The European Union may never have its ‘Hamilton moment’

The European Union has always been quintessentially risk averse. What a surprise therefore to see it jeopardizing its very existence by playing a high-stakes multi-handed poker game involving debt mutualization, financial reflation and constitutional law against a backdrop of anti-EU sentiment.

The founding fathers of the European project championed progress towards an ever-closer union by evolution not revolution. Opportunistically the European Commission — guardians of the treaties — seized on important international moments to widen and deepen European integration, as with the end of the Cold War and German reunification to extend state membership, pass the Maastricht treaty and institute the euro. They justified and executed them on the basis of consensus, albeit more in the mould of ‘democratic centralism’.

Perhaps the COVID pandemic is just one of those opportunities, when the EU can again change gear and take integration deeper. Why not attempt that much-touted ‘Hamiltonian moment’ to federate the member-states by debt mutualization, financial transfers and EU-wide taxation? In doing so, the EU would follow in the footsteps of America’s first Secretary of the Treasury, Alexander Hamilton, in the 1790s following the War of Independence.

But getting the reluctant wealthy ‘frugal’ states to bail-out the poorer spendthrifts via greater fiscal federation, as Hamilton did, is only one of the high-stake poker hands the EU is playing. In reality, the COVID pandemic could be a ‘reverse Hamilton’ moment for the way it exposes the fudge that holds together the EU project. That fudge pervades every aspect of the EU, from its multi-currency status to its legal and constitutional governance to its monetary and financial responsibilities. The Covid crisis and the EU’s audacious gamble in dealing with it could lead to an unravelling of much of the integration achieved over the last 70 years.

First, the European financial recovery package of €750 billion ($844 billion) and its debt mutualization exposes the two decade fudge of the EU being a multi-currency bloc. The 2012/13 Euro sovereign debt crisis was a eurozone affair requiring the financial participation of only its 19 members. Although predominantly a eurozone affair again today — with Italy, Spain and France worst affected — the proposal this time is to use the existing seven-year EU budget as the essential tax resource that backs the debt that the European Commission would issue to bail-out these member states. That requires the consent of the non-euro member states and thus collides with the fudge of the EU’s multi-currency status. Hungary and Poland, states with a pre-existing animus with the EU, must be won over. Hamilton was not required to federate multi-currency states.

Second, the EU — via the European Central Bank – has last week doubled down on its bond buying and quantitative easing program to combat the pandemic’s effects on the eurozone by purchasing an extra €600 billion ($675 billion) bonds. It has done so in the teeth of the May 5 ruling by the German constitutional court in Karlsruhe, which had already denounced the previous bond purchases as ultra vires. Its ruling asserted that EU treaty law does not allow subsidy of member states, which its bond purchase program effectively does by way of fudge. This makes a further showdown with the German court — which has already demanded justification by July — inevitable.

Third, the German court’s ruling shines a spotlight on the EU’s constitutional and governance confusion. It points out the conflicting responsibilities of European monetary and economic policy as defined by the treaties which place the former in the realm of the ECB, the latter with the member states.

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What’s more, the Karlsruhe court has drawn attention to the confusion between the supposed supremacy of both the European Court of Justice and EU law versus that of member state constitutional courts and law.

For the EU and the ECJ to ignore the German court, as some suggest, could lead in the first instance to an injunction to the Bundesbank not to participate in the ECB’s QE program thereby eviscerating it. In the second instance, it could provoke a constitutional governance crisis between the EU and member states if the latter seek to go down the German court route.

What can the EU do to resolve this looming crisis that its COVID policy gamble has provoked? The clearest path would be treaty change. But it is well known — particularly after the debacle over the Lisbon Treaty ratification — that such change, in an era of anti-EU sentiment, is anathema to the Commission and to certain member states, requiring as it does approval by national referendum or parliament. The EU is at a stand-off in its high-stakes game. If its bluff is called it could take some very big losses that could change its very nature for the future.

This article was originally published onThe Spectator’s UK website.