The European Council on Thursday is a moment of truth, unlike most events that are billed as moments of truth. It will tell the world definitively whether European countries want to act together or separately when most it at stake. My take: 1/n https://www.ft.com/content/69b90ec0-83d5-11ea-b872-8db45d5f6714

2/n The Spanish government has put forward a proposal that shows a way out of the interminable old standoff. The leaders should all unite behind it. https://english.elpais.com/politics/2020-04-20/spain-proposes-a-15-trillion-coronavirus-recovery-fund-financed-through-perpetual-eu-debt.html

3/n It also promises cross-party agreement at European level, as it reflects meeting of minds bw Spain’s centre-left government and liberals in European Parliament, who published similar ideas last week. https://www.project-syndicate.org/commentary/european-union-covid-reconstruction-fund-by-guy-verhofstadt-and-luis-garicano-2020-04 https://drive.google.com/file/d/1tYudiy4WgFt07if8wkQr_Mp71MDZNkxF/view @lugaricano @guyverhofstadt

4/n The proposal is the best, on the economic merits, of all that have surfaced. First, because it takes the magnitude of the problem seriously. At E1-1.5tn it amounts to some 10 per cent of annual EU GDP, or to a second 7-year budget (but to be spent in just a few years).

5/n That is commensurate with hit to GDP and public finances. Second, because it focuses on what is really at stake, namely mutualised _spending_, not old fight over mutualised _borrowing_. The fund is explicitly for outright grants to the places worst hit by the Covid crisis.

6/n This ticks an important political box, because it sweeps away vicarious arguments, suspicions, and bad faith. Here is an argument for outright transfer for a one-time crisis, not an attempt to smuggle in old desiderata (eg mutualised borrowing capacity) on new pretexts.

7/n Other political boxes this ticks: The proposal is proofed against any risk of indefinite liability between member states, in 3 ways. It is capped and earmarked for post-Covid recovery. It is tied to the EU budget, so contributions will largely follow MFF contribution shares.

8/n And it proposes to frontload the spending by having the EU issue perpetual bonds, meaning only interest payments have to be paid by MS, and these can be permanently locked in at the start.

9/n I would add one feature: allow any member state that so wishes, to redeem its share of the perpetual debt when it wishes to put up the cash to “de-mutualise”. All in all, this means all national liabilities are predictably capped. It is several but not joint liability.

10/n _If_ there is to be a common fiscal response to the Covid fallout, this is irrefutably the way to do it. And it strips the debate down to whether or not European national leaders want a common response or not. All else is noise.

11/n There are good arguments for: solidarity and political commitment, of course, but also that massive state intervention upsets level playing field in single market if not everyone does it at the same scale. Largely national fiscal response means widening EU’s economic split.

12/n There is one solid argument against, which is the simplest. It is that some people may simply want each government to be solely responsible only for its own citizens. But that must be advocated openly, with admission that consequences are a matter of choice, not of accident.

13/13 Even the Scroogiest of budget hawk countries are not in a place where they are prepared explicitly to make that choice - which the current proposal forces them to confront. So I both hope and think that an agreement can be reached. /Ends