There has been huge excitement in the world financial markets at talk of the eurozone establlishing a fiscal union to supplement its monetary union.
This excitement is misplaced. What is being proposed is not a fiscal union even though that is what the German Chancellor and the French President are calling it. A fiscal union is where there is a single government with a single finance ministry or treasury deparment, a single budget and a single tax system. It requires a unified political and administrative structure with a single tax collection service that is able to collect taxes across the entire eurozone and prosecute defaulters.
What is being proposed bears no relation to any of this. Instead there is to be another EU treaty supposedly setting out unified tax and spending rules that are to be administered by the eurozone states. Since there will be no eurozone government (the French President ruled that option out) the levels of tax and spending in each eurozone state in each budget period will presumably have to be negotiated between all the eurozone states. One shudders at the thought of the conflicts to which this will give rise.
Supposedly there will be fixed financial penalties imposed if the rules are then broken. Since the eurozone will not have a government with powers of coercion over its members It is completely unclear how these penalties will be enforced. The Maastricht Treaty already sets out rules for the eurozone specifying a limit on budget deficits of 3% of GDP and a limit of 60% of GDP for public debt. All the major eurozone states have broken these rules. Germany”s public debt currently stands at 84% of GDP. No penalties have however been imposed for breach of these rules since in the absence of a eurozone government there is no one to impose or enforce such penalties.
The proposed solution anyway addresses the wrong problem. As has been repeatedly and correctly pointed out by such people as Paul Krugman and Dean Baker the problem in the eurozone is not profligate governments. Until the financial crisis broke all eurozone governments except Greece had kept their spending under tight control. This was the case in Spain, Portugal, Italy and Ireland. Spain’s budget deficit and its level of public debt were lower than Germany’s. The problem in the eurozone is not profligate governments but a broken banking and credit system aggravated by structural trade deficits between eurozone states that were masked until the arrival of the financial crisis by heavy private lending by eurozone banks. It was only when the weakness of the European banking system became clear following the start of the financial crisis in 2007 and 2008 that sovereign debt mushroomed and became an issue.
If the eurozone states want to create a fiscal union to support their currency then they must face up to the reality that this is only going to happen if and when there is a full political union as well. This means a single European government elected by direct elections. In the meantime what is being proposed not only fails to address the underlying problems of the eurozone but by creating more sources of conflict is going to make them worse.