Alberto Mingardi  

What is a 'fiscal union'?

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The other day I attended a conference on the euro-crisis, and I questioned two of the speakers on what they meant for "fiscal union." Sometimes, words become cozy, people use them rather liberally as they become fashionable, but we lose track of their true meaning.

The two economist I quizzed were both arguing in favor of a European fiscal union. Answering my question, economist A replied that he thought the European Union was more or less already a "fiscal union." The euro as a common currency is still very young (it was sneaked into people's pockets in 2001) and in a very short period of time Europeans soon developed a series of solidarity mechanisms. The combined effect of an independent ECB, the ESM (European Stability Mechanism) and the older EFSF (European Financial Stability Facility), and of fiscal rules (Six Pack) described the framework of an already existing de facto "fiscal union." He added to this mix of policies the idea of a "banking union" and, specifically, uniform resolution procedures for banks. Such a "fiscal union" would ideally be governed by rules rather than by men, not least because of the heterogeneity of the EU member states.

Economist B held a very different point of view. For him, a fiscal union meant basically a European Finance Minister and, thus, centralization at the European level of a certain degree of public spending. The idea is that you need to go further than common budgetary rules on the spending side--and then, why not on the revenue side, too? Can you picture a fiscal union with a single finance minister, but with wide differentiation in tax rates among member states?

My impression is that economist B is right on what logically a fiscal union is, but that economist A is right on where to draw a line. The fact that they both used the very same words to mean different things is symptomatic of the state of the debate in Europe. If you say you do not want a fiscal union, you may be aligned with the deep rooted sentiments of the voters--but you disqualify yourself from the debate technocrats and elites are having.

But schizophrenic words may yet hold some surprise in store, particularly if different meanings are, actually, different translations, so to say. Can this have no political consequence whatsoever? It doesn't take much imagination to recognize which of the two economists was from the North of the Eurozone--and which one from the South.

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CATEGORIES: Eurozone crisis

COMMENTS (3 to date)
Floccina writes:

Excellent thought provoking post.

Eelco Hoogendoorn writes:

I couldn't disagree more. Indeed these economists are right not to squabble about such details. They both want to go down the same one way street; the only disagreement is on what tune to fiddle as they do.

Note how there probably wasn't anyone at the debate pleading to let the euro die with what dignity it has got left, and let a free market in currencies takes its place. One can dream.

Thomas Boyle writes:

The fact that almost the entire population of the EU is being excluded from the debate the technocrats and the elites are having, is symptomatic of the problems with the EU - and causal, too.

Fiscal union is not needed. Wal-Mart's revenues are bigger than the GDP of Greece, and comparable to the GDP of Belgium, but there is no fiscal union of corporations: the high-risk ones borrow at higher interest rates, and if they cannot make the payments (because their customers balk at the prices, or because they are inefficient) they default. Lenders forgot, for too long, to look into the solvency of Greece, Italy and Spain (Ireland's government took on the banks' loans, which could have been a surprise event even to someone who did their diligence).

What's needed is a mechanism to ensure that default does not become a propagating crisis - not a mechanism to create uniform risk exposure across all the countries of Europe, nor what many of us surmise is really behind all this "fiscal union" talk: an excuse to eliminate intra-union inter-country tax/service competition, the better to control the taxpayers.

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