The time has come to decide what kind of Union wewant or the choice will be taken out of our hands.
The long debate on the night of 12 July that lead up to the decision to bail out Greece (for the third time) is likely to have triggered a process that will soon determine the future structure – and thereby durability – of the eurozone.
While the drama seemed to be all about Greece, behind the curtains something much bigger was at stake, namely the two (linked) questions of whether fiscal union was coming through the backdoor. That is, fiscal transfers without matching political union, or at least policy consensus (a key German fear), and whether the eurozone is indeed ‘irreversible’.
By way of recap, currency union was a price Germany agreed to pay for the broad political acceptance of reunification in 1990. Other European powers, including France and Margaret Thatcher’s UK, saw it as a way of capping the future power of a unified Germany – and Germany went along.
So, the Bundesbank – until then all-powerful in European monetary policy matters – was replaced by the ECB in which each member, from Malta with less than half a million people to Germany with more than 80 million, each has one vote on European monetary policies. By any standards, Germany gave up monetary power; all others gained monetary power.
While sceptical about “stand-alone” monetary union, Germany has always been committed to broad-based European integration. But while a currency union was an acceptable political initiative in the context of the historical changes that swept Europe in the late 1980s, its twin-brother – fiscal union – was seen by Europe’s leaders as either too complex and time-consuming, or (mysteriously) unnecessary so long as everyone kept their fiscal house in order.
To prevent this “one-legged” union leading to fiscal union through the backdoor, fiscal discipline was “assured” via (arbitrary and hardly enforceable) limits on fiscal deficits.
In economic theory, fiscal transfers within a fiscal union play a critical role in smoothing the effects of asymmetric shocks. For example, when oil prices fall and erode income in Texas, the US federal fiscal system helps cushion the blow to the Texan economy.
In reality, however, transfers inside fiscal unions do much more than that. Indeed, they seem to be virtually permanent hand-outs from wealthier states to poorer ones. In the US, the same handful of states have been net-providers of tax-money to the same roughly 45 poorer states for decades. It is a one-way stream that has never reversed.
Such transfers may be acceptable inside a political union, but nobody can be expected to transfer tax money to another country on a permanent basis. Fiscal transfers require some form of political union.
In 2012, the German government proposed exactly that: A fiscal and political union to match the currency union. However, political union implies a surrender of national sovereignty, which the French government (and some others) oppose.
The question of fiscal transfers without matching policy consensus (the current poor substitute for political union) moved to the forefront of European politics in January. Even though Greece had already received more transfers per capita during the crisis than any state within a major fiscal union (apart from west German transfers to the east), the new Syriza-led government began to roll back reforms while asking for still more transfers.
Running into uniform opposition from its European partners, Greek prime minister Tsipras called a referendum in early July and received the mandate he asked for, namely to continue to oppose reforms while financing the larger gap with still more transfers from the rest of Europe. In a fitting cartoon in Germany’s Handelsblatt, Tsipras was depicted holding a gun to his own head, saying “hand over the money or I’ll shoot”.
The philosophical divide between Germany and France on the issue of fiscal transfers versus policy reforms had now become a very concrete political issue, the outcome of which is likely determine the future shape of the European union.
While surely uncomfortable with Syriza’s political tactics, Paris rode to its rescue. They helped draft a decent policy proposal, forcing upon Tsipras a complete U-turn within days of his victory and controversial finance minister Varoufakis was fired.
But Germany had lost faith. In a brief one-page response to the French-Greek proposal, finance minister Schaeuble asked that EUR 50bn in Greek assets be transferred to a (German controlled) agency in Luxembourg for future privatization (collateral), or – if Greece did not agree to a comprehensive reform program with those provisions – they leave the Eurozone for five years.
For most, to ask Greece to hand over assets to a German – not European – controlled agency, and to pretend that one can leave the Eurozone temporarily were steps too far. It put Chancellor Merkel in an awkward position when she found herself in a room with French president Hollande, Greek PM Tsipras and Council president Tusk to hammer out a deal during the night of July 12.
Yet, as far as the greater European political picture is concerned, the genie is out of the bottle. The possibility of showing anyone demanding fiscal transfers without corrective reforms to the door is now out in the open. Meanwhile, France is out on a political limb after underwriting a government as errant as the present Greek one.
This all leaves Europe with the urgency to implement the “Five Presidents’ Report” for the future structure of Europe. A degree of fiscal union is necessary, but it must come with a matching political union.
The time has come to decide what kind of Union wewant or the choice will be taken out of our hands.
