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A Fiscal Union Won’t Fix Europe

Tuesday, 22 Nov 2011 | 11:11 AM ET
German Chancellor Angela Merkel
Michael Gottschalk | AFP | Getty Images
German Chancellor Angela Merkel

European leaders are reportedly preparing a plan to “strengthen” the European Union in advance of a Dec. 9 meeting in Brussels. One of the plans they are considering is “centralized” fiscal oversight.

German Chancellor Angela “Merkel wants far more centralized euro fiscal oversight so that something like Greece can never happen again,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in a phone interview with Bloomberg.

More from Bloomberg:

That means euro governments will have to cede some sovereignty over budgets, he said. “There seems to be some kind of deal between Merkel and [French President Nicolas] Sarkozy on this.”

Michael Meister, the [Christian Democratic Union's] parliamentary finance spokesman, raised the prospect of joint euro-area bonds following. “An integrated fiscal policy” in the euro region would mean “we can discuss the question of joint liability,” he said in an interview on Nov. 10. “The sequence of events is important.”

Judging by Merkel's remarks, however, the plans are likely to be a complete non-starter.

From Bloomberg:

German Chancellor Angela Merkel said it’s time to move toward closer political union in Europe to send a message to bondholders that euro-area leaders are serious about ending the sovereign debt crisis.

Speaking on the eve of her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, Merkel said she wants to preserve the euro with all current 17 members. “But that requires a fundamental change in our whole policy,” she said.

“I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,”

Merkel said today in an interview with ZDF television. “Otherwise people won’t believe that we can really get a handle on the problems.”

The basic problem here is that Germany has a totally different idea of what it means to “cede some sovereignty over budgets” than its debt troubled European cohorts. To Merkel and many German officials, the ceding is all one sided: countries like Greece, Italy, Spain, Ireland, and Portugal will cede control of their budgets to German bureaucrats.

But that’s not how fiscal unions work. In reality, for a greater political and fiscal consolidation to work everyone would have to cede power to a union that would be governed by a body in which the peripheral nations would be over-represented. And that over-representation would mean enormous wealth transfers from Germany to the peripherals.

Take a look at the United States. Our bicameral federal legislature guarantees the wealthier states fund the less-wealthy states. The Senate, to the great consternation of many progressives, gives the poorer and less-populated states far more say in national budgets than their population would warrant. As a result, states like New York pay out far more than they receive in federal taxes while states like Oklahoma receive far more than they receive.

It’s a great engine of wealth transfer, with the more productive funding the spending of the less productive.

In short, it is exactly what the Germans keep trying to avoid in the current mess.

Without strong bicameralism — including an “upper-house” that gives far peripheral states power far disproportionate to their populations — there won’t be any fiscal union. But Germans don’t want to be the one’s ceding control over their wealth and savings, so they are unlikely to accept this.

In short, fiscal union is another plan that simply won’t work.

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