Wednesday, September 7, 2011

EU Fiscal Union Is Highly Unlikely

. Wednesday, September 7, 2011

Phil Arena was fishing for a post from me on Europe in response to this:

Europe appears to be inching closer to a more centralized fiscal union that would eventually turn the euro zone into something resembling a United States of Europe.
Today we have news that a German court has ruled that Merkel's actions to bailout other European countries were not illegal -- good news for Merkel -- but that any new funding must be approved by the German legislature -- very bad news for Merkel. And yet even Merkel does not approve of the sort of measures that would create a "more centralized fiscal union" in Europe. Her joint statement with Sarkozy on August 16 repudiated eurobonds, as well as an extension for the European bailout mechanism, the EFSF. Meanwhile voters in Finland (and other countries) are starting to assert themselves by demanding increased collateral from Euroborrowers before they approve of new funding. Any one of the 17 EMU members can veto any agreement, and it looks increasingly likely that one or more of them will. And not just the creditors... the debtors are angry too. (Most recently Italian workers went on strike to protest a new austerity package, following similar protests in Greece, Portugal, and Spain.) The EU banking crisis looks like it's spreading, placing even greater burdens on public sector balance sheets and economic growth rates.

Meanwhile, where is the constituency for a greater fiscal union? Perhaps Sarkozy wants that, but Merkel does not. Voters in the Eurocore do not, and it's not even clear that voters in the Europeriphery do either, at least if that comes with supranational authority to set budgets and intervene into macroeconomic policymaking. Which it surely would.

So I just don't see how a fiscal union is politically possible. And I don't even see why it's desirable. Or more precisely, I don't see who would desire it. So I don't see it happening.


Phil Arena said...

That's about what I figured, but I wasn't sure if I was missing something.

Thanks for responding to my less than subtle request. :)

Benjamin Thomas Sutpen said...

Don't make it too easy for yourself. Schäuble is in favor of further integration, von der Leyen (the German Labor Minister) recently came out in favour of a United States in Europe. The German opposition is in favour (in other words the (probably) next German government) also.

Voter preferences are also far from as certain as you make them sound. It just depends on how questions are framed ('Do you want more Europe' for example garners a hugely positive response almost everywhere).

Finally, you'll have to ask yourself whether economic necessities won't force politicians to choose between the break-up of the € and fiscal union. I would (and actually have) put my money on fiscal union in that case.

Kindred Winecoff said...

I can't read German so my impressions are largely formed by the international press or German pubs with English versions (eg Der Spiegel), but my impression is that many of the Germans who would support a US of Europe would do so only under the conditions that a) Germany has a lot of control over how the funding mechanisms work; b) that there are strict, enforceable rules for fiscal discipline. There are good reasons to think that those terms are not acceptable to Greeks, Portugese, and Spanish. And there are good reasons for northern European countries (eg Finland) to reject them too, since they will essentially be ceding more sovereignty to Germany even though they have no need for the new union.

All it takes is one country to veto any plan. Given the difficulties getting Lisbon through during an economic boom, it seems pretty likely (to me) that there will be one such country for pretty much any feasible agreement. The relevant question isn't "Do you want more Europe?" The relevant question is "How much would you pay for more Europe?" The answer to that is far from clear. And it's not a good sign when far-right parties are gaining ground in the Euronorth while left parties are gaining in the Eurosouth.

I'm not sure that the eurozone will break-up, although I think the chances are pretty good. I still think the plan is to try to muddle through until growth returns to the Eurosouth thus allowing them to service their debt, or the banking sector in the Euronorth recapitalizes sufficiently that a sovereign default won't cause a new crisis. Whichever of those happens first will determine what comes later, I think.

After that is resolved Europe might look towards further fiscal integration, a regional version of the IMF, or at least "Maastricht with enforcement". But the current crisis has to be resolved one way or the other first.

Benjamin Thomas Sutpen said...

Seeing as the Italians are working on an ECB-forced austerity drive right now, the Spanish (and French) are installing a German-style debt brake in the their constitution, I am not so sure why you think the Southerners wouldn't accept those terms.

Plus, if you look at the recent Dutch proposal (which supposedly has Finnish and German backing), then the way to avoid ceding sovereignty to Germany is giving it to Brussles ('ever deeper union' quoi), which is really the way the EU has been functioning since the 70s (crisis, lots of talk of the EU failing --> deeper integration).

As for treaty change. Hell yeah, it'd be difficult but veto power doesn't work the way you imagine it to be. Rarely does a single state block something, they usually get some kind of a deal or an opt-out clause and things move on. This especially as this whole affair has made clear that we are fast approaching a two-speed EU.

EU Fiscal Union Is Highly Unlikely




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