The EU has come up with a plan, to be discussed at this week’s summit, to dramatically consolidate fiscal policymaking power in a Eurozone leadership figure, without authorizing the kind of fiscal transfers that would smooth over imbalances and make the currency union a true “United States of Europe.”
The EU would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times.
The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union. They are contained in a report to be presented at the summit, which will also outline plans for a banking union and political union.
Berlin has demanded tough controls over national budgets as a prerequisite for mutualising sovereign debt within the eurozone and the proposals appear to be an effort to get the German government to support a move towards commonly issued eurozone bonds.
Under the plans for closer fiscal union, the European Commission would present detailed adjustments for a country in breach of its commitments. The changes would be put to a vote of all other EU countries.
The plan was designed by technocrats from the European Commission, European Council and European Central Bank. This would be a disaster for any of the poorer European countries – yes, they would get (limited, vague) relief on their debt commitments through some kind of collectivization (or maybe not; I don’t know how German Chancellor Angela Merkel’s cry that Europe will not have shared debt burdens “for as long as I live”), but they would lose almost all of their sovereignty in fiscal policymaking, while getting no assurances on transfers.
This combines the worst aspects of a fiscal union. It would be as if Congress got to dictate the tiniest aspects of the state budget in a Mississippi or Alabama, without authorizing any grants to go to those states to pick up the slack for their lagging economic picture. This is a recipe for permanently impoverishing large swaths of the Eurozone.
Moreover, as Matt Yglesias points out, the richer northern countries in the Eurozone are highly unlikely to ever go along with the kind of open-ended fiscal transfer policy that would be necessary to stabilize the currency union.
What’s unusual about the eurozone is not that it contains some backward regions that can only be kept afloat with persistent transfers. The United States is like that (coasts to the southeast), Germany is like that (west to the east), the U.K. is like that (the London area to the north), China is like that (the coasts to the interior), and even Canada has its perpetual laggards east of Ontario. There’s no sense in expecting that an adequate application of coercion, dirty looks, and signed agreements is going to change the fact that one section of Europe is richer and more productive than the other part. The basic political economy here seems to be that the German taxpayer hitches his fate to the economies of Southern Europe, and in exchange Germany “gets to” maintain currency competitiveness—i.e., low wages—with the rest of the continent. This is a very nice deal if you happen to own a German factory, but not otherwise.
In sum, it’s difficult to see why saving the euro works for any country, other than to save face for the elites who put this thing together in the first place, and to save everyone else the trouble of converting their money again. We’re either going to see dissolution now or dissolution later, in my view. It will become more expensive later.