NEW HAVEN – Those are tough words to swallow for a hardcore Euroskeptic. Like many, I have long been critical of Europe’s Economic and Monetary Union as a dysfunctional currency area. Notwithstanding a strong political commitment to European unification as the antidote to a century of war and devastating bloodshed, there was always a critical leg missing from the EMU stool: fiscal union.

Not anymore. The historic agreement reached on July 21 on a €750 billion ($868 billion) European Union recovery fund, dubbed Next Generation EU, changes that – with profound and lasting implications for both an overvalued US dollar and an undervalued euro.

Unlike the United States, which appears to be squandering the opportunities presented by the epic COVID-19 crisis, Europe has risen to the occasion – and not for the first time. In July 2012, in the depths of a seemingly fatal sovereign debt crisis, then-ECB President Mario Draghi vowed to do “whatever it takes” to defend the beleaguered euro. While that pledge solidified the European Central Bank’s credibility as an unshakable guardian of the single currency, it did nothing to address the greater imperative: the need to trade national sovereignty for a pan-European fiscal transfer mechanism.

The July 21 agreement accomplishes just that. And now the EMU stool finally has all three legs: a common currency, one central bank, and a credible commitment to a unified fiscal policy.

Of course, the deal is far from perfect. Significantly, it requires unanimous consent from the EU’s 27 member states – always a nail biter in today’s charged and polarized political environment. And there was a major tug of war over the composition of the EU fund, which will comprise €390 billion in one-off COVID relief grants and €360 billion in longer-duration loans. While the devil could lurk in the details, the bottom line is clear: the Next Generation EU plan will draw critical support from large-scale issuance of pan-European sovereign bonds. That finally puts Europe on the map as the backer of a new risk-free asset in a world that up until now has only known only one: US Treasuries.

Europe’s fiscal breakthrough drives an important wedge between the overvalued US dollar and the undervalued euro. Recent trading in foreign-exchange markets now seems to be catching on to this. But there is a long way to go. Notwithstanding a surge in June and early July, the broad euro index remains 14% below its October 2009 high in real terms, whereas the dollar, despite weakening in recent weeks, remains 29% above its July 2011 low. My prediction of a 35% drop in the broad dollar index is premised on the belief that this is just the beginning of a long-overdue realignment between the world’s two major currencies.

I fully recognize that currency calls have long been the trickiest macro forecasts of all. Former US Federal Reserve Chairman Alan Greenspan famously put them on a par with coin tosses. Still, sometimes it pays to take a stab.

My bearish view that an overvalued dollar is ripe for a sharp decline reflects two strains of analysis: America’s rapidly worsening macroeconomic imbalances and a government that is abdicating all semblance of global leadership. The July 21 breakthrough in Europe, and what it means for the euro, only deepens my conviction.

On macro imbalances, the precipitous decline in US domestic saving that underpinned my original argument now seems to be well under way. The initial pandemic-related spike in personal saving now seems to be receding, with the personal saving rate falling from 32% in April to 23% in May, while the federal budget deficit is exploding, spiking to $863 billion in June alone – almost equaling the $984 billion shortfall for all of 2019. And, of course, the US Congress is just days away from enacting yet another multi-trillion-dollar COVID-19 relief bill. This will put enormous pressure on already-depressed domestic saving – the net national saving rate was just 1.5% of national income in the largely pre-pandemic first quarter of 2020 – and put the current account on a path toward a record deficit.

The comparison with Europe is particularly compelling from this perspective. Whereas the International Monetary Fund expects the US current-account deficit to hit 2.6% of GDP in 2020, the EU is expected to run a current-account surplus of 2.7% of GDP – a differential of 5.3 percentage points. With the US entering the COVID crisis with a much thinner saving cushion and moving far more aggressively on the fiscal front, the net-saving and current-account differentials will continue to shift in Europe’s favor – putting significant downward pressure on the dollar.

