Macron and Merkel deliver an $859 billion breakthrough

After days of bad-tempered talks, the European Union's 27 members have agreed a 750 billion-euro ($859 billion) Covid-19 recovery fund that looks like a historic step toward more joint stimulus across the bloc — even if it's not yet a "Hamilton moment."

While the unusually united Franco-German duo of Emmanuel Macron and Angela Merkel couldn't avoid watering down their original proposal, the deal is still worth cheering.

Getting it over the line wasn't just about responding to a virus that has claimed the lives of more than 100,000 Europeans and tipped the bloc into its worst recession in decades. It also meant settling scores between northern and southern Europe, with the "frugal" Dutch and Austrians reluctant to hand out cash to the heavily indebted Italians and Spanish. There was also a need to bridge the political gap between the west of the EU and the east, where democratic backsliding by the likes of Hungary's Viktor Orban has increased the pressure on Brussels to be more discerning about where it sends money.

Several radical new steps have been proposed. First, rather than individual countries raising the funds, the EU as a whole will use its collective financial muscle to borrow 750 billion euros on capital markets to rebuild its virus-scarred economies. Second, almost 400 billion euros of that money will be handed out as grants, and the rest as low-interest loans, making it cheap and easy to spend. Third, the European Commission — the EU's executive arm — will study a range of possible new taxes, including technology and financial transaction levies, to help pay for the fund.

This isn't quite a United States of Europe brought together by the modern equivalent of a Hamilton bond, but the power to tax and spend is important. The fund is being presented as a temporary one-off, but this is still a big moment for supporters of deeper European integration.

The deal also upends the traditional approach of a bloc that for years — under the economic influence of Germany — has preached fiscal rectitude and austerity as the response to economic crises. Past EU joint-funding efforts for struggling member states have been plagued by the top-down imposition of punitive terms and conditions, as analysis by the Institut Jacques Delors think tank shows. The treatment of Greece during its debt bailout program is the most depressing example.

This pandemic recovery fund, by contrast, is intended to help needy countries without making their already strained finances worse. That's a healthy development, even if it took a public health crisis to achieve it. It's also fair: Covid-19 is not the fault of any nation. 

There's still a risk that this breakthrough in European solidarity might be weakened by overly strict conditions on how the money is awarded and used, which the frugal nations have called for. While some oversight is needed — to avoid abuse, fraud or cronyism — excessive scrutiny and obstruction could delay spending and trigger long political disputes. If a small group of countries can easily veto others' plans, the recovery fund might be less effective.

So far, it looks like the right balance has been struck on conditions. National Covid-19 recovery plans will be assessed by the Commission and signed off by a qualified majority of EU governments. Further down the line, individual governments can complain if another EU state isn't sticking to its promises, but it doesn't look like this would derail the spending. 

Obviously, these are early days. The lingering lack of trust between states after the Covid-19 emergency is hard to ignore. Even with the U.K. gone and Germany swearing off frugality, the EU's North-South divide hasn't gone away. Part of the price of securing the approval of Dutch Prime Minister Mark Rutte and his fellow frugals was a big increase in their EU rebates, which cuts the amount of money they have to pay into the bloc's budget. There may be more fights to come as national spending plans kick off.

Skeptics will also wonder whether 750 billion euros is really enough. The EU's GDP is set to shrink by 7.8% this year, and yet its 27 members have been at each other's throats over a stimulus package worth about 5% of GDP.

Still, it's an encouraging first step. The EU is showing that it can combine fiscal stimulus with monetary support from the European Central Bank without sacrificing its values.

And, as French historian Frederic Bozo puts it, once the emergency faucets are opened, it's hard to turn them off. If the EU can deliver a mixed monetary and fiscal response, backed by mutual borrowing, then such rescue packages will be forever within the realms of the possible rather than the fantastical. This fund may be the messy progeny of many governments rather than one, but it's progress.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.