One of the long-standing criticisms of the euro is that a monetary union cannot survive without political union. The United States can use one currency even though it consists of states with their own budgets, rights and economic conditions because, in the end, a national government is in place to solve crises, transfer funds and coordinate policy. No one worries that if California goes bust, the entire union will fall apart. In Europe, however, the individual countries using the euro have been to a great degree left to their own devices. They lost control over monetary policy of course, and they were supposed to adhere to certain limits on the size of their budget deficits and sovereign debt. But the system never worked as intended. In Greece, the government simply lied about the state of its national finances. Even when it was clear a government was breaking the rules, the European Union never properly enforced them.
The dangers of this oddball mixture of the supranational and the sovereign state have been blatantly exposed in the current debt crisis. A handful of Eurozone members, and for the most part, small and peripheral ones, were able to nearly destroy the entire union with their fiscal irresponsibility. But what can be done about this problem? Can Europe achieve a “fiscal union” to match its monetary union?
The talk in Europe is about the formation of some kind of “economic government,” some way of better coordinating national economy policies across the entire Eurozone. The European Commission, the executive body of the EU, has already started the debate over such a “government” by proposing a new system to oversee the state budgets of individual members. You can read some of the details of the plan here. The general idea is to put in place a mechanism whereby Eurozone governments would submit their budget plans in advance for review by the EU, which would then offer what the Commission called “guidance” to each state. This process would be backed up by the stricter use of sanctions on those governments which flout the rules of the Eurozone. Here’s what Olli Rehn, European Commissioner for Economic and Monetary Affairs, had to say about these proposals in a statement:
Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension, that they don’t put at risk the stability of the other member states…For euro-area it means deeper and broader surveillance, in particular with regard to macroeconomic imbalances.
We’re basically talking about some kind of pre-approval process of national budgets at an EU level. But can such a system work? The basic problem with any such proposals is that the EU may simply not have the tools, the will or the power to control the actions of the otherwise independent governments. It hasn’t so far. And I’m not sure simple fines or other penalties would be enough to convince politicians with their own local interests and priorities to fall back into line. Would the EU threaten to toss a wayward nation out of the Eurozone, a form of financial excommunication? I can’t imagine that happening.
And if the EU can’t be trusted to enforce policy, the individual countries can’t be trusted either. The Greece case shows how governments have all kinds of tools at hand to hide reality. Javier Díaz-Giménez, an economist at IESE Business School in Madrid, argues that one solution is to base the formation of government budgets not on estimates of revenues and growth calculated in national capitals, but by the technocrats of the EU. That would ensure forecasts weren’t based on local politics, eliminating the emergence of unexpected deficits and debt. For Díaz-Giménez, greater fiscal coordination is truly a life or death matter for the euro. “You can’t have a single currency without fiscal policy coordination,” he told me. “If we don’t do this we won’t have a euro.”
He might be right. But will the Eurozone states really go for any of these ideas? The problem is the same as it always has been – Europe has wanted the benefits of economic integration without the sacrifices of political integration. How much power do Europe’s politicians and voters want to turn over to the administration in Brussels? I think we can all appreciate the hesitation. The politics of the EU are dominated by its most powerful members, Germany and France. Will the Eurozone’s smaller members, let’s say the Netherlands or Portugal, surrender more sovereignty to the Germans and the French? Would you?
Yet there does seem to be some feeling in Europe that a form of fiscal union is inevitable. Jaime Malet, the chairman of the American Chamber of Commerce in Spain, told me that Europe’s states have already given up their sovereignty on all kinds of lesser issues, and the resistance on fiscal policy may eventually give way as well. Fiscal coordination”is a sensitive issue, but I don’t know why,” he says.
The basic point here is that without greater integration in Europe, the Eurozone is going to remain unstable.