The Corner

Fiscal Union, No Thanks

 Unlike The New York Times, the Daily Telegraph’s retrograde Liam Halligan still seems to think that Germany democracy should still count for something – and so should commonsense:

Our financial and political “leaders” desperately want “fiscal union”. If Germany agrees to “debt pooling” and a “banking union”, together with more QE-style measures by the European Central Bank, then bond yields elsewhere in the eurozone would plummet and, across Europe and the world, equity markets would soar.

Yet sustainable fiscal union is never going to happen. Debt mutualisation and “special monetary measures” could well snap the patience of German voters. The Bundesbank, too, is openly critical of such moves. Since Germany joined the euro in 1999, with no referendum, not a single national opinion poll has recorded a majority in favour of entry. I doubt one ever will. German citizens, prosperous by dint of their own hard work and skill, have a lot to lose. And money-printing and bail-outs of the profligate are anathema to the German psyche.

Even if Merkel does stitch together some kind of compromise on fiscal union, assuming she wants to, any bearable pooling arrangements will prove inadequate. To be sustainable in the long run, a monetary union also requires a “transfer union” – with explicit payments from stronger to weaker members. This is what happens in the US, with richer states financing poorer states, the whole edifice held together by hundreds of years of nation-building and a common identity. Europe doesn’t have that – and never will.

Back in 1977, the eurocrats commissioned the Scottish economist, Donald MacDougall, to examine what scale of fiscal transfers would be needed annually to hold together a stable monetary union. MacDougall’s report, based in part on US experience, suggested a level approaching 10pc of eurozone GDP – a massive figure that dwarfs even the already bloated European Union budget.

Will voters in the likes of Germany, the Netherlands and Finland really accept that kind of money – almost a quarter of their total tax revenues – being transferred to Portugal, Greece and Spain, to fund Mediterranean welfare and pension payments? I think not.

Well, if those voters are not careful, they might find themselves excluded from the decision-making process. That’s happened before, and it could happen again. Take another look at the two sentences above that I emphasized in bold. German voters never wanted the dangerous and speculative euro, but they were never given the chance to say no. If they are not careful, something similar (cheered on by the likes of Obama, Cameron, and the NYT) will take place again as what is left of their democracy is sliced away.

But back to Halligan…

These “strong” Northern countries anyway have fiscal problems of their own. For all the talk of Germany’s budgetary fire-power, Berlin is itself shouldering enormous sovereign debts – well over 130pc of GDP if you include the country’s European Central Bank debts and other off-balance-sheet liabilities.

Fiscal union also won’t be enforceable. When it comes to something as fundamental as tax and spending, elected governments will always do what their local electorates want, rather than following strictures from Brussels – or Berlin. It’s as simple as that. A stiffer fiscal treaty will just mean the rule-breakers apply more fudge.

Are we really to believe, after all, that under “fiscal union” the voters of Spain, Greece – France! – are going to accept, month after month, year after year, what the German government tells them to do? Of course they won’t. Tensions will escalate, civil unrest will abound. Europe will become mired in conflict.


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