AGAINST fiscal union

FOR fiscal union


As long as the European Union is made up of independent nations with their own elected governments, their problems are going to be essentially local and they will need local solutions. Squeezing them into the same monetary straightjacket has clearly failed and adding a fiscal union would just exacerbate an already unsustainable situation. Governments need flexibility to deal with their own problems. Fiscal union would entail a ballooning of the EU budget – provoking endless bickering among the 27 (or more) member states on how to share it out, not to mention the expanded scope for graft and bureaucratic inefficiency. It’s a recipe for gridlock.


The ongoing European debt crisis has provided daily evidence that monetary union cannot work without fiscal union. The Eurozone is clearly unable to manage its macro-economic imbalances without some sort of federal structure to oversee revenue collection and expenditure. Without it, the euro will always be vulnerable to asymmetric shocks. Combining supranational monetary policies with national fiscal policies is unsustainable. A fiscal union run by a fully empowered EU Finance Ministry under proper democratic oversight will give the Union strength and stability, mutualizing credit risk while imposing tough fiscal discipline.


Fiscal union is another nail in the coffin of national independence. Setting budgets is a core responsibility of sovereign parliaments. Transferring that power to some distance, opaque Brussels institution would be deeply undemocratic. History tells us citizens will not accept taxation without representation. An unpopular fiscal union would hand piles of ammunition to anti-European political demagogues, undermining the foundations of the Union.


In 1990, EU nations made up half the world’s 10 biggest economies. By 2050, Europeans will struggle to have two in the top flight. Closer economic union is the only way to halt Europe’s decline in the new global environment. The current half-baked arrangements just won’t do. Unless a strong fiscal element is adopted, predatory markets will be able to pick off the weakest members of the euro herd. Fiscal union would raise Europe’s market credibility and eurobonds would rival US treasuries.


The tax harmonization that will follow fiscal union will only move in one direction: up. We’ll all end up paying more. Countries like Ireland or Slovakia that boosted their economies with innovative revenue policies will be forced to apply job-destroying high taxes as part of a French-led crusade against “fiscal dumping.” Another blow to Europe’s competitiveness.


Fiscal union would be a major step towards a true political union. It would have to be administered by real federal bodies. Central tax resources and mutualized debt would become powerful symbols of a united Europe. The need for strong democratic oversight will spur the creation of a revitalized European Parliament and directly elected Commission. That could evolve into the government of a United States of Europe able to stand up alongside the leading powers of the emerging multipolar world.


Fiscal union oozes moral hazard. Loose spenders will be given an everlasting bailout fed by virtuous nations, led by Germany. By necessity the fiscal union will become a transfer union that punishes budgetary righteousness. The safety net for sinners will lessen their incentive to tighten belts and push through reforms their economies need. Keeping high-debt countries afloat artificially will eventually drag everybody down.


“It would … contribute in an eminent degree to an orderly, stable and satisfactory arrangement of the (union’s) finances.” So spoke Alexander Hamilton, US treasury secretary 1790 as he urged America’s founding states to join together in fiscal union. A European fiscal union, with proper institutions would be able to provide joined-up management of the EU economy as a whole. Ex-ante control would mean that wayward Irish, Spaniards or Greeks would not be able to recklessly inflate property bubbles or cook their budget books. The trust that responsible EU-wide economic management would engender will assure markets, draw investment and boost growth, creating a Europe thats more fair, stable and prosperous.