Has the EU just crossed its Rubicon to unity?

Until last Monday, that is, when she changed her mind. Late on May 18, the German chancellor and French president, Emmanuel Macron, presented a joint plan for a 500 billion euro pandemic recovery fund, that would disperse grants to European Union member states hardest hit by coronavirus. That in itself is not particularly radical – there are already several EU-run billion-euro aid packages and financial tools.

What is unusual is this: the money would be borrowed from capital markets by the European Commission itself, then given out to member states in need. But individual countries won’t have to pay the money back, the EU will do it – as a group, from out of its annual budget over the next 20 years. And that is no matter who gets the funding, or how much they get.

As a result, all 27 states can count on paying more money into the EU budget from 2025; each nation does this according to the size of its own economy anyway and Germany will likely foot the bill for more than 100 billion euros worth of the credit.

Basically this is, in many ways, the thing the Germans always dreaded: common European debt.

‘If this goes through – and as has been proposed – there will be a page on it in all future textbooks on EU integration,’ Andrew Watt, deputy director at the Macroeconomic Policy Institute, or IMK, at the Dusseldorf-based Hans-Böckler Foundation, said.

There were similar comments about the momentousness of the proposal from all sides of the political spectrum. Some hailed it as a European revolution, something of a ‘Hamiltonian moment’, they said, referring to the historic 1790 nation-building compromise in a fledgling United States. That included Germany’s own finance minister, Olaf Scholz, and economists like Henrik Enderlein, professor at the Hertie School in Berlin.

‘The political signal here is that the EU is more than a grouping of nation states and has its own federal identity,’ Enderlein tweeted. Others were not so enthusiastic. One German newspaper’s editorial criticised the proposal as a ‘180-degree turnaround’ by the government, warning that German citizens would end up paying too much and getting too little. The proposal was disparaged as ‘sleight of hand’, too contentious to pass unscathed through all EU parliaments and too small, because the expenditure ceiling in EU budget would be increased by only 1% of gross national income annually, over the next three years. The EU’s total GDP last year amounted to about 14 trillion euros.

So it was hard to know how big a deal the proposal really was. Is this the beginning of a United States of Europe and the end of Germany’s dedication to austerity? A small step toward the financial integration that euro watchers say is so desperately needed? Or is this just a one-off that will be rolled back at the earliest possible opportunity?

The answer: It could be all, or none, of the above, depending on what happens next.

Although German-French backing carries a lot of weight, the proposal will now need to be agreed upon by parliaments of the other 25 countries in the EU. Southern nations, hard hit by the pandemic, are likely to benefit most from grants and will be keen. But states in the north and east may object to repaying funds they won’t profit from as much.

The IMK’s Watt says the proposal may eventually end up substantially changed. ‘Either the volume will be lower. Or it will be loans rather than grants. Or a lot of unattractive conditionalities will be added,’ the expert on European economic governance cautions. Choosing how to disburse the money will also be complicated. Legacy debt is not supposed to be taken into account – those are the financial problems that countries had before the Covid-19 pandemic even began. But how fast a country recovers from the coronavirus crisis, will depend on where they started from. So, controversially, legacy debt may need to be considered. EU economies also specialize in different things. Manufacturing (as in Germany) could recover fairly quickly but this summer’s tourism (as in Italy, Spain or Greece) may be utterly devastated. Funding will need to be carefully and strictly calibrated.

If the proposal goes forward in good shape, it could be a fiscal foot in the door that leads to similar integrative tools, maybe even to some EU coordination in taxes, experts suggested. On the other hand, the money will take time to come through and none of the grants are going to pan-European projects. They’re still aimed at nation states. The fund is also tied to the EU’s seven-year budget and may simply disappear during negotiations for the next one, in 2026.

In Germany, locals wonder if a new, less fiscally uptight nation is emerging. Thanks to the pandemic, the country had already – unusually – decided to go into more debt as a nation. And it is true that this proposal counteracts longstanding taboos in Germany, Christian Odendahl, the chief economist at the Centre for European Reform, confirms. However, German politicians are stressing that the half-a-trillion-euro plan is a one-off solution for a once-in-a-lifetime crisis, he says.

