2020: The Hamilton Moment: Productive Credit Creation and Innovation

Anno Hellenbroich

On June 4rth the German Grand Coalition Cabinet made a final decision on an additional national economic stimulus budget in the dimension of 130 billion Euro – in order to assist different sectors of the most hard hit parts of the German economy, in particular medium as well as small sized firms, as well as to assist municipalities in the form of payments of social assistance programs; this will also include a reduction of the Values Added Tax for 6 month. A crucial aspect of this package is the 50 billion Euro “investment for the future” including 7 billion for the development of the “National Hydrogen Strategies”, and other digitalization and innovation projects (artificial intelligence for example). This is the latest step in the direction of European decisions to stem against the tremendous crisis as result of the pandemic. The additional budget decision comes on top of the pandemic emergency measures which the government and the federal states had decided upon before in  the dimension of 342 billion euros. One of the instruments which is especially effective is the so called “short work” regulation, that allows the employer to keep the workers;  the government pays for a certain period  60 or 67% of the regular payments.

In the last two weeks a breathtaking series of initiatives has been taken by the EU- Commission with Ursula von der Leyen as president, who announced (27.05.20) that they  want to increase the planned European reconstruction budget up to 750 billion Euro- this includes 250 billion Euro in form of subsidies for nations that are worst hit by the Corona pandemic and the rest is credits from the EU budget (2021-27) announcing this with the words: “ The current crisis is our biggest collective challenge since the birth of the European Union”. (All measures taken together so far add up to breathtaking 3.39 trillion Euro promises by the EU according to their website, looked at 5.6.)

This statement must be seen as follow up to  the historic proposal reached on May 23^rd between French President Macon and German Chancellor Angela Merkel who decided on a 500 billion Euro  financing package for “European Reconstruction”.  This includes common debts- or bonds which so far were refused by Berlin and the northern European states. The repayment of these debts: 250 billion Euros are subsidies and 250 billion Euros will be issued in form of credits with a very long repayment term.  Both Merkel and Macron underlined that given the fact that the  EU is facing such a gigantic crisis, it must act in an “extraordinary” way with extraordinary means. Our aim is clear: “we want Europe to get out of this crisis in a stronger way,“ they both stated. The announced 500 billion Euro packed is supposed to help countries which are hard hit by the Corona crisis (for example in Southern Europe.)

In addition it was reported (June 4^th) that the Frankfurt based ECB will increase its PEPP (Pandemic emergency assistance program) by an additional 600 billion Euro (!), which will increases the overall PEPP volume to 1,35 trillion Euro. The Emergency measures were taken by the ECB in mid- March as a direct response to the Corona pandemic and its consequence for the EU. It implies that the ECB will be buying up enterprise and government bonds within the EU and assist banks.

German Finance Minister Scholz draws parallels to Hamiltonian financing

In order to understand better what goes on behind the scenes, we should look at an interview with the German Finance Minister gave to the weekly German “Die Zeit” (19.05.2020) in which  Scholz urged the spirit of European solidarity and responsibility, stating that the “crisis is a chance to further develop the European Union, and to set an impulse for a stronger EU cohesion.”  He demanded strong solidarity with the municipalities in Germany that suffer from the effects of the Corona Pandemic and from the load of “old debts”. Being asked about the French -German 500 billion Euro Reconstruction Fund Proposal, he reacted extremely positively, stating that this is a test.  He pointed out that in addition to the 500 billion Euros, which the EU finance ministers have already approved, additional 500 billion in loans should be given: “overall we are talking about 1000 billion Euros. That’s an enormous sum. And there are even the huge national aid programs that are not even considered,” Scholz underlined.

Die ZEIT asked at one point that the EU is supposed to get money through loans -,whether this-does not mean- as many critics fear – is not  piling up new debts. Scholz answered that such concern is unfounded, “because the loans have to be financed within the EU budget and should be paid off over a longer period, for example 20 years. But I think that in the course of a deeper integration of the EU, temporary borrowing at a European level should not be a taboo. There are historical models for such fiscal reform: The first US Treasury Secretary Alexander Hamilton was able to pay off debts accumulated during the War of Independence by the States and has been given more responsibilities for this. His debt deal is seen as an important step in the formation of the United States of America in its present form.”

Scholz emphasized that he is convinced that the present crisis should provide impetus for Europe to grow even closer together. He stated “I am talking about a more perfect Union, an even better Union (…) In the long run Europe will remain a Europe of individual states with their different traditions, languages and cultures, but what unites us are principle of the rule of law, liberal democracy and social market economy.”

There were prompt hysterical reactions in response to Scholz’ reference to Hamilton’s debt policy expressed both by economists, as well as politicians who have been running a major campaign against the so called “debt communitisation” of the EU member states (f.i. with the so called Eurobonds) in the past. What has been obviously hit is  a “raw nerve” – namely the question, how to issue credits, how to spend the money and how to deal with the debts in the long run, which remains indeed some kind of taboo that should be solved. There are historic precedents which prove that “productive credit creation” works in the real economy.