In 1790, following the American war of independence, Alexander Hamilton proposed that federal government should take on the huge debts incurred during the struggle by individual states. It had long been Hamilton’s view that this move would be a key moment in the forging of a true United States of America. “A national debt,” he had written, “if it is not excessive, will be to us a national blessing. It will be a powerful cement of our union.”
Until now, this kind of thinking has never gained a foothold in the European Union. Despite periodic calls for deeper fiscal union, richer EU states have balked at the notion of pooling debt with weaker neighbours. After the crash of 2008, when Greece hovered on the edge of bankruptcy and a sovereign debt crisis threatened to engulf Italy, the EU went no further than the provision of emergency loans and cheap credit. The bailout money came with painful strings attached, as countries were obliged to launch deeply resented austerity programmes in order to manage their growing debt mountain. The alternative – writing off debts in Hamiltonian fashion – was dismissed out of hand by Germany’s finance minister at the time, Wolfgang Schäuble.
That was then. On Wednesday, Angela Merkel and Emmanuel Macron are expected to present plans for a €500bn (£448bn) EU recovery fund, which would distribute non-refundable grants to the countries that have suffered most during the coronavirus pandemic. Crucially, the money would be borrowed by the European commission on behalf of all member states, and sit within the EU budget to be agreed for 2021-27. Germany would be liable for about €135bn (£120bn).
This could be a watershed moment. Since the adoption of the euro, there has been fierce argument over whether a common currency should entail at least some degree of common debt. The countries of the prosperous north, led by Germany, have resisted such talk. Governments have been wary of seeing their borrowing costs rise and conscious that such a move would be domestically unpopular. But Covid-19 is challenging old taboos.
Deprived of tourism revenue and facing the sharpest economic downturn in modern times, southern Europe fears a regional meltdown. Loan packages already agreed via the European Stability Mechanism, while welcome, will contribute to unprecedented levels of sovereign debt. In these dire circumstances, both Mr Macron and Ms Merkel have recognised that unless the burden of reconstruction is seen to be genuinely shared, there will be existential implications for the future of the EU.
Last week, Ms Merkel said the devastation wrought by the pandemic was of a magnitude such that it could “endanger the European Union’s cohesion”. Mr Macron has suggested the “European idea” itself will be in danger, unless there is a step-change in solidarity between the stronger and weaker eurozone states. They are both right.
The negotiations that begin on Wednesday will not be easy. At the weekend, the first signs of organised opposition to the Franco-German proposals emerged, led by the so-called “frugal four” of the Netherlands, Denmark, Sweden and Austria. Eastern European countries, which have had far lower infection and death rates during the pandemic, have also balked at the idea of a jointly financed recovery fund. It is vital that the substance of the Merkel-Macron plan survives intact. Hamilton was right in thinking that debt assumption by Washington would consolidate the status of the emerging United States. The EU needs to act in the same spirit in these similarly dramatic times.