In the spring of 2020, when Europe was on the verge of a cataclysmic economic crisis provoked by the COVID-19 pandemic, it summoned the will to arrange its largest common debt issuance and coordinated economic support program. This was arguably not the first time: the eurozone had done something similar in arranging support programs for indebted Greece, Ireland, Portugal, and Spain by way of the European Stability Mechanism (ESM) during the euro crisis, but it was the first time that European governments had backed the EU and its budget in such a way.
At first, Germany resisted the move. Then Chancellor Angela Merkel, staring into the abyss that would have engulfed the EU, and considering the long shadow of her legacy, jumped. Her finance minister and vice chancellor, Olaf Scholz, described it at the time as Europe’s Hamiltonian moment.
Alexander Hamilton, the United States’ First Secretary of the Treasury, had indeed set out the foundation of the American federation when he established the first federal debt by mutualizing war debts in 1790, agreed to tariffs becoming the first resources of the federal government, and established the financial foundations of America with the First Bank of the United States.
The reality is that the EU has not taken close to all of the steps that would be required for us to consider the €750 billion NextGeneration EU (NGEU) program agreed in 2020 to be a true Hamiltonian moment. In fact, the official political stance of European leaders remains that this will be an exceptional one-off and that after 2026, when NGEU ends, the EU will return to the status quo ante.
Stiff Resistance
If anything, all of the efforts to date to expand and extend the NGEU experiment have failed. Whether it be calls for a real European Sovereignty Fund to back the EU’s green industrial policy in 2023 or the more recent discussions of establishing a European Defense Fund to bolster Europe’s industrial defense base in the face of Russia regaining the military initiative in Ukraine, all have been met with stiff resistance.
Discussions about introducing a new set of taxes for the EU have not gone any further, either. More concerning is that in the absence of a new round of borrowing, the EU will have to agree to repay the debt issued under NGEU. In the absence of an agreement on new taxes to repay NGEU, it will have to come from national budgets, or worse, EU budget spending would have to be cut substantially to repay this extraordinary borrowing.
In short, between now and 2027, when the next seven-year EU budget is to be agreed, Europe will have to decide whether to jump off a fiscal cliff and cut EU spending abruptly to repay the COVID-19 recovery debt, thereby undermining its security and green energy transition. Or whether to take a truly Hamiltonian leap forward by establishing a new set of tax resources for the EU budget, increasing its size, and establishing a new or ideally permanent capacity to borrow.
As it stands, this genuine Hamiltonian moment appears distant and the political coalition to defend it rather thin. Indeed, the current German coalition government is undecided despite the coalition’s stated long-term aim of turning the EU into a federal state. The recent Dutch elections have ushered in a rather euroskeptic and conservative parliament. Even more importantly, the uncertainty surrounding the next French presidential elections in the spring of 2027 is liable to hold the rest of Europe back until a government emerges in Paris.
Taken together, this means that Europe could fail the coming Hamiltonian test and revert to the status quo ante; or it might be compelled to engineer second or third best solutions, for example by bootlegging the dormant European Stability Mechanism, which sits idle with a borrowing capacity of nearly €500 billion.
These suboptimal options would at least leave the door open to further integration down the line. But a real step back in fiscal integration is sadly highly probable. It would weaken Europe durably, undermine its climate transition, jeopardize its defense, and wreck its economic potential—unless another Donald Trump presidency or an upset in Ukraine provides the impetus and the resolve that European leaders summoned in 2020. The campaigns for the European Parliament election should offer a moment of reflection about Europe’s choices that lie ahead.
Shahin Vallée is Senior Research Fellow at the Geopolitics, Geoeconomics, and Technology Center at the German Council on Foreign Relations.
