As Europe grapples with the deadly Coronavirus, the national economies of the European Union continue to fail. While some are failing after being hit hard by the virus, others are failing, amongst other reasons, due to structural economic issues such as massive debt and disproportionate public spending. However, the Union has previously fought battles comparable to the current one against coronavirus, be it the Eurozone crisis, the refugee crisis, or the financial crisis from 2008.
Every crisis has paved the way for the Franco-German duo to come out with flying colours while getting proclaimed as the leaders of the Union. While the Union’s combat with corona has led to expansive lockdowns, lack of employment, social welfare, and a suffering population, French President Emmanuel Macron, along with the German Chancellor Angela Merkel have designed an ambitious plan to be the rescuers of Europe, once again.
Market and the Merkel-Macron Deal.
The deal, which is worth 500 Billion Euros is aimed to repair the economic damage faced by the Union due to the coronavirus pandemic. In a rather surprising turn of events, Merkel agreed to support the long term French ambitions of building a more efficient and greater fiscal burden sharing system by mutualising debts and establishing common expenditure to a certain extent among the members of the European Union. This is an unprecedented move from Berlin, as it has time immemorial resisted any attempts to create a fiscal union as part of the EU.
The markets were left exasperated earlier this month when the Karlsruhe Court, or the German Constitutional Court, challenged the European Central Bank’s Quantitative Easing. The court argued that ECB’s QE has to be restricted and controlled like every other QE measure around the globe. This put the euro in a state of severe jeopardy, where the blue-chip euro stocks raised 5% and further risked the European market. Berlin’s out of the ordinary move has brought hopes to the European and global markets, where the world’s biggest market could possibly survive this battle, and even thrive while growing out of it.
The high market confidence that this proposal brings is due to its political nature rather than just the economic recovery of the Union. Olaf Scholz, the German Finance Minister in a completely striking statement, called the European Union approaching its “Hamilton moment”. This is a reference to the time when the first US Treasury Secretary- Alexander Hamilton turned the United States of America into a fiscal union when all the state debts were converted into federal debt in the year 1790. Taking into consideration years of German opposition to introducing a fiscal union in Europe, this move left the financial markets in awe.
Jacob Funk Kirkegaard of Washington’s Peterson Institute for International Economics, in a fit of excitement and optimism, said, “This is a really, really big deal. In both debt mutualisation and common expenditure, a taboo has broken - this is not something the German government has been willing to do before. It’s precedent setting and it offers the EU project an entirely new set of powerful tools.”
The Frugal Resistance
However, this proposal has begun facing resistance from the ‘frugal four’ of the European Union, who do not wish to have a system of grants from the European Commission to the worst-hit countries of the Union, but rather have a loan based system in line with their own counter-proposal that was brought up a couple of days following the announcement of Merkel-Macron proposal.
Frugal four have further criticised the proposal for not being comprehensive enough to deal with the EU members who got affected economically in spite of having very few COVID cases in their country. Eastern European countries are afraid that this proposal will send most of the investment and help down south and not to the east. While these issues plague the revolutionary Merkel-Macron proposal, the markets have received a glimmer of hope and are thereby performing better than before following the news that the European Commission shall produce their own proposal against this crisis where they welcomed the initiative taken by France and Germany.
In spite of there existing opposition to this proposal by the members of the EU, the markets are performing well as they are “focussing on the principle rather than the scale”, in the words of Paul Donovan, chief economist at the UBS Wealth Management.
Integrating Europe for Multiplying Markets
European and global markets are looking at this with hope as this is a sign of European integration, rather than the one of disintegration which was prevalent due to Euroscepticism. German change of heart in the matter of fiscal union has resulted in four of the biggest economies in the Union - France, Italy, Spain, and now, Germany. This puts a lot more weight in the idea of a fiscal union and thereby is a welcomed European integration.
Conclusively, this is a huge win for ECB chief Christine Lagarde, who has been campaigning to prompt the euro members to focus on fiscal policy, rather than the monetary policy to support and boost European growth. The success of this revolutionary proposal lies in a balance as the strong opposition could result in massive compromises which would turn this into another euro stalemate and loss of efficient economic policymaking, once again.
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