The same is true from the standpoint of global leadership, especially with America pushing ahead on deglobalization, decoupling, and trade protectionism. Moreover, I was particularly impressed by Europe’s latest efforts to address climate change — not only framing Next Generation EU to be compliant with the Paris climate agreement, but also earmarking close to one-third of its broader budget package for green infrastructure and related spending initiatives. US President Donald Trump has unfortunately gone in precisely the opposite direction, continuing to dismantle most of the environmental regulations put in place by President Barack Obama’s administration, to say nothing of having withdrawn from the Paris accord in early 2017.

The COVID containment disparity is equally striking. New cases in the US soared to a record daily high of 67,000 in the week ending July 21 – up a staggering 208% from mid-June. In the EU-27, the daily count of newly confirmed infections has remained roughly stable since mid-May, at a little over 5,000. Given that the EU’s population is 35% larger, America’s abysmal failure at containing the coronavirus is all the more glaring on a per capita basis. Moreover, the expansion of coronavirus testing in the US is actually decelerating just as the infection rate is exploding, undermining the Trump administration’s vacuous justification that more testing is driving the rise in infections. With Europe’s much deeper commitment to public-health policy and enforcement, whose currency would you rather own?

American exceptionalism has long been the icing on the cake for the Teflon-like US dollar. Those days are gone. As the world’s most unloved major currency, the euro may well be headed for an exceptional run of its own. Downward pressure on the dollar will only intensify as a result.

LONDON – After four days and nights of tough negotiations and many painful compromises, European leaders have reached a deal on a groundbreaking €750 billion ($868 billion) recovery fund. As a gesture of solidarity toward Italy, Spain, and other countries still reeling from the COVID-19 crisis, the agreement is a major step forward for the European Union. Even so, it does little to address the eurozone’s deepest problems.

The COVID-19 crisis has strained the monetary union to breaking point. While the pain has been widely shared, some countries have been hit harder than others. Italy, France, and Spain have suffered the most deaths and the deepest recessions, and tourist-reliant southern Europe seems headed for an especially slow recovery.

Worse, while government debt is soaring across the eurozone, it is reaching perilously high levels in many southern countries, particularly Italy. The initial response to the pandemic left Italians feeling aggrieved, owing to the perception (not unjustified) that northern Europeans had been quicker to blame them for their plight than to offer assistance. Even the pro-European Italian mainstream – from President Sergio Mattarella on down – felt politically alienated from the EU at the height of the crisis.

To her credit, German Chancellor Angela Merkel recognized the gravity of the situation. In May, she and French President Emmanuel Macron proposed a €500 billion recovery fund that would be financed through EU-issued debt and allocate grants to the hardest-hit regions and sectors. The European Commission then built on the Franco-German proposal, increasing the headline total to €750 billion by adding EU loans to the grants.

The deal struck by bleary-eyed EU leaders in the early hours of July 21 is welcome in several respects. While an agreement of some kind was always likely, there was reason to worry that the negotiations would drag on throughout the year, deepening the EU’s internal divisions and distracting policymakers from other priorities. Reaching agreement before Europe shuts down in August is a significant achievement in itself.

Better still, the deal preserves many positive elements of the Merkel-Macron proposal, notably €390 billion for EU grants, with few strings attached. Four richer northern European countries, led by the Netherlands, had previously insisted that the EU provide only loans, conditional on recipient governments enacting reforms dictated by the EU (and subject to national vetoes). But the stigma of such intrusive conditionality – reminiscent of Greece’s treatment a decade ago – was anathema to southern European countries.

Moreover, with government borrowing costs already so low – owing in no small part to the European Central Bank’s €1.35 trillion Pandemic Emergency Purchases Program (PEPP) – EU loans would have been of little help. If anything, they would merely aggravate debt-sustainability concerns, not least in Italy, where public debt is set to soar to more than 160% of GDP next year.

As an economic matter, €390 billion in grants over the next three years will provide a significant boost. The European Commission expects the EU economy to contract by around 8% this year, to €12.8 trillion. As such, the recovery-fund grants would be equivalent to 3% of GDP, or 1% for each year. If Italy’s economy shrinks by 10% this year, the €82 billion earmarked for it would amount to some 5% of GDP. Thus, while much smaller than national fiscal stimulus packages, the EU grants still will provide a helpful boost to complement the ECB’s monetary firefighting.

