Is the EU living through its Hamiltonian moment? Probably not. | American Enterprise Institute
Since the Euro’s introduction as a common European currency, many economists have pointed to the inherent fragility of a monetary union that lacked a shared financial and banking system and a common fiscal authority.
After the 2008 financial crisis, some progress has been made. A rescue fund, the European Stability Mechanism, was created for countries in financial distress and the EU moved toward a banking union — though common deposit insurance scheme has not been implemented. The eurozone survived mainly thanks to the accommodative stance of the European Central Bank (ECB), following former governor Mario Draghi’s “whatever it takes” speech in July 2012, which led to large-scale asset purchases that calmed down the bond markets and stabilized nominal spending across the eurozone.
With the recent ruling of Germany’s Federal Constitutional Court, the future of similar asset purchasing programs is uncertain. The decision binds German authorities and the Bundesbank, not the ECB, which could, in principle, choose to continue in future waves of quantitative easing without German participation. Practically and politically speaking, however, that seems farfetched. However, the levels of particularly Italian and Spanish debt are unsustainable, especially in the light of the ongoing global contraction of yet-unknown magnitude.
The gravity of the situation is highlighted the breaking of a long-standing taboo in German politics against debt mutualization. Under a joint proposal put forward by Chancellor Angela Merkel and France’s president Emmanuel Macron, a €500 billion recovery fund would be set up to help economies worst affected by the economic fallout of COVID-19, financed by bonds issued by the European Commission.
While this move is genuinely without precedent, it also
means less than meets the eye. Compared to the macroeconomic size of, say, the
CARES Act in the United States ($2 trillion), the fund’s size is modest. The
rollout is likely going to be slow, and the specific modalities are still to be
agreed on. Without any doubt, fiscal hawks in the Netherlands, Finland, and
Austria will insist that the final deal be ‘fair’ to their own taxpayers — a
goal that is necessarily in tension with the imperative of keeping the
economies of Italy and Spain from imploding.
With the ECB’s hands tied, the recovery fund seems like the necessary minimum for keeping the eurozone together. Macron and Merkel deserve credit for taking the step, which could not have been easy — especially for the latter. But make no mistake: This is not Europe’s ‘Hamiltonian moment’. It is simply another instance of Europe doing what Europe does best — muddling through. But that is not good news for those who suspect that more is needed in order for the eurozone to thrive. And, as The Telegraph’s Ambrose Evans-Pritchard put it, “if the most violent economic shock in 300 years does not force fiscal union, nothing will.”