Alexander Hamilton, one of the brilliant group of “founding fathers” of the United States and its first finance minister, was once remembered mainly because he was killed in a duel by vice president Aaron Burr in 1804.
But he’s enjoying an afterlife—first the subject of a Broadway musical and now constantly invoked in articles about the European Union’s (EU) “Hamiltonian moment”.
Hamilton was an economic nationalist who wanted to use protective tariffs to build up manufacturing industry in the US.
In 1790 he set up a national debt to help fund a strong federal government and promote economic development. He persuaded Virginia, the most powerful state, to include in this national debt the debts of the other states, many of which had borrowed heavily during the War of Independence against Britain.
So what is supposed to be the European equivalent of this “Hamiltonian moment”? Last week, German chancellor Angela Merkel and French president Emmanuel Macron announced that they supported setting up a £447 billion “European Recovery Fund”. This fund is being set up to help EU member states overcome the economic effects of the pandemic.
So what’s the big deal? Lots of governments have been throwing the financial equivalent of the kitchen sink at the developing economic collapse. Yes, lots of governments, but not the EU, which has been paralysed by a split between North and South.
The key country here is Italy, the EU’s third biggest industrial economy and its worst victim of the pandemic. Italy’s national debt, 135 percent of gross domestic product in December, is projected to rise to 180 percent as government spending increases and economic activity and tax revenues shrink.
But the Northern “Frugal Four”—Austria, Denmark, the Netherlands, and Sweden, so far backed by Germany, have insisted that any financial assistance to hard-hit member states should be loans. They argue these should be policed by the neoliberal apparatus that inflicted such suffering on Greece, Spain, and Ireland during the eurozone crisis.
They have also refused to support financing any recovery fund through collective borrowing by all EU member states. This would amount to what they call a “transfer union”, in which the rich Northern member states underwrite the poorer Southern ones.
The economist Michael Pettis has pointed to the absurdity of this stance. He argues, “the German economy has benefitted more than that of any other country from membership in the transfer union that is the EU.”
Austerity was enforced on the eurozone to maintain an economic regime based on low wages and high exports in Germany. But Merkel has now shifted to accept the Southern states’ demands. She and Macron are backing a fund that would make grants not loans to member states, and funded by the European Commission’s borrowing.
Merkel probably moved because the German constitutional court earlier this month essentially endorsed complaints by Eurosceptic economists about the policies of the European Central Bank (ECB).
She had relied on the ECB’s quantitative easing—creating money and pumping it into the banking system—to take the edge off austerity. But the constitutional court—which claims the right to overrule European law in the interests of German national sovereignty—could upset the apple cart.
Macron has been warning the EU’s cohesion is in danger. China is courting Italy, where there is much bitterness about the lack of European support when the pandemic hit. In a recent Italian poll, China and Russia topped a list of friendly countries, while France and Germany were at the bottom.
So is this the Hamiltonian moment? No. Hamilton created a national debt of £62 million when US national income was £155 million. £447 billion is peanuts compared to the EU’s gross domestic product of about £14 trillion.
More fundamentally, Hamilton was trying to build a nation state, which is necessarily a “transfer union” that shifts resources from rich to poor areas.
The EU remains a cartel of nation states, which still dominate taxing and spending, where the most powerful—above all Germany and France—dominate. Merkel’s and Macron’s plan is an attempt to paper over the cracks, not a game changer.