Here they go again. Leaders of the euro zone are inching forward in their quest to form a fiscal union that will shore up the common currency. With Italy hell-bent on causing Euro Crisis 2.0, that might sound like a good idea. But upon scrutiny, the reform proposals are risible: too timid to integrate the euro zone economically, and simultaneously large enough to embolden Eurosceptics.
The plan centers on a Franco-German compromise to introduce a common budget for the euro zone. But if the French were hoping for a new and hefty tool to use for Keynesian demand management, they will be disabused.
That’s because the Germans acceded only nominally to the word „budget“. In reality, fearing a „transfer union“ in which northern Europeans chronically pay and southern Europeans receive, they are hobbling the new fiscal tool. The budget will be tiny. And it will squirm in a straitjacket of rules that prevent discretionary spending to smooth aggregate demand.
This „reform“ will instead leave the euro zone in a no-man’s-land, neither fixing the currency union nor preparing its orderly dissolution. This is a tragedy, especially since another currency union, the American dollar zone, has been there all along to offer lessons.
In a sense, the dollar area came into being through a bold debt mutualization. Alexander Hamilton relieved the member states of their debts, which were assumed by the new federal government. But he simultaneously gave that federation democratic legitimacy and powers of direct taxation, which is what „Brussels“ would need today. (A central bank only came much later.)
Hamilton’s move did not end debt crises in the states. In the 19th century many defaulted (and none was „bailed out“). That’s why all American states (except Vermont) adopted balanced-budget rules similar to the „debt brakes“ that Germany advocates.
But in the US as in Greece, such austerity programs are pro-cyclical (making recessions worse). Balanced state budgets only work if there is a federal tier that can wield a counter-cyclical fiscal weapon as well as „automatic stabilizers“ such as common welfare benefits.
Moreover, unlike the euro zone, the dollar area never tolerated unhealthy links between states and banks. Yes, the US sporadically has spectacular banking crises. But these can’t kick Nevada or Florida out of the dollar zone. One reason: The US has one deposit insurance scheme – not 50 – and it is federal.
To survive, the euro zone needs at a minimum: the ability to tax and spend; automatic stabilizers such as common unemployment benefits; and joint deposit insurance. You may not like these things. But then you must be honest and admit that you don’t want the euro.