The biggest benefit of the recovery fund, though, is political. The EU is demonstrating that it can come to Europeans’ aid when they need it most. That should provide a sorely needed antidote to Euroskepticism and alleviate the anger generated by the crisis.

Institutionally, the deal is a major win for the European Commission, which was often bypassed during the 2010-12 eurozone crisis. The Commission will be the one borrowing the €750 billion to finance the fund, and directing the grants and loans through the EU budget that it administers. And with an eye toward repaying the debt after 2027, it will also oversee the search for new EU revenue sources, such as a digital-services or carbon-border-adjustment tax.

The downside is that, because the recovery fund was folded into the broader negotiations over the EU’s 2021-27 budget, the deal required some regrettable compromises. Before the pandemic, Commission President Ursula von der Leyen’s flagship initiative was the European Green Deal to address climate change. Now, the funding to support a clean-energy transition has been slashed.

Another big challenge for the EU is homegrown authoritarianism. Illiberal governments like that of Hungarian Prime Minister Viktor Orbán continue to subvert the rule of law with impunity while misappropriating EU regional cohesion funds for their own benefit, which is why one of Merkel’s top priorities had been to tie future EU funding to respect for the rule of law. But conditionality provisions were gutted, apparently in order to overcome Orbán’s threatened veto (which was scarcely credible, because Hungary would have remained a large net beneficiary of EU funding anyway).

With the departure of the United Kingdom in January, there was also hope of doing away with the proliferation of national rebates, a perk first secured by British Prime Minister Margaret Thatcher in the 1980s and subsequently obtained by other net contributors to the EU budget. These provisions tend to encourage a penny-pinching, zero-sum mentality that undermines European solidarity. But instead of curbing rebates, the budget deal essentially bribes the obstreperous Dutch, Austrians, Swedes, and Danes with even larger ones.

After the 2010-12 eurozone crisis, the philanthropist George Soros pointed out that Merkel always does just enough to keep the euro going, “but nothing more.” That is true again. The recovery fund is a welcome step forward. But it does not resolve the eurozone’s fundamental problems, which include Italy’s unsustainable debt dynamics, Germany’s deflationary bias, and the lack of a fiscal rebalancing mechanism. The eurozone has dodged a bullet, but it is still an open target.

MUNICH – European Union leaders have reached agreement on a big €750 billion ($870 billion) recovery fund intended to help the EU member states hit hardest by COVID-19. But during the lengthy negotiations over the package, it became increasingly clear that Europe’s pandemic-induced economic crisis is an extension of the euro crisis that has been festering since the collapse of Lehman Brothers in 2008.

In essence, this is a competitiveness crisis brought about by the distortion of relative prices within the eurozone, which is a result of inflationary overpricing in Southern European countries. This overpricing, in turn, stemmed from the flood of capital that entered these economies after they joined the euro.

The collapse of the euro bubble following the 2008 financial crisis reversed the direction of private capital flows, leading to several rounds of intense capital flight from the Mediterranean region to Germany. This was reflected in a surge in the so-called TARGET balances that measure net payment orders and provide a sort of public overdraft credit within the eurozone. And now COVID-19 has triggered another phase of capital flight that eclipses all the others.

After the pandemic struck earlier this year, international lenders refused to roll over their outstanding loans to Southern European countries and demanded repayment, subsequently investing the money in the eurozone’s northern members, particularly Germany. Southern European investors also shifted their investments to Germany, and transferred corresponding amounts of money. These two streams of payment orders have forced the Bundesbank to tolerate open credit positions so far amounting to €1 trillion.

In March 2020, German TARGET claims increased by €114 billion – by far the biggest monthly rise since the euro’s introduction in 1999. Capital flight during two previous high points of the euro crisis, in September 2011 and March 2012, also caused Germany’s TARGET balance to spike, but by only €59 billion and €69 billion, respectively. Although capital markets cooled off slightly in April and May of this year, German TARGET claims increased again in June, this time by €84 billion. Between February and June, they rose by a total of €174 billion, to reach a record-high €995 billion.

