Thanks, especially for the well-made points on unified fiscal policy.
One of the EU‘s founding fathers allegedly said that „the project will advance one crisis at a time“, or words to that effect - so we may get there in the end.
One question, again on fiscal unification: doesn‘t Switzerland also have some degree of wealth transfer between towns (in the same Kanton) and between Kantons?
I can understand countering UK opinions on the euro and EU is not unwarranted since it seems most EU criticism functions to produce a better looking UK. (Though early eighties warnings by Labour - they even visited the EU commission back then to find out how one leaves the EU - and James Goldsmith's words on globalisation both seem rather on target).
Still, this longevity pov of the EU/eurozone then would be ‘The Financialized States of Europe’
I would argue:
1 The US (back then neurotically capitalist and democratic - my interpretation of Tocqueville) grew together as it grew economically, and it experienced (and fueled) gigantic steps forward in productivity. (It also produced the world’s first industrial war before 'completion'...). The demographically young US was protectionist until its economy benefited more from free trade.
The pro-free trade EU (for now, i wonder how their clean energy & carbon-taxed-products policies are going to play out internationally), is aging, especially in the least productive member states. In other words: EU laggards are literally dying and euro membership does not seem to make any difference.
2 The eurozone does not seem to inspire a (more) optimistic ie risk taking mindset in member states where it should matter most. Italian politicians in the late nineties publicly said they hoped joining the euro would grow Italian productivity and modernize the economy. I.e a foreign entity/structure should achieve what they could’t (anymore). But the euro mostly numbed them / Italy. Productivity growth rates kept up nicely in the north (though they are worsening now vs the US) but down south you see them decline after 2000 and flatten post 2010. I don't think the euro is very ‘schumpeter-friendly’ there where it should stimulate exactly that in order to make the eurozone a success.
3 Apart from economic and financial matters, dominant EU politicians / parties express a narrow-mindedness and groupthink which results in policies that imo do not exactly underwrite a political shelf life of 50 to a 100 years. On topics like climate, immigration, foreign policy, energy politics i.e. energy security (do they know what that means?) they show a unified vision that renders all wef conspiracy thinking pointless. They don’t conspire, they’re simply utter clones. The people with some kind of individuality left in their circles wisely keep their mouths shut.
Compared to national politics they seem to reproduce clones at a much faster rate, i.e. they seem to be much better insulated from the preferences of electorates. In other words: insulated from the preferences of the boots on the ground. This friction will imo lead to ever greater attempts at media influencing and straight-out censorship.
The writing has been on the wall for a number of years now: any discontent right of center or ‘nativist’ is deemed ‘populist’ * or framed as the result of foreign meddling. This is the EU saying ‘it wasn’t us’. Just like national politicians are eager to blame the EU for unpopular home-measures. In the US Washington may also be (very) unpopular in states, but there it's mostly culture wars where the fights are over, not economics or what the FED is doing - apart from some posturing economically rep's & dem's are almost the same.
The EU is now adding to its arsenal of discontent US culture war-items like DEI and other expressions of fundamentalism - recently the Dutch police has decided it is ''institutionally racist'...While one of the new highly inclusive political parties driving critical theory in the NL has collapsed when it turned out to be 'racist', 'sexist' and of course also 'toxic' & 'unsafe'. And these days one's opinion on the right level of nitrogen emissions determines where one apparently can be found on the political spectrum... It seems EU 'emotional unification' has to happen in an highly divisive environment where voters for major Dutch parties feel more aligned with foreign parties' voters with similar views (and education, employment etc) while they allow themselves to be disgusted (publicly) with local rivals. That is not the healthiest of circumstances.
It's still the national level that can make or break EU unity. And because the national level is fracturing, and with significant segments of society that do not seem to have their pov expressed through Brussel's policies and cultural stances, imo therefore EU media intervention is not only allowed, it's ‘crucial to protect our (our?) democracy’...(I can’t stand the EU and my national gov deciding for me which websites i can see and which are verboten. I don’t think i’m the only one). I cannot see the EU holding things together without it trying hard to create an information 'straightjacket'.
The financial economy may not kill the euro that fast (though good old economic items like productivity (growth) and demographics may kill EU coherence sooner), and i can envision the ECB trying hard to save politicians’ **s forever but…
EU politics - an insulated minority that mixes groupthink with hubris and shows signs that it prefers to cut out about one third to over half of national electorates - are the short term risk.
