Here they go again. The leaders of the euro zone are once more inching forward in their quest to form a fiscal union that will, they hope, shore up the common currency. At a time when Italy seems hell-bent on causing Euro Crisis 2.0, that might sound like a good idea. Upon scrutiny, however, the proposals, even if they pass, are risible. They are too timid to integrate the euro zone economically. Simultaneously, they are large enough to embolden Eurosceptics and populists.
The plan, such as it is, centers on a Franco-German compromise to introduce a common budget for the euro zone. But if the French and others were hoping for a new and hefty tool to use for Keynesian demand management wherever in the euro area it may be needed, they will be disabused.
That’s because the Germans, aware that they must help Emmanuel Macron avoid humiliation in France, acceded only nominally to using the word “budget.” In reality, fearing a “transfer union” in which northern Europeans would chronically pay and southern Europeans receive, they are hobbling the new fiscal tool. First, the budget will be tiny. Second, it will squirm in a straitjacket of rules that prevent truly discretionary spending to manage aggregate demand. This makes the reform pointless.
The “reform,” if it comes about, will instead leave the euro zone in a dangerous 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. Let us review them briefly.
In one sense, the dollar area came into being through a bold act of debt mutualization. Alexander Hamilton, one of America’s founding fathers, relieved the young union’s member states of their debts, which were assumed by the new federal government. But he simultaneously gave that federal government democratic legitimacy and powers of direct taxation, which is what “Brussels” would need today. (A central bank, by contrast, only came much later.)
Hamilton’s move did not end debt crises in the states, and in the 19th century many defaulted (and none was “bailed out”!). That’s why all American states (except Vermont) adopted balanced-budget laws similar to the “debt brakes” that Germany advocates at home and in the EU. 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 has sporadically had spectacular banking crises. But these can’t kick Nevada or Florida out of the dollar zone. One reason is that America has one deposit insurance scheme - not 50 - and it is federal.
To survive in the long term, the euro zone needs at a minimum: the ability to tax and spend, combined with balanced-budget laws in member states; automatic stabilizers such as unemployment benefits for the whole currency area; and joint deposit insurance for banks. You may not like these things. But then you must be honest and admit that you don’t want the euro.
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