Conversely, Italian and Spanish TARGET debts increased by €152 billion and €84 billion, respectively, during the same period. That implied debts of €537 billion and €462 billion, respectively, at the end of June – or €999 billion in total. Both this figure and the German claims number are so close to the €1 trillion threshold that one cannot help but wonder what secret forces in the background might have pulled the emergency brake.

Investors fled Spain and Italy because they no longer viewed these countries as safe bets. And the two countries’ central banks made their flight possible by providing extra liquidity via national printing presses.

Part of this liquidity came from the European Central Bank’s various asset-purchase schemes, including the Pandemic Emergency Purchase Program (PEPP) and the long-established Asset Purchase Program (APP), which the ECB has increased temporarily in response to the current crisis. Although these programs had envisaged symmetrical asset purchases by the ECB and all national central banks in the eurozone, these institutions bought a disproportionately large volume of Italian assets.

The additional liquidity also comes from a special Targeted Longer-Term Refinancing Operations (TLTROs) program worth more than €500 billion that the ECB made available to eurozone banks in mid-June. The -1% interest rate on the TLTROs was extremely favorable – so favorable, in fact, that many banks borrowed the money and immediately redeposited it with their own central banks at a rate of -0.5%. This provided them with an immediate arbitrage gain that amounted to an open subsidy by the Eurosystem.

But Spanish and Italian banks needed the TLTROs in large part to compensate for the capital outflows. Or perhaps they used them simply to pay off private foreign loans that had less favorable terms. In that case, the loans that the Spanish and Italian central banks provided via their national (electronic) printing presses would not only have enabled capital flight, but also served as a means of driving private capital away by offering better terms.

Be that as it may, the eurozone remains internally unbalanced. This also becomes apparent if one looks at manufacturing output in Southern Europe. Unlike domestic sectors, the region’s manufacturers must compete internationally, and therefore have suffered the most from high relative prices. Even before the coronavirus crisis, manufacturing output in Italy was 19% below its level in the autumn of 2007, just before the real economy reacted to the financial crisis; in Spain, it was 21% lower. The downward trend has continued during the pandemic, widening the output gaps to 35% and 34%, respectively.

The new EU recovery fund is meant to address this fiasco, but money cannot solve the problem of distorted relative goods prices within the eurozone. Fixing it requires an open or real devaluation. But no one wants to talk about that. Instead, the EU’s strategy seems to be based on hope and prayer.

LONDON – The €500 billion ($547 billion) COVID-19 recovery fund proposed by German Chancellor Angela Merkel and French President Emmanuel Macron has been hailed as a turning point for the European Union – and for good reason. Beyond its concrete economic implications, the proposal reaffirms a commitment to solidarity by the EU’s two largest economies, thereby setting the stage for genuine progress toward fiscal union.

The basic proposition is straightforward. The EU would borrow in the market at long maturities with an implicit guarantee from the common budget. It would then channel borrowed funds to regions and sectors hardest-hit by the COVID-19 crisis.

There is plenty left to be negotiated, such as where to offer loans versus grants, what kind of conditionality to apply to projects, and the extent to which aggregate fiscal capacity should be increased. Opposition from the so-called Frugal Four – Austria, the Netherlands, Finland, and Sweden – will undoubtedly necessitate some compromise.

But, leaving these considerations aside, and while we wait for the proposal due from the European Commission this week, it is important to consider the potential long-term implications for the EU if some version of the Franco-German proposal is implemented.

In particular, where does this leave the debate about European fiscal capacity, and monetary- and fiscal-policy coordination in the eurozone? Is this a decisive step in that direction – a moment as consequential as the declaration in 2012 by then-European Central Bank President Mario Draghi that the ECB would do “whatever it takes” to save the euro? Or is it a pragmatic response to today’s crisis, which defines the limits of risk-sharing that is possible to achieve, under current conditions?

