Merkel, Macron Conjure Hamilton Moment to Fight EU Break-Up

(Bloomberg) -- Just when it looked as if the economic gulf between Europe’s essential powers was starting to become unbridgeable, Germany and France lined up a deal worthy of Alexander Hamilton.

The legendary U.S. treasury secretary forged a fiscal union after the American Revolution that helped prevent states from being bankrupted by their war debts. By videoconference on Monday, Chancellor Angela Merkel and President Emmanuel Macron, took a key step toward tighter fiscal integration in the European Union in their response to the coronavirus pandemic.

“We might have seen a Hamiltonian moment,” Henrik Enderlein, president of the Hertie School of Governance in Berlin, said on Twitter.

Merkel agreed that German taxpayers will underwrite as much as 135 billion euros ($148 billion) of aid to help the hardest hit countries rebuild their economies after Covid-19. More than that, she demonstrated that, in a pinch, the EU’s most powerful country is prepared to help the bloc’s other 26 countries shoulder their financial burden.

“The political signal here is that the EU is more than a grouping of nation states and has its own federal identity,” Enderlein said.

As so often in the history of the EU, it took a moment of real danger to create the political impetus for a breakthrough. A German constitutional court ruling that the European Central Bank‘s bond-buying program may not be able to paper over the cracks indefinitely might have been the final shove.

In Berlin, lawmakers from Merkel’s ruling bloc were already warning in private that the economic divergence between France and Germany could eventually put the euro zone at risk.

In Paris, meanwhile, Macron’s economic strategy was upended by the lockdown. His team started crafting an initiative to shift the Germans from their default opposition to joint debt issuance and to reassure them that sufficient safeguards could be put in place.

The architects of EU federalism have been working toward such a settlement for years.

Hamilton’s Deal

One precedent they have is Hamilton’s move in 1790 to transfer the revolutionary war debts accrued by the states to the federal government. By letting President George Washington levy taxes to repay those obligations and issue treasury securities, Hamilton laid the foundations for the U.S.’s federal system.

By backing a 500 billion-euro fund financed by jointly issued debt -- and partially underpinned by Germany’s fiscal weight -- Merkel will shield the EU’s vulnerable members from the fallout from the coronavirus pandemic and shore up their shared currency.

The moves from both France and Germany reflected an awareness of how important their partnership is for the EU and how even Germany, the bloc’s export superpower, would be hit hard if they allowed the project to unravel.

”I believe that, as part of deeper EU integration, a temporary assumption of debt at the European level should not be taboo,” German Finance Minister Olaf Scholz said in an interview with Die Zeit, adding that Hamilton’s deal was a decisive step in the construction of the U.S.

While Germany has weathered the coronavirus relatively well, with sufficient intensive care beds for patients and the fiscal reserves to protect its economy, France has suffered a higher death toll and a bigger hit to economic growth. By the time Europe emerges from its lockdown, France’s higher unemployment, lower incomes and weakening public finances will leave it heading in the same direction as struggling Italy rather than its partner Germany.

Nevertheless, German officials were surprised to see Macron aligning himself with the EU’s economically weaker southern camp in a letter calling for common bond issuance -- it was only the second time that France had made a written demand to the EU without having Germany as a co-signatory.

Macron’s Next Move

An official close to Macron said the French had warned Germany that the letter was coming and pointed out how the language was carefully calibrated to instigate a debate that was both ambitious and respectful. There was no reference to “coronabonds” or a “Marshall plan,” and there were signatories from outside the southern bloc to telegraph an emerging consensus, the official said.

The Germans were flabbergasted by Macron’s next move, when he warned in an interview with the Financial Times about the dangers of “sacrificing” some EU members. That was perceived in Berlin as a direct criticism of the German position.

Yet throughout, the two leaders maintained close contact.

When local officials in southern Germany set up checks on the border with France to control infections, Merkel had called Macron to warn him and the two leaders speak on the phone almost everyday. Within Europe, Germany is the country with whom coordination on border has been the smoothest, according to an official close to the French president. The transfer of 200 Covid patients from France to Germany at a time when French hospitals were overwhelmed is also one of the most visible successes of the Franco-German relationship.

And then came the curveball from the German constitutional court.

In a May 5 ruling, the court raised questions about the ECB bond-buying program which has helped to keep French and especially Italian borrowing costs under control, despite the hit to their finances. The decision raised the prospect of Germany’s Bundesbank being blocked from participating in future bond purchases and whether the ECB would be able to maintain its program beyond this year.

That afternoon, Finance Minister Olaf Scholz insisted that Germany would find a way to do whatever was needed for Europe and that it showed the need to “further deepen and intensify” cooperation. It was perhaps a recognition that Germany itself benefits from the single currency and would be hit hard by a break up.

Two weeks later, we’re starting to see the fruits of that resolve.

If Merkel and Macron can win over opponents of their framework in the rest of the EU, they will have laid down another key pillar in the decades-long process of constructing the EU and achieved a settlement that bears comparison to those other nation-builders working more than 200 years ago.

The sums involved are small relative to the needs of the European economy, Paul Donovan, chief economist at UBS Wealth Management, said in a note to clients. “Markets however seem to be focusing on the principle of the thing rather than the scale.”

“This is a step towards fiscal confederation,” he said.

©2020 Bloomberg L.P.