Leaders in the European Union will not take the measures towards fiscal union that would save their ailing economies.
(Telegraph.co.uk) You wouldn’t believe it to listen to the fulminating indignation directed at the UK from across the Channel, but David Cameron did the eurozone’s political leaders a favour last weekend. By refusing to sign up, he managed to create a convenient Aunt Sally for Europeans to throw stones at, and divert attention from the summit’s failure to come up with anything remotely credible to address either the single currency’s existential crisis or the gathering economic slump. The latest in a long line of self-styled “make or break” summits, it was in truth no more momentous than any of the others.
What was agreed was some minor strengthening of the Maastricht framework for governing monetary union, though some aspects of the original “stability and growth pact” have actually been watered down. The maximum fine that can be imposed for breach of the rules has been reduced from 0.5 per cent of GDP annually to 0.2 per cent.
In most other respects too, the idea that some kind of great leap forward in terms of fiscal and political union has occurred is a nonsense. Consider what fiscal union of the type that exists within federal states such as Germany and the United States actually means. First and foremost, it requires centralised powers of tax collection and public spending. These powers provide the main mechanism through which fiscal transfers can be made to the more depressed regions of the sovereign state.
The amount of tax collected per head of population varies between regions, but expenditure on schools, hospitals and other public services remains uniform, or even weighted towards the poorer areas so as to provide compensating inputs. Taxpayers in richer regions are made to subsidise the poorer ones, in much the same way as high earners, by paying disproportionately for public services, subsidise low earners. These transfers are thought acceptable because nations are bound together by shared history, language, culture and political institutions.
Monetary union cannot work effectively without such transfers. The eurozone provides a textbook study in why this is so. A common currency and interest rate allowed less competitive nations to borrow from richer ones to finance unsustainable development, public spending and lifestyles. The curtain has now fallen on the abundance of credit that fuelled these booms. With no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating austerity in order to survive and pay their debts. The default mechanism of currency devaluation is also denied to them.