Thread by @henrikenderlein

Here is a short explainer of the 🇫🇷-🇩🇪 proposal.

The expenditure ceiling in the EU budget would be increased to around 2% of GNI (currently around 1% of GNI) for the next 3 years.

The additional around 165bn, which the EU could spend per year, would add up to 500bn.

1/11

By contrast to 'normal' EU spending (i.e. the normal 1% of GNI), the 1% on top would not be covered by Member State annual contributions, but by debt.

This debt would be pure EU debt, i.e. only implicitly backed by future Member State contributions, but not explicitly.

2/11

This new EU debt would thus also not show up as debt in the individual debt accounts of the Member States. This is legally sound: committed Member State contributions to the EU budget and the MFF of the EU were never counted as debt.

This is the main signal of the day.

3/11

But let's also add that this kind of jointly issued EU debt is not really new. The EU has issued debt for balance of payment support or macro-financial assistance. But now the amounts will be much larger.

For details on current EU debt see here: ec.europa.eu/info/sites/inf…

4/11

It will be interesting to see how financial markets and rating agencies will assess the quality of this new EU debt. Clearly, the backing here is political integration, not a formal agreement on joint and several liability, which is not in the Treaties.

Today, EU is AAA.

5/11

So this is a big. 🇫🇷 & 🇩🇪 (and Merkel in particular) deserve credit for finally recognizing that the financial and economic risks of the pandemic should not be treated like risks during the €A-crisis. Words like "conditionality" don't fit. See here: hertieschool-f4e6.kxcdn.com/fileadmin/2020…

6/11

Are there downsides? There are a few. First, real financial solidarity is limited. Italy will contribute to reimbursing joint debt and we don't know about the difference between what they get and what they have to reimburse. So the symbol is larger than the € contribution.

7/11

Then, it is unclear whether the frugals will back the plan. But it will be hard to stop the dynamic Merkel + Macron have created. Finally, the prize for the political support of some less integration-oriented countries (think Hungary) is still unknown. It won't be for free.

8/11

The good news is that the German Constitutional Court can't stop this initiative. This is EU fiscal policy and will be mandated by the German parliament. If approved, there is no way this can be stopped in Courts. And I believe the German parliament will support this plan.

9/11

We still lack details about how the 500bn will be distributed among MS, with which maturity debt will be issued and how EU will build guarantees in its own budget to commit for repayment. But this is technical work. With this political backing the Commission can act.

10/11

What matters most today, is that 🇫🇷 & 🇩🇪 have agreed that in a crisis the EU can issue its own debt at a large scale The political signal here is that the EU is more than a grouping of nation states and has its own federal identity.

We might have seen a Hamiltonian moment.

END