off, strings-attached loan programme, rather than grants, conditional on fiscal reforms and without any mutualisation of debt.
Still, it is conceivable that fiscal integration could take on a momentum of its own and lead to a more permanent transfer union down the line. The Chinese wall against fiscal transfers has finally been broken, and precedent is powerful. In the next recession, European leaders may well appeal to the past and demand another round of bailouts to backstop the euro. “We did it last time,” they’ll say. “Why not again?”
Moreover, the task of repaying the debts issued to finance the relief spending could lead to calls for direct EU taxes later on. Member states may want to avoid the political burden of levying the taxes themselves and opt to shift responsibility to the Commission. Such a move would be a much more significant pooling of sovereignty.
For now, though, a true fiscal union is a long ways off. Nonetheless, the Commission’s victory puts further integration back on the table. After reeling from the disastrous handling of the Eurozone crisis, Brussels has shown that it can solve big problems, not just spread them, and that European cooperation can be a force for stability. The comparisons between the two crises are sure to be stark and the message clear: Europe is stronger when it works together.