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German Chancellor Angela Merkel, right, and French President Emmanuel Macron prepare to address a media conference at the end of an EU summit in Brussels, July 21, 2020.

John Thys/AFP/Getty Images

Spanish Prime Minister Pedro Sanchez probably overstated matters by likening the giant economic rescue deal reached this week by European leaders to a “real Marshall Plan.”

German Finance Minister Olaf Scholz may have come closer to the mark by calling the deal “Europe’s Hamiltonian moment” as the European Union’s 27 members agreed for the first time to issue joint debt to help poorer countries weather the COVID-19 crisis and its economic aftershocks.

Either way, by comparing the deal to the postwar plan to rebuild Europe initiated under U.S. secretary of state George Marshall, or the assumption of state debt by the U.S. federal government under the country’s first treasury secretary, Alexander Hamilton, Mr. Sanchez and Mr. Scholz sought to underscore its historic significance.

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The agreement struck in the wee hours of Tuesday morning in Brussels, at the end of 90 hours of sometimes testy negotiations, marks a turning point for the EU.

Under the deal, the European Commission will issue €750-billion ($1.16-trillion) in bonds to fund what amounts to an equalization program that transfers wealth from “have” countries to the “have not” ones. While such fiscal federalism has long been a feature of the Canadian economy, its introduction in Europe had long been resisted by the EU’s richer countries, led by Germany.

For years, and most notably during the Greek debt crisis that brought the euro zone to the brink nearly a decade ago, German Chancellor Angela Merkel had insisted that there could be no free lunch for member countries that had managed their public finances poorly. To do so would only invite similar behaviour in the future. No matter that Germany had been the biggest beneficiary of the introduction of a common European currency, Ms. Merkel had never flinched until now.

Riding a renewed wave of popularity at home because of her enviable management of the coronavirus pandemic, and preparing to bow out of politics next year, she hardly wanted to leave office with Europe in the throes of a debt crisis deeper than the last one. Yet, that is exactly the situation the EU risked facing as Italy and Spain – the member countries worst hit by the coronavirus – saw their economies crater and borrowing costs rise as the pandemic took hold.

French President Emmanuel Macron, who had pushed for fiscal federalism within Europe, saw it as a now-or-never opportunity to change Ms. Merkel’s mind. He even intervened in domestic German politics by appealing directly to Mr. Scholz, a Social Democrat, and German Green Party officials to apply pressure on Ms. Merkel, whose Christian Democratic Union is mostly made up of fiscal hawks.

Getting Ms. Merkel to sign on was only half the battle, however. Persuading hold-out countries such as the Netherlands and Austria to countenance the issuance of joint debt took more than a bit of arm-twisting. They were joined by Sweden and Finland in opposing the Macron-Merkel initiative, leading to a weekend of brinkmanship around the negotiating table in Brussels.

French media reported that Mr. Macron threatened to walk away from the talks and let the “frugal” countries, led by Dutch Prime Minister Mark Rutte, wear the blame for their collapse. In the end, Ms. Merkel and Mr. Macron agreed to reduce the amount of direct cash transfers provided under the plan to €390-billion from €500-billion, with the remainder being allocated in the form of repayable loans to poorer countries.

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Justifying that concession in interviews with the French media, Mr. Macron explained that the leaders of the hold-out countries have “different political sensitivities” given the threat of right-wing populist parties within their borders. “If we put their leaders in danger, we risk favouring populism in these countries,” he said, without mentioning the similar threat he faces at home.

Indeed, the far-right National Rally, led by Marine Le Pen, did not miss a beat in denouncing the joint debt deal as anti-democratic, adding it “gravely threatens France’s interests” and “opens the way for an EU income tax to repay the common European debt.”

It remains to be seen, then, whether the plan will weaken euroskeptic parties such as the RN or strengthen them.

That is not the only risk. To win the approval of Poland and Hungary, Mr. Macron and Ms. Merkel also agreed not to make EU aid conditional on meeting rule-of-law requirements. Yet, the increasingly autocratic governments in those countries are perhaps a bigger threat to what the EU stands for – peace, democracy and shared prosperity – than any potential debt crisis.

Ms. Merkel and Mr. Macron chose, for now, to put off what looms as an inevitable clash with governments in Poland and Hungary, which have both undermined the independence of their judicial systems and trampled on the rights of migrants and minorities, alike.

Only time will tell whether reaching Europe’s “Hamiltonian moment” was worth the price.

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