“Well written and an interesting perspective.” Clan Rossi --- “Your article is too good about Japanese business pushing nuclear power.” Consulting Group --- “Thank you for the article. It was quite useful for me to wrap up things quickly and effectively.” Taylor Johnson, Credit Union Lobby Management --- “Great information! I love your blog! You always post interesting things!” Jonathan N.

Thursday, November 8, 2012

Divergent Fiscal Policies in the E.U.

States on divergent fiscal paths can test the flexibility of an empire-scale union, particularly if it is relatively new and still developing. Simply having different industrial/agricultural make-ups can put states at odds with each other. That the richer states can use fiscal policy to become even richer, while the policies imposed on poorer states may aggravate their fiscal conditions, can mean that the economic distinctions between states can become an increasing problem in a federal system, even given the allowances enabled by federalism itself (e.g., by the principle of subsidiarity). 

 
In November 2012, the governing coalition in the state of Germany agreed to changes to social welfare programs—changes that can be interpreted as being in line with the coalition’s electoral chances in the following year.  According to the New York Times, “(t)he measures include scrapping an unpopular quarterly medical fee, increasing spending to improve transportation infrastructure and introducing a bitterly disputed child care subsidy. Over all, they are expected to cost $3.9 billion a year.” The Times adds that state could well afford the cost at the time. Meanwhile, the state of France was planning to cut payroll taxes that companies must pay by 30 billion euros ($38.4 billion). Unlike the $3.9 billion additional outlay by the German state government, the government in France sought to raise consumption taxes to make up the difference (owning to the E.U. law on state budget deficit limits). Even with respect to these two large states, the better fiscal condition of Germany meant that it could prosper from it more than France could, given its own condition as relatively limited fiscally. Even so, both states had much more flexibility than the heavily-indebted states such as Greece, Spain and Italy.
 
Whether to improve social welfare or economic competitiveness, the two proposals in Germany and France distinguish the two states from those that are heavily indebted and subject to austerity strictures. For instance, the Greek Parliament was voting at the time on yet another round of austerity measures, that one worth $17 billion — equal to 7 percent of the state’s gross domestic product. Whereas the social welfare spending and decreased business taxes could be expected to result in more economic activity, the austerity could actually contract it and even add to the government deficits. As the relatively rich states could make efficacious use of their fiscal flexibility to become even richer, the austerity measures in the excessively-indebted states threatened to further aggravate their fiscal situs.
 
In short, divergent paths were underway within the E.U. in 2012. At the big-picture level, it can be asked whether the union itself, albeit as a federal system allowing for differences among the states, could continue to be viable if its states move further and further apart in terms of their respective fiscal and economic conditions. There is a limit, in other words, to how much interstate diversity a federal system can hold. The prospect of Turkey becoming a state, for instance, makes this point rather transparent as it would have been only natural for E.U. citizens to wonder whether the diversity within the union would be too much for it to sustain. This is particularly salient because of the extent to which the state governments hold power in the E.U. Government.
 
One means to address the fiscal differences proposed in 2012 by the state of Germany and other states is greater fiscal integration for states using the euro (with the option for the other states too). In particular, additional federal redistribution could mitigate the discordant fiscal policies of the states in terms of differential economic results. The rich states would see a benefit in the strengthened consumer markets in the poorer states. The additional redistribution can be viewed as applying leverage to the benefit already extant in the huge common market.
 
For this proposal to see the light of day, its status as a track rather than as a “one-size-fits-all” remedy would have to be stressed so the Euro-skeptic states do not sabotage the additional transfer of governmental sovereignty from the states to the union. A drawback of the “fiscal track” route concerns the free-rider benefit, whereby a rich state such as Britain would not have to pay as part of the additional redistribution even while being able to enjoy the benefit of the wealthier consumer markets in the indebted states. Although this element makes the approach unfair to the rich states within the track, the flexibility of the union to accommodate different divisions of governmental sovereignty between the federal government and the states is more valuable to the European project than making sure that each competency is fair. In other words, “forcing” states like Britain and the Czech Republic to greater fiscal integration (and thus giving up more sovereignty) because it would be fair to Germany and France would contravene the political ideology in the two Euro-skeptic states. Political pressure could build in them until they eventually secede from the union.
 
In conclusion, more of a balance in power between the state governments and the federal government of the E.U., in a flexible way, would preserve the union while mitigating the trajectory wherein the richer and poorer states become increasingly at odds in terms of their economic and fiscal interests. Even though one of the chief benefits of federalism is its ability from design to accommodate the unique conditions of the states, as an Italian scholar used to repeatedly remark to me concerning “super-sized” America, “there is a limit to everything.”


Sources:

Melissa Eddy, “Changes Are Approved to Ease Germans’ Costs for Welfare Programs,” The New York Times, November 6, 2012.

Gabriele Parussini, “France Looks to Halt Industrial Decline,” The Wall Street Journal, November 6, 2012.