By The Bloomberg Editors
A PROPOSAL announced this week by German Chancellor Angela Merkel and French President Emmanuel Macron marks a real advance in the European Union’s sluggish response to the novel coronavirus. Their idea is for the European Commission to borrow some 500 billion euros ($548 billion) and distribute the money as grants to the member states most in need of fiscal support. That’s a much bigger number than previously contemplated, and the idea of giving grants rather than making loans is even bolder.
In coming to this agreement, Germany has veered toward France’s position, and that’s a move in the right direction.
Admittedly, to say that details remain to be worked out would be an understatement even by EU standards. The two leaders haven’t said exactly how they would like the money to be allocated, or exactly how the new borrowings would be repaid — crucial and extremely contentious questions. And though an understanding between France and Germany on a new fiscal plan is necessary for anything to happen, it isn’t sufficient. Support from all 27 members of the union will be needed to move forward, and fiscally conservative governments are already lodging objections.
It’s hard to quarrel with Merkel’s account of why a program of this kind — and preferably bigger still — is needed. As she pointed out, “There is a risk that the EU’s cohesion will be endangered by the economic effects of this virus.” Without help, the countries worst hit with cases of COVID-19, especially Italy, will struggle to cope with the budgetary consequences. That’s partly because, as members of the single-currency system, they lack independent recourse to monetary accommodation of their emergency public spending. Italy’s debts are already onerous. The European Central Bank has stepped forward with powerful monetary-policy support, but its ability to direct help to the countries that need it most is constrained.
The EU’s hesitation has added to popular resentment in Italy and elsewhere, and things could get worse if the hoped-for economic recovery is delayed or interrupted. Euroskeptic sentiment was on the rise even before the pandemic’s fiscal demands drew fresh attention to the weakness of the EU’s policy tools.
In the longer term, Europe requires a permanent budget-policy framework to furnish the euro system with the necessary fiscal instruments. That means EU borrowing, EU taxes, and EU public spending. This, however, is work that will take years, supposing it can ever be accomplished. Europe would need a new treaty — a drawn-out process that requires unanimity — and would have to address issues of identity and solidarity that up to now it has preferred to dodge. Because of the coronavirus, a much faster remedy is essential. A temporary de facto union, skirting the need for a new treaty and consequent delays, is the best way forward.
This new proposal could start to fit the bill. Granted, even in getting to a short-term fix, complex negotiations will be needed over who gets the money and who in the end pays. The effort might fizzle out, like previous attempts. But in agreeing with Macron and recognizing, for the first time, that a single-currency area can’t work well under stress without a unified fiscal policy, Merkel has taken a big and possibly momentous step.