Europe’s existential recovery fund battle

Alexander De Croo is Belgium’s deputy prime minister and finance minister.

The question facing Europe as it grapples with how to weather the economic storm unleashed by the coronavirus pandemic is not whether or not to create debt, but how to manage it as efficiently as possible.

On that score, there’s a lot Europe can learn from the United States, which turned heavy debt following World War II — peaking at 120 percent of GDP — into decades of global economic dominance through debt-management mechanisms in which investors still place a high degree of trust.

The basis for all this was laid in the years following its war for independence in the late 18th century — a war that had turned out to be extremely expensive. The U.S. government had incurred a debt of $54 million and the individual states combined were on the hook for an additional $25 million. Because there was no foreign confidence in this new American project, the young nation had no option but to be resourceful.

Treasury Secretary Alexander Hamilton’s plan to tackle this crippling debt was to reconvert the old, depreciated bonds into new debt at a lower interest rate that would be taken entirely on the federal government’s shoulders.

Pushback came almost immediately from states such as Maryland and Virginia, which were not indebted and didn’t want to step in to help out the others. Still, Hamilton stubbornly insisted that federal, pan-American debt and a U.S. Treasury would be much cheaper and much more efficient for funding the young nation than each individual state fending for itself.

He was right. Foreign investors, including many Europeans, soon lined up to risk their money on the newly formed union. By 1835, all accrued debt had been “grown away” to zero percent of GDP. The plan was a huge success, and it helped transform America into an industrial powerhouse.

The discussion over debt and economic recovery we are having today in Europe — and had back in 2012 during the sovereign debt crisis — is in essence “Hamiltonian.” We need to be just as stubborn in putting aside our differences and insisting on a common solution.

Previous roadblocks should no longer hold us back. Back in 2012, the resistance to mutualizing debt was enormous. Wealthier Northern countries insisted that taking on new debt on the European level was out of the question, mainly because of the “moral hazard” involved. They viewed Southern countries as profligate spenders and insisted it should not fall on them to bail these governments out.

That may have been a legitimate argument at the time. It no longer holds water today. We are all facing drastic economic consequences as a result of the coronavirus crisis, which cannot be blamed on any one country.

It’s time we break free from the narrative of the “lazy” South and the “hard-working” North. Europe’s North has benefited hugely from the common currency. According to calculations by the Bertelsmann Stiftung, those that have benefited the most from the internal market are Germany, along with the Scandinavian, Baltic and Benelux countries — in no small part thanks to a relatively undervalued euro.

It’s easy to forget, but the Italian export engine was running at full speed in the 1990s and early 2000s (thanks in part to a series of lira devaluations). From Rome’s perspective, the euro means a net loss. They feel like a “German” economic model was imposed on them by force and that Brussels has come to stand in between them and a well-functioning export machine.

History does not wait. The coronavirus crisis has taken a merciless blow to our European economy — the damage is three to four times as great as it was in the 2008 crisis, according to the IMF. The question we face in this historic moment is this: Do we dig ourselves further into the moral trenches — or do we, like Hamilton did, strike a bold compromise and move past previous disagreements?

For decades, the European Commission has held a “triple A” rating but a lack of political consensus has prevented it from raising money in the markets. That may have changed last month, when Berlin presented, together with France, a Copernican proposal for a response to the crisis that would be fully financed by debt issued by the EU and backed by all 27 members.

The result was a rescue package launched by Commission President Ursula von der Leyen a week later: €500 billion euro in hard cash and €250 billion in loans to member countries. The plan would be paid for by debt financed cheaply through eurobonds, whose low interest can be paid back over years by new forms of revenue.

Not everyone is happy with the plan, and there remains, of course, important work to be done. But it would be a mistake to deviate too far from what von der Leyen has proposed.

The basic building blocks of the rescue package are solid. First of all, the plan does not seek to mutualize existing debt (an important difference with the Hamilton plan) and as such avoids getting tangled up in a web of past national responsibilities. The amount of money it puts forward is substantial enough to make a difference to the European economy, without creating debt frivolously. We are talking about 3 percent of the Union’s GDP.

Second, the plan combines solidarity with responsibility. The new European money comes with clear conditions attached to it: National governments will have to implement reforms that are difficult for both the left (when it comes to labor market and pensions) and the right (tackling “tax havens” and the creation of a common corporate tax base).

Third, the Commission has a clear plan for what to do with the new money: transition to a carbon-free and digital economy and invest in Europe’s strategic autonomy. In short, the plan will ensure Europe does not remain a “nation of old industries.”

And fourth, the Commission has also designed clever ways to raise new so-called own revenues that will ensure a level playing field with the world’s other big economic blocs. The digital tax, for example, could be levied on major digital platforms in Asia and America who now earn free money by amassing European data. The Carbon Border Adjustment Tax, too, is more than fair for products with a heavy environmental footprint, such as steel, produced by countries that play fast and loose with the Paris climate agreement.

The choice between accepting this plan or rejecting it is the choice between coming out of this crisis stronger than we entered it or merely surviving it.

Across Europe, companies are on the verge of bankruptcy, and citizens have lost their jobs or are having to dig into their savings. Eurozone debt has risen from 86 percent of GDP to more than 100 percent, and EU countries are more dependent on each other for economic recovery than ever.

Europe’s North and South need each other. When it comes to the economic impact of the coronavirus, we are all in the same boat. We all have a strong incentive to agreeing on a strong and credible recovery plan that will restore confidence in Europe among consumers and investors, both at home and abroad.

This is an existential battle for Europe. We need to prove that we are ready to build a common European future.

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