The proposal crosses several historical red lines, from the assumption of European-level debt to transfers based on need, rather than contributions to the EU budget and in forms of grants rather than loans. In principle, it would finally achieve the much-touted objective of “solidarity.”

Moreover, though not a stated objective, the proposal’s implementation would ultimately result in some creation of EU fiscal capacity for stabilization purposes. Disbursing money for projects that are aligned with EU priorities, such as sustainability and digitalization, would affirm the principle of a common EU purpose, potentially galvanizing popular support for greater integration.

A recent interview with German Minister of Finance Olaf Scholz suggests even a broader agenda for the future, including the creation of EU taxation capability and some degree of fiscal harmonization. This is not yet a fiscal federation, but it is a clear signal that we are moving in that direction – the first such signal since the Five Presidents’ Report on completing Europe’s economic and monetary union in 2015. (That proposition went nowhere.)

Crucially, this is not just an agenda supported by technocrats in the EU institutions, but one endorsed by the political powers of France and Germany. Like with Draghi’s “whatever it takes” moment, the key to progress was German political support.

In 2012, Germany’s support came with conditions, including the creation of the European Stability Mechanism (to ensure that ECB intervention in the sovereign-bond market would be based on the principle of conditionality) and a banking union (to serve as a risk-mitigation tool). Germany’s support for the COVID-19 recovery fund is predicated on another grand bargain: EU-funded projects must be consistent with shared objectives, and monitored collectively.

So, does the Franco-German initiative suggest a path towards shared fiscal capacity? Not necessarily.

The recovery fund’s stated goals do not include demand management. The fund is meant for the EU, not the eurozone, and is therefore not designed to address the challenges that arise from having a common central bank without a corresponding fiscal authority.

Those challenges were laid bare during the eurozone crisis of 2011-12, when eurozone policymakers struggled with a “flight to safety” toward northern Europe, which led to large differentials in the costs of government financing and a breakdown in monetary-policy transmission. This put irresistible pressure on the ECB to introduce policies with a quasi-fiscal dimension, provoking accusations that the ECB was exceeding its mandate.

To address these problems, the eurozone needs a budgetary tool to serve as an insurance mechanism in severe crises (automatic fiscal stabilizers) and to support the monetary- and fiscal-policy coordination that effective demand management requires, especially when interest rates are near-zero or negative. The proposed COVID-19 recovery fund could fulfil that purpose.

Aligning the eurozone’s monetary and fiscal institutional capabilities will be no easy task. It will require a high degree of risk-sharing and the surrender of some national sovereignty. So it would most likely necessitate treaty changes.

The decision not to address this problem in the Franco-German proposal was a pragmatic one. However ambitious its objectives, they are easier to digest politically than reforms to the eurozone’s architecture aimed at upholding the euro’s stability.

Yet the proposed recovery fund could buy time for action to address these longer-term challenges. Despite not being designed to do so, it could create enough EU fiscal capacity to ease pressure on the ECB. And it could allow sufficiently large temporary transfers to cope with the asymmetric effects of the COVID-19 crisis in the short run.

But, if the downturn persists, debt-to-GDP ratios will inevitably rise, underscoring, yet again, the need for eurozone reform. The fund’s more fundamental contribution may be to shift the ground in the debate, removing – or, at least, redrawing – some of the red lines surrounding risk mutualization and the benefits of transfers.

Another crisis has meant another step forward for the European federalist project. But this is not quite the “Hamiltonian moment” that some have claimed. Sooner or later, EU treaty revisions will be needed to build a framework for effective monetary- and fiscal-policy coordination, while preserving ECB independence.

The German Federal Constitutional Court’s recent ruling that the country’s government and legislature had violated the constitution by failing to monitor the ECB properly is a reminder that progress will be difficult to achieve without revising the EU’s legal and institutional foundations. And the political conditions for that step do not yet exist.

LONDON – On July 17-18, European Union leaders will meet in Brussels to try to reach an agreement on the bloc’s proposed €750 billion ($852 billion) recovery fund. Member states currently disagree on several issues, including the shares of grants and loans in the package and which conditions, if any, should be attached to the disbursements. But once leaders clinch a deal, the most important question will be how member states should spend the money. The answer is far from obvious.

