Clive Crook on How Fiscal Unions Slide Into Transfer Unions

by Reihan Salam

While Merkel’s Germany is keen on building a fiscal union, with stiff penalties for EU member states that exceed various fiscal targets, it is adamantly opposed to building a transfer union, in which resources move across the EU to accommodate various economic shocks and income gaps, etc. Clive Crooks explains why the Germans are not likely to prevent a sufficiently strict fiscal union from evolving into a transfer union:

A fiscal union in the proper sense of the term is a transfer union. Yet Germany’s government, which has pressed so hard for what it calls fiscal union these past few weeks, is implacably opposed to a transfer union. Shielding German taxpayers from the cost of supporting Greek, Irish or Italian taxpayers as this crisis has unfolded is the organizing principle of Chancellor Angela Merkel’s entire policy.

Is her position hopelessly illogical? I wouldn’t go that far. Germany’s leaders calculate, I imagine, that a strong fiscal pact will make a transfer union less likely. In this belief, they are not being illogical, merely delusional.

The reason, Crook goes on to explain, is that fiscal discipline alone isn’t enough to forestall a crisis that can cause deep deficits. By creating a tight fiscal straitjacket, the new EU rules will keep member states from responding to severe downturns through fiscal expansion. So either the straitjacket has to go — or the rich member states will have to rescue the rest, again and again.

Let’s suppose that Europe muddles through this time. Next time, with zero fiscal flexibility, persistent underperformance in many parts of the EU, and an ever-widening gap between incomes in Europe’s core and its periphery, a stark choice will present itself. Let the euro area and the single European market dissolve, which would be a disaster for Germany as for everyone else. Or form a transfer union that puts German taxpayers permanently on the hook for the EU’s backward regions, which is the very outcome that Merkel dreads most.

So what are the implications for the United States? One possibility is that the U.S. will benefit from a European superstate. As hard as it is to imagine now, the next half-century might yield a proper transfer union that shares a common (second) language, namely English, and in which cross-border migration becomes an even more pervasive phenomenon. This would presumably accelerate the evolution — some would say deterioration — of various distinctive European cultures and traditions, yet it also might preserve Europe’s geopolitical relevance by serving as a hedge against rapid aging. Individual European states will soon have less demographic and economic weight than a number of secondary Asian powers. A European superstate, in contrast, might be able to hold its own, thus preserving the relative influence of the trans-Atlantic west.

Another possibility, however, is that a post-federal Europe composed of prosperous pygmy states would actually be much better off, as these smaller entities might avoid, or rather they might recover from, an era of economic sclerosis and serve as fonts of entrepreneurial growth. The strategic influence of the region might decline in some sense, as the lack of a powerful state would make it difficult to martial resources for traditional geopolitical competition, but its prosperity and cultural influence would not.

I don’t think it’s obvious which scenario is better for the U.S. Much depends on how the U.S. evolves over the same period. My gut tells me that the latter course is better for all parties involved. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.