The French-German Plan: Europe's last chance?

If the European Union were a painting, it would look much more like a Jackson Pollock painting than one by Piet Mondrian; to paraphrase Saint Teresa of Avila, we could say with certain sarcasm that the European project is painted with crooked lines.  The new proposal for the recovery of the continental economy presented by Merkel and Macron could not be an exception, although for the moment all we know is that they have put a rabbit in a hat, which, as in the Schrödinger paradox, is both alive and dead, now pending the decision of the whole of the 27 on its state.

What is certain is that, a priori, the French-German plan is hopeful, and has the potential to square the circle around which Spanish finances revolve. Before going over Merkel and Macron's proposal, let's see what problem it tries to solve. The crux of the matter is that the price of membership of the Eurozone is the weakening of national governments, because when a state is part of the monetary union, it loses its own currency, and hands over the administration of the new one to the European Central Bank, which means losing national control over the money. This has several fundamental consequences, the most obvious of which is that the member states of the Eurozone have no choice but to issue their external debt in a currency that they do not control, which means that the national banks are not in a position to guarantee payment to creditors, something that the Spanish Bank could do before adopting the Euro, because until then, the Spanish Government issued debt in pesetas, from which the Spanish Bank could issue as much as it needed, as the Federal Reserve or the Bank of England now do. In other words, before joining the Euro, Spain had a sovereign mechanism to avoid a liquidity problem. 

Now, however, the financial markets can drag Spain into insolvency against its will, because if international investors consider that the Spanish government is facing a liquidity problem, they will divest themselves of Spanish bonds, which are denominated in euros, and buy bonds from a nominally more solvent country, such as Germany. As a result, the Spanish government is forced to offer more lucrative interest to investors, so that it is more profitable to buy Spanish bonds than German ones, thus incurring higher costs of financing the public deficit, and less liquidity. 

Of course, issuing more currency, as the United States does, is not without cost either. Thus, if international investors (the case of Japan is different, because the bulk of its public debt is contracted with Japanese creditors, thanks to which it has negative interest rates) do not trust the solvency of a monetarily sovereign country, they will sell their debt in dollars, and cause a depreciation of that currency. But thanks to the Federal Reserve, the United States can never have a liquidity problem: if it fails to place sovereign debt in the financial markets to pay off its debt, it will print more dollars at the end of the term. In summary: the financial markets cannot push the US government into a liquidity crisis and insolvency, as they can with the Spanish and Italian governments. Or in other words, the governments of the United States or the United Kingdom would never allow their respective central banks to turn a blind eye during a financial crisis, much less allow the national economy to be left in the hands of speculators, as is the case with Spain and Italy and the European Central Bank.

Hence the importance of the initiative by Merkel and Macron cannot be underestimated. Although it does not resolve the basic problem of the eurozone that we have described, it is nonetheless a step in the right direction for the whole European project. In essence, the proposal of the French-German duo is that it will be the European Commission itself that will raise the necessary funds on the international markets, in order to double the annual budgetary limit, and to carry out public spending over three years in all the countries of the European Union, with particular attention to the industries most affected by the pandemic, such as the tourism, automobile and commercial aviation sectors. 

The proposed formula differs from the Troika rescues in the previous financial crisis in that the funds will not be granted in the form of loans with strict conditions, but will be part of the European Commission's ordinary expenditure, so on the one hand it will be jointly supported by all member states, and will be repaid through national contributions to the EU budget, as well as through new tax measures in the digital and environmental field. In terms of specific weight, the size of the proposed fund is three times larger than the 1948 Marshall Plan, and has the added virtue that the expenditure will be materialised through European finalist projects and subject to an audit that mitigates the risk of misuse.

The cleverness of the proposal lies in the fact that it takes advantage of the ambiguity of the treaties of the union, which neither specifically allow the European Commission to obtain massive loans in the financial markets, nor explicitly prohibit it, thus allowing it to circumvent the literalness of the legal limitations imposed on mutualized debt, precisely the reason why Germany had no political margin to support the coronabonds claimed by the countries of the South, especially after the recent ruling of the German Constitutional Court.

It is said that an opera does not come down until the soprano comes on stage. Now that the spotlight is on Merkel, it will be difficult for the secondary singers' choir to continue to be out of tune.