THE SPECIAL SUMMIT of the 17 euro countries that met in Brussels in mid-July 2011 had to make a major policy decision. Eventually, the government leaders decided that European monetary union should continue to move forward and that its path should head in the direction of a culture of stability that could lead to fiscal union. This is not an immediate once-and-for-all solution to the sovereign debt crisis in which some euro countries are entangled, because each step in this process will take a great deal of time and will encounter strong resistance within individual countries. It therefore remains uncertain at present whether the agreed Europeanization process will proceed smoothly and directly. If the eurozone summit’s commitment to Europe is not to become the bone of contention that will destroy the euro and with it the European Union (EU) as a whole, increasing the population’s democratic participation in the next steps must now be given the highest priority on the European agenda.
The decision made at the eurozone summit means that politics has begun to correct the birth defects of the euro. Without a doubt, the faults in the way the euro came into being have come home to roost in the European sovereign debt crisis. Faith in the euro led people to expect the common currency to balance out the truly massive economic differences within the EU. That is why they believed it would be possible to get by without a common fiscal policy. That was a fatal mistake. The euro has not reduced the differences between a low-performing south and high-performing north; on the contrary, it has intensified them. It has not eliminated, but increased Germany’s enormous competitive advantage. Because exchange rates in the eurozone are fixed and no longer flexible and the south has not been able to devalue, adjustments have had to take place through the goods and labour markets. That’s why Germany has succeeded in exporting huge amounts of goods. As a result, German trade deficits have become larger, not smaller. Above all, however, the employment situation has split in two. While Germany is moving towards full employment, unemployment is steadily rising in southern Europe.
A common currency without a common fiscal policy is not viable. Sooner or later all currency unions – even those structured along highly federalistic and decentralized lines – have had to transfer a significant proportion of their economic policy from their constituent members to the joint federation. In the USA, Germany and Switzerland, neither the common nation nor the common federal government came from nowhere. The federation had to evolve over centuries. And it only came into being after civil wars. There is no way back for Europe, just as there never was for the USA or Switzerland. Both the US dollar and the Swiss franc were only introduced after protracted resistance from the individual constituent states. And monetary union was inevitably followed by a far-reaching centralization of economic policy. In economic terms, that has not harmed countries that are organized as federations.
A fiscal union certainly does not have to involve the harmonization of tax laws and tax rates. Federations like the USA and Switzerland demonstrate that a fiscal union is well able to tolerate decentralized cantonal or even municipal tax jurisdiction. An equally unlikely outcome is an administrative model of the French kind, in which the central government allocates its regions’ budgets in a centrally planned way, asserts lawful use of funds by prefects and punishes misconduct by removing the relevant administrator. An autonomous model following the Swiss example could equally well come into effect, one in which the individual euro countries retain fiscal autonomy and the credit market acts as a referee through risk premiums. What are definitely required, however, are strict insolvency proceedings for the eventuality of state bankruptcy. They must also go far beyond the existing euro stability pact, which has proved to be a toothless tiger during the crisis.
The Swiss model demonstrates what is required. Cantons have autonomy over financial policy and therefore also sole liability for their debts. There is no bail-out clause – the Swiss federation will not take responsibility for cantonal debt. Yet federal legislation demands that the cantons levy certain taxes and stipulates who should pay, tax bases and tax deductions. Above all, however, regulations govern what will happen if a canton becomes insolvent and is no longer able to perform its duties and meet its obligations. This initially leads to what is known as “federal execution” and then to “federal intervention”, which can in extreme cases even entail military measures.
If this were applied to the eurozone, it would mean that the insolvency of a euro country would automatically result in a shift from the Swiss autonomous model to the French administrative model. The indebted euro country would lose its financial autonomy as the price for its rescue. National tax authorities would be replaced by euro sequestrators who collect taxes and implement economies and privatization programmes. International Monetary Fund (IMF) support programmes for indebted developing countries serve precisely this purpose. And the more European rescue packages – especially also after the decisions of the eurozone summit – begin to resemble a European monetary fund, the more you can imagine this procedure being applied to crisis-hit euro countries.
Taken to its logical conclusion, the path to fiscal union also involves accepting that monetary union will become a community of joint liability. If all other measures have failed, but for good reasons one wishes to prevent a collapse of the eurozone, what is inevitably required is a jointly financed stability mechanism that provides emergency financial aid to indebted euro countries at times of crisis. This is the goal of the European Financial Stability Facility (EFSF), which received additional powers at the eurozone summit. To prevent the euro crisis spreading to additional countries the EFSF will be able to buy government bonds directly on the secondary market – in other words, from banks and insurances – to support indebted euro countries. This will therefore result in a transfer union – as has always been the case historically in all federations. This makes clear the historical significance of the decisions made at the eurozone summit. They will take a Europe of nation states on the long journey towards a United States of Europe.///
