Alberto Mingardi  

Can fiscal transfers solve the Eurozone's problems?

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I take a skeptical view in an article for I don't think transfers will automatically produce economic convergence. My point is based on the Italian experience, which I summarise this way:

Since its unification in the nineteenth century, Italy has had a common currency and fiscal transfers from north to south. And yet, the different parts of the country have grown at very different rates.

More than 60 years ago, at the end of World War II, the per capita GDP in the south of Italy was just half of what it was in the North. In response, a newly democratized Italy pledged to address the problem and established the so-called Cassa del Mezzogiorno, a government fund whose purpose was to update the South's infrastructure and pave the way for economic development. But the fund soon became a device for channeling public spending into industrial projects in the South for which demand was, to say the least, dubious.

... And as government investment poured South, public employment in the region boomed. Between 2005 and 2007, for example, the central government yearly has taxed some €76 billion more than it spent in the North and spent some €37 billion more than it taxed in the South. To put these figures in perspective, the fiscal transfers from North to South roughly equaled the entirety of the income taxes paid in the North.

And yet, the South has little to show for all the money it received. Today, the region remains on average half as rich as the North -- just as it was at the start of the project. Government redistribution may have worked well for other purposes -- such as growing political consensus -- but it failed to bring about economic convergence.

The piece is here. closerunion.jpg
I fear the "fiscal union" has became some sort of a mantra. There is a surprising consensus among European intellectuals that the Eurozone's problems are easily solved, on paper, if only nation states were not standing in the way. That is, more European centralisation would do it. I find this a disturbing shortcut. By saying that we need "more Europe", people avoid the far more interesting question: what kind of Europe do we need?

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CATEGORIES: Eurozone crisis

COMMENTS (7 to date)
Will C writes:

The fiscal transfer mechanism in the US, if we are going to deem it successful, is used also as a persistent way to redistribute income across states. West Virginia has been a net beneficiary for a long time and Massachusetts a net payee. The main benefit of it for the Euro Zone is that it would spread risk from external shocks, not lead to economic convergence.

J Mann writes:

FWIW, I always thought this was the best argument for Brexit.

I think the economic weight was on the side that Britons were somewhat better off economically with the EU status quo pre-Brexit than they are with leaving, but I don't think the status quo is going to be an option for too much longer.

Sooner or later, the EU is likely to move towards political union and transfers or break up, and I'm not sure it would have been as easy for Britons to get off the train at that point.

Tim Worstall writes:

In political terms (and I should reveal I used to work for Nigel Farage at Ukip, on this sort of political propaganda) fiscal union can be described as:

"German taxes really paying Greek pensions"

And when it's put that way it's obvious that it will never happen.

Slightly more formally, in order to have the sort of fiscal union that the US does would require the central fiscal pot to be about the same size. 18% or so of GDP. Does anyone really think that Germany, or Holland, Denmark, are going to send 18% of GDP to Brussels there to be distributed right across the bloc?

As to Alberto's actual point, I used to live just outside Naples. The Bagnoli steelworks were an example of this sort of spending. A lovely great big steel works nowhere near any iron ore, coal or limestone, and without any historical expertise in the process either.

Just not the sort of "development" which works.

Thaomas writes:

The fundamental problem with the euro zone is the inability of policy makers to find ways to raise levels of prices and wages in the "north" relative to the 'south." That is, the problem of the Euro zone is the Euro.

Mr. Econotarian writes:

The EU needs an "economic reform union", where the Hartz labor reforms are shipped from Germany into France, Italy, and Greece!

Max writes:

From my point of view: No.
The same is true for Germany (West to East). There is a good point to made that it actually makes matters worse. The Ex-CEO of BASF said that in those circumstances "Fördern ist schlechter als Fordern" (To give something without demanding something is not good).
I think sadly this holds for any kind of non-emergency transaction.

S D writes:

No one is proposing large-scale, permanent, Italian-type fiscal transfers from north to south Europe.

What would have clear benefits would be some kind of short-term fiscal transfers to deal with assymetric shocks within the euro area.

When business cycles are aligned there would be no transfers but when there is divergence (unemployment rising in Germany but falling in Spain) you would see transfers for a few eyars.

You would fund temporary spending (unemployment benefits) from temporary revenues (corporation taxes). This would be revenue-neutral over the long run. 1% of euro area GDP is big enough to have an effect but small enough to not produce much political objection.

You would even get support in booming economies as it would reduce the political pressure to use temporary windfalls to fund permanent spending increases.

This position paper from the French Finance Ministry in 2013 is very good:

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