‘So, in a way you can say that Germany broke its own taboos – but only to a certain extent,’ Odendahl told me. ‘This shows that Germany really is willing to put its money where its mouth is and provide solidarity for Europe in an crisis. Describing it as a 180-degree turnaround is not fair though. It does not change the basics.’

For the time being, what may be most important are the immediate political ramifications of the Franco-German proposal. In those terms, this is a significant moment, Odendahl suggests, pointing out Merkel’s attitude as particularly noteworthy.

‘I’ve often been critical of her leading from behind,’ the Berlin-based economist explains. ‘But for her to come out with Macron, with a proposal of that size – and already so well prepared that the CDU [the Christian Democrats, her own conservative party who usually oppose any plan for common European debt] could come out in favour of it just ten minutes later – indicates that she was really fighting for it. This is her really showing leadership and it’s quite a different approach.’

A press conference after the announcement supported that impression. ‘Today we are presenting a short answer to the crisis. Longer answers must be discussed – because Europe must evolve further,’ Merkel stressed. ‘Europe must act together, the nation state alone has no future. As I always say: Germany will only be able to prosper in the long run if Europe is prospering.’

The IMK’s Watt thinks various factors play into this apparent change of opinion. ‘Attitudes in Germany and in the governing class have changed quite a lot since 2010,’ he says. Reasons include ‘a belated recognition of the costs of the failed resolution of the euro crisis’ that began in 2009, and having a Social Democrat heading the Ministry of Finance, rather than a conservative.

It could also relate to Germany’s assumption of the EU presidency in July and the fact that Merkel’s leadership will end in autumn next year. She possibly sees this as part of her legacy, Watt and others have suggested.

Additionally, Merkel’s steady, technocratic style of leadership during the pandemic has seen her approval ratings soar, along with those of her party. That has put the conservatives ‘in a political position where they can push through economically sensible measures,’ Lars Feld, head of the German Council of Economic Experts, told Die Zeit. ‘The political capital that has been amassed can now be deployed.’ It may also be that the German mindset on this topic has changed. Locals tend to save around 10% of their disposable income, twice as much as the average European, Briton or American does. German politicians usually insist that their piggy-bank-conscious voters would be opposed to any common EU debt. However recent surveys seem to indicate otherwise. An April survey of 4,500 people conducted by the Max Planck Institute for the Study of Societies concluded that, the more information German voters get about the cost of, say, Italy leaving the EU and financial tools for common debt, the fewer are opposed.

‘When all pieces of information are considered, almost 50% of German voters are in favour… and less than 35% are opposed,’ the Cologne-based institute’s researchers wrote. It’s quite possible that Brexit scenario has also made the costs and benefits of European unity clearer. An opinion poll undertaken for Der Spiegel found that just over 50.8% percent of Germans supported the idea of the recovery fund, most of those coming from more left wing parties. A third of respondents – 33.8% – didn’t like the idea, with supporters of the far right wholeheartedly opposed.

It may also be that German solidarity is more forthcoming during this crisis because they cannot find fault with their neighbours over this: a virus doesn’t care about the moral virtues of saving or whether good citizens pay their taxes.

For the time being, Odendahl remains cautiously optimistic. ‘I understand the enthusiasm,’ he says. ‘For the first time, we have a proper European fiscal response to a crisis. People have been waiting for this for years. But I am relatively certain that [conservative German politicians and more frugal northern member states] will do everything in their power to make it a temporary thing.’

It’s more of a Hamiltonian opportunity, than a Hamiltonian moment, he quips. ‘Maybe we can learn from a temporary centralisation like this, to see how it works and whether its beneficial for all of Europe. Maybe,’ he concludes, ‘by 2026, we might all be thinking, well, that wasn’t such a bad idea.