The COVID-19 crisis: A Hamilton moment for the European Union?

Abstract

According to Jean Monnet, one of the founding fathers of the European integration after World War II, Europe always needs a crisis to make progress in integration. The COVID-19 crisis seems to deliver a perfect case to go forward. The pandemic represents an exogenous shock for all EU member countries. But the impact is asymmetric. Countries with already high public debt before the crisis would run into great difficulties in financing the measures needed to stabilise their economies. Against this background, a number of politicians and academics have called for a “Hamilton moment” and proposed mutualising the new debt at the European level and providing the financial means to the countries most seriously hit by the pandemic.

In 1790, upon a proposal by the Union's finance minister Alexander Hamilton, the debt of states accumulated during the War of Independence was assumed by the Union. Hamilton interpreted this act as “cement” for the Union. Should the EU follow this example and move in the direction of a fiscal union? This article tries to demonstrate that the historical comparison is not well founded, and the establishment of a fiscal union in Europe needs a change of the Treaty on the Union.

European integration saw many ups and downs and always needed a crisis to make an important step forward. According to this perception, on the one hand, European integration is based on a grand political design. On the other hand, progress in political reality can only be achieved—and the manifold obstacles overcome—under the pressure of a crisis.

In short, politics must use the opportunity, following the motto: never let a crisis go to waste. Since the start of (Western) European integration after the end of WWII, there has been no shortage of crises. The great financial crisis of 2008/2009 was only partly used to deepen integration—and mainly wasted. The turbulences caused by the current pandemic now offer an almost unique chance to do better.

For many observers—among them German Finance Minister Olaf Scholz—this crisis offers a “Hamilton moment”, referring to the situation after the American War of Independence. Alexander Hamilton, the first Finance Minister of the Union, proposed the assumption of the debt that states had accumulated to finance their participation in the war. Hamilton argued that the debt of the 13 states was not the consequence of permissive fiscal policy, but due to external circumstances—today, one would call it an exogenous shock—namely the war. The debt was the price of liberty (Hamilton, 1790). On 4 August 1790, the US Congress accepted Hamilton's proposal to assume, that is, nationalise, states’ debt. Negotiations ended in a compromise. In exchange for the bail-out, the authority to tax imports, the most important source of revenue, was transferred from the states to the federal government (Sargent, 2012). (The compromise also included the decision to make Washington the future capital.) For Hamilton, the bail-out was an act “to cement more closely the union of the states” (Hamilton, 1790).

What conclusions can for Europe be taken from the American experience? The corona crisis could be seen as a Hamilton moment for the following reasons. The economic consequence of the pandemic is a deep decline in economic activity in all countries. The shock is exogenous and symmetric. However, the impact of the shock is asymmetric in so far as some states are exposed to the risk of an unsustainable fiscal situation if they increase their already high level of debt by financing economic recovery measures.

The Hamilton element is seen in an approach that allocates the new debt at the EU level and provides the means to countries in greatest need.

The decision of 1790 had an important influence on the history of the United States in the period that followed, up until the Civil War. The bail-out did not lead to a stable, sustainable system of state finance. States, relieved from their debt, started to finance expensive projects by incurring new debt. In the course of the next decades a number of states became insolvent. As a consequence, the reputation of the federation and of the states as borrowers suffered. “The irresponsibility of states also gravely damaged the reputation of the federal government and made external borrowing prohibitively expensive” (James, 2015, p. 176). In the end, fiscal union proved to be explosive rather than cement and contributed to the tensions which ended in civil war. “It took 4 years of awful civil war to force rebels to accept not only Abraham Lincoln's interpretation of what it meant for all men to have been 'created equal' but also the type of federal union that Hamilton and Washington had begun and that Abraham Lincoln preserved and extended” (Sargent, 2012, p. 23).

The unsustainable fiscal situation only ended when another bail-out of some states was refused, and the window of state credit was closed. The regime that individual states in the United States have to present a yearly balanced budget and that the option of a bail-out by the union is excluded goes back to this time.

A fundamental difference between the assumption of debt in the United States and the current situation in Europe is that the union, in the former case, already existed. The states followed the advice of an acting finance minister of the union to assume the debt of individual states. This union was the result of the common war of independence. From this perspective, would it not be logical to create in Europe in the first place a defense and foreign policy union before claiming a Hamilton moment to establish a fiscal union? By the way, it took more than a hundred years for the federal state to expand substantially. Finally, one should not disregard the fact that democracy practiced in the United States at that time excluded many people from voting.

“Hamilton moment” is a nice catchword. However, it would be dangerous to create the impression that using the corona crisis implies the chance for a state-creating moment in Europe comparable with its achievement in the United States. First of all, the historical analogy is simply wrong. The union that assumed the debt from individual states already existed. If Europe wants to establish a fiscal union by transferring sovereignty on taxation and public spending from the national to the European level, there is only one democratically legitimate way to do so—a change of the Treaty that must be ratified by all governments and parliaments, and even confirmed by a referendum in some countries. In Germany, such a decision requires a change in the constitution. Seeking a shortcut by seizing a supposed Hamilton moment creates an illusion that might backfire and ultimately undermine popular support for deeper European integration.

Europe must find its own way. And this way to fiscal and finally political union must not use the backdoor of more or less tricky ploys which undermine the democratic accountability of national parliaments. European politics must choose the front door of an open process leading to democratic legitimacy via a change of the Treaty.

Reference to a Hamilton moment neglects many of the specific institutional aspects of European integration. Following the COVID-19 crisis argument and the plans for a common fight against the economic and social problems, all 27 members of EU should be included. The vision that a common currency would work as a pacesetter for a common foreign policy and finally political union turned out to be an illusion. Will a fiscal union accelerate the adoption of the euro by all 27 EU members? And if so, will tensions caused by a substantial increase in already high political and economic heterogeneity break up the euro area?

These and other problems are not addressed by the proponents of a Hamilton moment. Brexit has not least demonstrated that one country did not accept the call for “creating an ever closer union among the peoples of Europe” which is stated in the preamble of the Treaty on European Union. And the people of the United Kingdom might not be alone.

What about this message coming from the COVID-19 crisis: Organise cooperation and solidarity within the present institutional arrangement. The complexity of the decision-making process presents a challenge to achieve a viable compromise. First, meet this test at both levels—European and national—to agree on democratically legitimised actions. After a success, one might first present an uncompromising analysis of all remaining problems, coming to a common understanding on where the Union and all member states want to go and design a road map which leads to the newly defined “finalité”. In case there is no agreement, the challenge is to find an arrangement which can deal with the obvious divergences. The supporter of the Hamilton moment argument should be reminded that, after a long series of crises, the United States needed a civil war to find common ground.

Relying on the “Monnet method” once too often by using the crisis for a “jump” into an inconsistent arrangement of strengthened European institutions, and remaining weakened competences of national states, might end in chaos, rather than in a Europe prepared to meet the great challenges stemming from geopolitical tensions and climate change.