Governments have two potentially conflicting objectives. First, European economies need a demand boost to compensate for the restrictions on “social” forms of consumption (restaurants, bars, concert halls, and the like) and to support spending by people whose incomes have fallen. In a recent working paper, researchers at the ifo Institute in Munich used surveys of German firms to show that COVID-19 is currently having a deflationary impact. This suggests that constraints on demand are greater than those on supply.

Second, European countries need to embrace digital opportunities more fully and make swifter progress toward carbon neutrality over the coming decade. The European Commission has therefore proposed that member states spend a sizeable chunk of the recovery-fund money on investments and reforms that promote long-term growth while fostering green and digital transitions.

But public investment – on items like new high-speed rail links, electric-vehicle charging stations, or fiber-optic networks – will do little to boost spending in the next few years. Such infrastructure projects need time to get through planning committees, and take many years to build. Consumption vouchers or cash-for-clunkers programs, on the other hand, would increase demand quickly, but would do little to hasten the transition to a sustainable digital economy, even if they were given a green tinge.

Yet, there is a way for policymakers to bolster short-term demand while simultaneously accelerating the shift toward carbon neutrality: a bold green tax reform, combined with generous compensation via the tax and benefits system and cheap funding to help firms and households adjust.

The economic rationale for such a plan is simple and widely accepted. By making harmful greenhouse-gas emissions more costly, green taxes push consumers and firms out of polluting activities and make energy conservation profitable. Furthermore, green taxes with a predetermined upward trajectory establish a credible path for the future cost of polluting. This gives businesses and households the clarity they need to invest in energy-saving innovation and equipment.

Europe’s existing carbon-emissions trading system has failed to provide this price signal. The carbon price was too low for too long to induce changes in consumption, and too volatile to give firms credible guidance regarding future pollution costs.

Recent fixes have brought the system closer to a carbon tax, but the price of CO₂ emissions is still only about €20 per ton. According to the World Bank, this would need to rise to about €50 per ton today, and €70 per ton by 2030, to be consistent with the emissions-reduction targets in the Paris climate agreement.

Moreover, the emissions-trading scheme does not cover three of Europe’s most polluting sectors: construction, transport, and agriculture. These three sectors, together with waste processing and some other activities, account for 55% of the EU’s greenhouse-gas emissions. Thus, bold national green-tax reforms are still needed.

In addition, EU member states should permanently reduce taxes on labor and increase social benefits, starting now. This would give the economy an immediate demand boost and strengthen incentives to work.

Policymakers should ensure that the tax cuts and additional spending more than compensate for the introduction of green taxes, which in turn would increase steeply over the coming decade. In the meantime, EU funding could partly offset the inevitable temporary increase in budget deficits resulting from such a policy mix.

True, green taxes can be politically problematic, because they create losers, including workers in polluting industries and people who cannot afford to insulate their homes or buy a fuel-efficient car. But the new EU funds can help to mitigate these effects.

At a regional level, the EU’s newly beefed-up Just Transition Fund can support local economies where polluting sectors are major employers. Governments should supplement this assistance with national investment programs to make green taxes more politically acceptable in these regions.

But giving households and firms clear price signals to reduce their emissions is not enough. They also need the means to adjust. The EU should therefore use some of its new funds to provide generous grants and cheap funding for green investments. Recipients should include municipalities, which often are responsible for public transport projects. Such investments would not only help to buy political acceptance for green reforms, but would also boost the efficiency of the new price signals by helping firms and households to react to them.

The COVID-19 crisis is distracting the world from the continuing threat of climate change. But it need not, because the EU’s recovery fund gives governments a unique opportunity to shift the tax burden from work to pollution. They should take it.

BRUSSELS – Many believe that the recent Franco-German proposal for a European recovery fund – to be financed by bonds issued by the European Union – could be the bloc’s “Hamiltonian moment.” The term refers to the 1790 agreement spearheaded by Alexander Hamilton, the United States’ first treasury secretary, whereby the US federal government assumed the debts incurred by the new country’s 13 states during the War of Independence.

