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Europe’s Hamiltonian Mirage: The Political Pitfalls of the EU’s Budget Deal

Was last week’s EU budget and recovery deal a true “Hamiltonian moment” Europe? Not quite, argues Angelos Chryssogelos in this blog post.

The agreement on the European Union’s new budget and recovery fund has generated enthusiastic plaudits for what appears to be a big step forward for European integration. Influenced perhaps by the worldwide popularity of the ‘Hamilton’ musical, commentators are keen to use analogies with Alexander Hamilton, the 18th century statesman who spearheaded financial and political union in the budding United States of America. But this Hamilton-euphoria distracts from the fact that the recovery fund formula leaves existing imbalances in EU economic governance unaddressed while threatening to exacerbate questions of democratic legitimacy of European integration.

In 1790 Alexander Hamilton, then Treasury Secretary, arranged for the US government to assume the debt individual states had accrued during the War of Independence. The government would use its own streams of revenue – tariffs and taxation – to pay off old debt and issue new debt in order to finance functions like developing a military. This arrangement is considered today the decisive step in the development of the US as political, economic and military power.

A “Hamiltonian moment”?

It is obvious why the analogy is appealing for today’s EU. It showcases how close cooperation between political units, and the empowerment of a political centre above them, can generate a self-perpetuating cycle of economic efficacy and political integration. Another interesting similarity is that the decision to pool the debt of individual states was not less controversial in late-18th century US than what equivalent ideas of deeper economic integration are in Europe today. Much as in the EU today, US states in the late 1700s had quite different fiscal and debt profiles. Virginia, the state from which Hamilton’s arch-rival Thomas Jefferson hailed, was, like the EU’s ‘frugals’ today, a low-debt state. Various bargains had to be struck for it to go along with the plan.

But all these intriguing historical analogies do not change the fact that what the EU has agreed differs from the Hamiltonian arrangement in fundamental ways. Back then, the US government assumed the existing debt of states. The EU instead has agreed not to relieve member-states of their debt but create new EU-wide debt on top of it. The Hamiltonian analogy would hold if all or some member-states had pooled parts of their national debt or issued new common debt between them. While the recovery fund will help member-states in the short term, and issuing EU debt is a major departure in the direction of economic integration, it does not address the main source of long-term imbalance in the EU: different levels of national indebtedness and the permanent insecurity of high-debt states exposed to the whims of financial markets.

Moreover, Hamilton succeeded in endowing the US government with its own sources of revenue, emancipating it from dependence on states. This neutralized fiscal issues as sources of inter-state rivalry that could have torn the union apart, much as almost happened with the Eurozone in 2010-15. But under the EU budget deal, the EU’s own independent sources of revenue to finance its debt issuance – to start repayment after 2027 and to be paid off by 2058 – still remain to be specified pending approval by member-states. The problem is that national governments hold substantially different views on issues like financial and digital taxes, so the EU being given its own revenue in these areas is highly unlikely.

Without any agreement on own resources, the EU must use national contributions to its budget as guarantee for issuing debt. This means that, while exposed states like Italy and Greece will benefit in the short-term from recovery funds, they may find themselves contributing directly or indirectly to the repayment of the EU debt for years after receiving crisis assistance. At the same time, due to the insistence of so-called ‘frugal’ Northern countries in the negotiations, almost half of recovery funding will be in the form of loans. Indirectly, poorer states will see their already heavy debt burden grow. This is the exact opposite of what happened in Hamilton’s plan.

Structural flaws remain

One could perhaps excuse these flaws of economic design given the immediate relief the recovery fund provides to hard-hit countries like Greece and Italy, where the budget deal was hailed as a success. But gaps in economic institutions may amplify political repercussions further down the line, as we saw in the Eurozone crisis. Here as well the Hamiltonian comparison exposes rather than flatters the EU.

The success of Hamilton was that he achieved economic outcomes in harmony with the principles of American democracy. Freeing states of debt back then became the precursor of today’s decentralized American political economy, where states are free to pursue a variety of fiscal and economic models without intervention from the central government. By assuming economic functions and direct sources of revenue on the other hand, the US government also developed a relationship of direct accountability and legitimacy with citizens. In both ways, the main principle of American democracy – concurrent democratic representation at local and federal level – was strengthened.

Of course, one should not idealize all aspects of US democracy in Hamilton’s time, when the main economic divide was not over market regulation and welfare, as in Europe today, but slavery. An unfortunate implication of the Hamiltonian compromise was that slavery was sheltered from central government interference for decades more. And the principles of American democracy – multi-level popular sovereignty channeled through mutually counter-balanced institutions – obviously were formulated with a very limited constituency (white men) in mind.

Whatever its flaws, the EU is superior to these deeply problematic features of America’s past. Yet invoking today Hamilton as a positive economic analogy at least requires acknowledging the philosophical conceptions of democracy that he tried to satisfy with his plan. On this score, the Hamiltonian analogy highlights how in the EU democracy at both the national and European level remains constrained even after the recovery deal. As differentiated levels of national debt persist, and as the EU’s draconian rules on spending and deficits are expected to be reinstated after the pandemic, national democracies will remain straightjacketed. Governments will still be limited in responding to societal demands. In addition, imbalances between surplus and deficit countries persist, exacerbating bitter divisions between ‘frugal’ and ‘borrower’ states in economic negotiations.

At the same time, it is unclear whether this new step will generate the much-desired politicization of the EU as a ‘European government’ attracting citizens’ allegiance. For all the new powers of the Commission, if citizens do not feel that it is a legitimate body that they can hold accountable, their sense of estrangement will only grow. At the same time, as spending priorities and the Commission’s revenue will remain controlled by member-states, the EU risks once again ending up with the worst of both worlds: giving the impression that it has usurped wide-ranging powers from the national level and the scrutiny of voters, while in practice being unable to function in the interest of the whole Union by remaining hostage to conflicting national agendas.

All of this contrasts sharply with how the Hamiltonian compromise had reconciled economic effectiveness with the prevailing democratic principles of the time. Instead, the EU budget and recovery fund deal keeps the main power asymmetries in the EU – dominance of national interests over the common European interest, and of surplus-states over deficit-states – intact. Contrary to prevailing optimism, and however much it is necessary to tackle the crisis at hand, the EU has done little to address the economic imbalances and democratic discontent that have been plaguing European integration for decades.

Angelos Chryssogelos is an Assistant Professor in Politics and International Relations at the School of Social Sciences, London Metropolitan University.