With Japan preparing a total of some ¥200 trillion in economic recovery measures in response to the COVID-19 pandemic, and the United States having passed a $2.2 trillion aid bill and considering more, the European Union’s €750 billion ($826 billion) plan to help address the economic crisis looks insignificant in comparison.
Focusing on the financial bottom line misses the point, however: The real significance of the EU proposal is how it will work, and its implications for an institution that has underperformed — and whose very existence has, at times, been threatened — for over a decade. If adopted, the plan could transform the EU from a loose union of countries into a genuine federation of states. There is a long way to go, but if it succeeds, a United States of Europe could emerge from this crisis.
Facing the worst economic crisis in modern history, German Chancellor Angela Merkel and French President Emmanuel Macron last month proposed a €500 billion rescue fund, the monies for which would be raised by the European Commission itself by borrowing on capital markets, and then used as grants to support EU spending rather than loans to national governments. That plan was expanded to €750 billion by European Commission President Ursula von der Leyen; she wants €500 billion to be in the form of grants to struggling countries, and the remainder would be loans with conditions.
With national economies facing losses of 10-20 percent, a fund of only 3 percent of EU gross domestic product doesn’t look like much. But the proposal could be transformative. Giving the commission the ability to raise funds by itself is being called Europe’s “Hamiltonian moment” because it resembles the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped turn 13 states into a real United States by creating an empowered central government.
The deal is by no means done. Commission decision making is done by consensus, so all 27 members must endorse the plan and there is vocal opposition. The “Frugal Four” (Austria, Finland, the Netherlands and Sweden) are ardent opponents of aid for southern European governments who “have only themselves to blame” for inept or corrupt economic policies. Prior recipients of aid complain that it is unfair since they had to pay their loans back, while others worry that new funds could reduce aid that might otherwise be theirs. All point back to the 2008 Global Financial Crisis and note that even then the EU did not take this fateful step.
It is telling, however, that Merkel, who long opposed any policy that let national governments off the hook for their own poor decisions or might put the German taxpayer on the hook for them, is one of the backers of this proposal. Merkel, like Macron, recognizes the gravity of the moment. The EU is reeling from Brexit, the ascendance of rightwing parties in member states that challenge the community’s democratic norms and principles, a loss of solidarity following the immigrant flood of recent years, enduring estrangement from the euro crisis, and is now being hammered by the COVID-19 pandemic. For Merkel, the EU is facing the “gravest crisis in its history, and such a crisis demands appropriate answers.”
Wolfgang Ischinger, a former senior German diplomat, warned that “It was a question of the survival of the European Union.” Dismissing complaints that the rescue plan is “a gift” to governments that mismanaged their economies, he countered that “It’s about assuring the survival of the European project to which Germany has now been attached to for the last 70 years. Our political future.”
That future matters not just to Europeans. Upon taking office last year, von der Leyen said she sought to lead a “geopolitical Commission” that would focus on external relations. That is in part a reaction to the shocks triggered by U.S. President Donald Trump’s “America first” approach and his subsequent withdrawal from or undermining of international deals, treaties and institutions. It is also a reaction to a rising sense of threat from Russia and China, both of which are viewed as revisionist powers, hostile not only to the international status quo but the European project as well.
European diplomats talk of a “new realism” in thinking about China, the most telling indication of which is the strategy paper released a year ago that identified the country as “a systemic rival promoting alternative models of governance.” Beijing is thought to be energetically identifying and widening divisions within the EU, using economic sticks and carrots to do so. Against this backdrop, the announcement by the U.S. last week that it will pull nearly one-third of its troops from Germany by September is especially troubling.
Josep Borrell, the EU minister for foreign affairs, warned last month that the success of any EU strategy depends on better relations with the rest of democratic Asia, and one vital partner is Japan. Two years ago, Tokyo and Brussels signed two agreements that were designed to usher in a new era of cooperation and international leadership. Most attention has focused on the Economic Partnership Agreement, which the European Commission called “the most important bilateral trade agreement ever concluded by the European Union.” The EPA is working as intended, with bilateral trade growing 5.8 percent last year as a result.
Potentially more important is the Strategic Partnership Agreement, which outlined 40 areas of cooperation for the two governments; concerns range from climate change to weapons of mass destruction. It focused on the common values they share — “democracy, rule of law, human rights and fundamental freedoms” — that make them “natural allies” in the fight to sustain a stable, peaceful and prosperous world. Skeptics rightly note that the SPA is more a wish list than a working agenda; a January meeting between the two governments reportedly identified “connectivity, security and digitalization” as priorities, which provides little indication of how that winnowing will proceed.
Cooperation continues. Last week, Prime Minister Shinzo Abe held a videoconference with von der Leyen and European Council President Charles Michel at which they agreed on the importance of international cooperation to deal with COVID-19. Last September, Japan and the EU agreed to build infrastructure and set standards in joint projects to promote Abe’s High Quality Infrastructure Initiative. Japan’s reluctance to join the trade dispute resolution that the EU and 14 other governments put together in January in the wake of the breakdown of the World Trade Organization dispute resolution mechanism — a product of U.S. refusal to appoint new judges to the Appellate Board — shows the limits of their purported convergence, however.
The vicissitudes of U.S. policy make the EU-Japan partnership, and cooperation with other like-minded governments, ever more urgent. Those possibilities rest, in turn, on the ability of the EU to act with more determination and substance. Jean Monnet, one of the founders of the European Union, argued that “Europe would be built through crises, and that it would be the sum of their solutions.” The COVID-19 pandemic may prove how visionary he truly was.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule Making Strategies at Tama University as well as senior advisor (nonresident) at Pacific Forum. He is the author of "Peak Japan: The End of Great Ambitions."