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Europe’s New Deal Moment

Summary:
US President Franklin D. Roosevelt’s 1930s reforms are now accepted as an essential part of America's “economic constitution.” The longer-term challenge for the European Union will be to implement its COVID-19 crisis measures in such a way that they, too, come to be seen as useful economic stabilization tools when more normal times return. BRUSSELS – Many believe that the recent Franco-German proposal for a European recovery fund – to be financed by bonds issued by the European Union – could be the bloc’s “Hamiltonian moment.” The term refers to the 1790 agreement spearheaded by Alexander Hamilton, the United States’ first treasury secretary, whereby the US federal government assumed the debts incurred by the new

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US President Franklin D. Roosevelt’s 1930s reforms are now accepted as an essential part of America's “economic constitution.” The longer-term challenge for the European Union will be to implement its COVID-19 crisis measures in such a way that they, too, come to be seen as useful economic stabilization tools when more normal times return.

BRUSSELS – Many believe that the recent Franco-German proposal for a European recovery fund – to be financed by bonds issued by the European Union – could be the bloc’s “Hamiltonian moment.” The term refers to the 1790 agreement spearheaded by Alexander Hamilton, the United States’ first treasury secretary, whereby the US federal government assumed the debts incurred by the new country’s 13 states during the War of Independence.

On superficial inspection, this analogy seems to warrant the introduction of Eurobonds right now. But a closer look reveals that the equation “Hamilton = Eurobonds now” does not hold, for three reasons.

First, whereas the US states had incurred most of their debts in a common cause, namely the war against Great Britain, that is not true of today’s EU member states. Although some might argue that the bloc’s governments are all fighting against another common enemy, namely COVID-19, this analogy is misleading. The additional debt that most governments will incur to keep national economies afloat during the pandemic will be large, but it will constitute only a fraction of their total debt.

Assume, for example, that the Italian government has to spend the equivalent of 15% of GDP to mitigate the looming pandemic-induced recession. The country’s public-debt ratio would then increase to about 150% of GDP, but the common fight against the coronavirus would have accounted for only one-tenth of the total.

Second, the US states’ wartime debts were not repaid in full by the federal government, because the portion owed to private creditors was substantially restructured – what we would now call...

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