On superficial inspection, this analogy seems to warrant the introduction of Eurobonds right now. But a closer look reveals that the equation “Hamilton = Eurobonds now” does not hold, for three reasons.

First, whereas the US states had incurred most of their debts in a common cause, namely the war against Great Britain, that is not true of today’s EU member states. Although some might argue that the bloc’s governments are all fighting against another common enemy, namely COVID-19, this analogy is misleading. The additional debt that most governments will incur to keep national economies afloat during the pandemic will be large, but it will constitute only a fraction of their total debt.

Assume, for example, that the Italian government has to spend the equivalent of 15% of GDP to mitigate the looming pandemic-induced recession. The country’s public-debt ratio would then increase to about 150% of GDP, but the common fight against the coronavirus would have accounted for only one-tenth of the total.

Second, the US states’ wartime debts were not repaid in full by the federal government, because the portion owed to private creditors was substantially restructured – what we would now call “private-sector involvement” – before the federal government assumed them. But a restructuring of EU member states’ existing debt today is out of the question.

Third, the federal government’s assumption of state debts that Hamilton engineered was in a certain sense unavoidable, partly because the main source of government revenues – external tariffs – also had been transferred to the federal level. Likewise, the large-scale introduction of Eurobonds would necessitate the transfer of a substantial share of national government revenues to EU level, along with restrictions on national fiscal policy, as Société Générale Chairman Lorenzo Bini Smaghi has eloquently pointed out. But few EU member states, including those advocating Eurobonds, would be willing to abandon a large part of their fiscal sovereignty.

For these reasons, it is difficult to argue that Europe’s current situation in any way resembles that of the US in the late eighteenth century, and that now is the time to introduce large-scale risk-sharing on Europe’s national public debts.

Some have compared the proposed European recovery fund to the 1948 Marshall Plan, under which the US provided war-ravaged Western Europe with substantial aid to finance reconstruction. But, again, the differences are more important than the similarities. Above all, the problem today is not ruined physical infrastructure, but rather the sudden limitation on the use of existing productive resources.

Arguably the most relevant US historical parallel for Europe today is President Franklin D. Roosevelt’s New Deal of the 1930s. After all, the US had entered the Great Depression with a fragmented banking system organized along state lines, and with the states also responsible for unemployment insurance and poverty relief.

The New Deal changed all that, but much of FDR’s program had to overcome resistance. Although his administration quickly established a banking union by creating the Federal Deposit Insurance Corporation in 1933, introducing fiscal measures and reorganizing unemployment insurance turned out to be much more difficult.

In particular, the US Supreme Court repeatedly stymied the New Deal by ruling that some of its central elements were unconstitutional because they were not federal competences. But after FDR won a landslide re-election in 1936 and threatened to add more supportive justices, the court changed its position – known as “the switch in time that saved nine” – allowing him to implement most of his initiatives.

Then as now, the key issues were unemployment and poverty relief. The New Deal did not simply override state competences in those domains, but instead provided states and municipalities with large federal funding for public works and unemployment compensation.

In a similar vein, the €750 billion ($852 billion) “Next Generation EU” fund, proposed by the EU Commission on the heels of the Franco-German proposal, would channel EU funds through member states and regions. And the bloc’s €100 billion SURE initiative to mitigate unemployment risks in hard-hit member states, which has already been agreed upon, also carries echoes of the New Deal.

The lack of a European unemployment insurance scheme should not be surprising. In the US, unemployment insurance is also still based on state-level schemes that the federal government supplements during recessions. (The $2.2 trillion US economic-rescue package that Congress adopted in March increased federal jobless payments by far more than in previous downturns.)

FDR’s reforms have stood the test of time and are now accepted as an essential part of the US “economic constitution.” The longer-term challenge for the EU will be to implement its COVID-19 crisis measures in such a way that they, too, come to be seen as useful economic stabilization tools when more normal times return.