* For populism i would like to refer to Thomas Frank (What's the matter with Kansas). Here in this interview he points out that with the nice left and the center saying goodbye to blue collar voters it’s not that hard to understand why they end up in the feared ‘populist’ camp. Where else should they go?
SH: Which candidate or president in recent history was most responsible for this turn?
TF: I think Bill Clinton was the pivotal figure of our times. Before he came along, the market-based reforms of Reaganism were controversial; after Clinton, they were accepted consensus wisdom. Clinton was the leader of the group that promised to end the Democrats’ old-style Rooseveltian politics, that hoped to make the Democrats into a party of white-collar winners, and he actually pulled that revolution off. He completed the Reagan agenda in a way the Republicans could not have dreamed of doing—signing trade agreements, deregulating Wall Street, getting the balanced budget, the ’94 crime bill, welfare reform. He almost got Social Security partially privatized, too. A near miss on that one.
As an Italian (and also a professional in the complex Italian tax system), I can confirm a couple of things that might be overlooked by non-Italians. Italy is a "fractal" piece of Europe, meaning that even after more than 160 years, economic differences persist from region to region, from north to south, just like in Europe, and even in terms of language. While Italian is the official language, countless dialects have survived, and if I move just 60 km to my wife's hometown, I can hardly understand what is being said in the local dialect. Nevertheless all doubts about the possibility of uniting a country with nothing unique have been brushed aside once it happened.
Second point: the resources obtainable through taxation. In Italy, the underground economy, and I'm not talking about organized crime, is still substantial and involves legal activities of professionals in all fields, businesses, and even private employment. I don't want to exaggerate, but in my opinion, a realistic estimate would be at least 20% more GDP than what is officially declared. So, while Italy may be the sick man of Europe in terms of debt, the introduction of new technologies (e.g., state blockchain for transactions) could be a good forced remedy. I hope I've been clear in expressing my point. Therefore, from my perspective, I am almost certain that the European Union will still be here when my children retire.
I enjoyed reading your presentation of the EU/Euro comparison to the USA and Switzerland states. One of the interesting aspects of this structure is to have monetary policy solely outside the state (in the central bank), but fiscal policy inside the über state (and the sub-state). With current central bank structures, in practice that means Bureaucrats control the money and Politicians control the spending.
In the USA most states have "balanced budgets" meaning that the issue no state level debt. Some do not. But Counties and Cities issue both "revenue bonds" (tied to revenue associated with a project, like airport revenue to build an airport) and "general obligation bonds" tied to taxing ability. With the EU I believe no state requires a balanced budget (and as you suggest, doesn't want to give up that right). Brussels twisted Greece's arm to force them closer to a balanced budget posture by requiring spending cuts.
I suspect that long term maturation of the EU will require something similar with member states required to have balanced budgets, and limiting sovereign debt to revenue projects, and transferring the ability to issue "general obligation bonds" to Brussels.
Great article. I would argue against the feasibility of the second backstop that you mention. The minute the EU even hints at levying taxes to citizens of each country, to repay debt mostly incurred by others, I'd bet you get more than one Brexit-like movement that fractures the union. I'm sure Brussels could argue all they want regarding the fact that it's best for the stability of the EU and that the debt was actually incurred by all of the members, but don't think it would fly by many regular, angry folks.
Hmm, note how the anti-EU movements have all gone away in the wake of Brexit. Neither the AfD in Germany, nor RN in France, etc. advocate for leaving the EU anymore. And while that may change again once the EU imposes taxes on all countries, the legal process would have to be one, where each member country would have to pass local tax laws to levy additional taxes for the EU. In Germany that has been done after reunification in the form of the Solidaritatszuschlag (wonderful German word...), which was an extra tax to help rebuild the East. Originally raised in 1991 for one year, it exists to this day.
I can easily picture a scenario in which anti-EU movements resurface from the levy of additional taxes, which doesn't mean they'll succeed. But my point is that it's very unlikely those taxes would be approved in a good number of countries without <very> strong opposition. A bit different for Germans to approve a solidarity tax to spend within Germany, than Czechs agreeing to pay more taxes to bail out Spanish or Italian debt, while they struggle at home. Although I don't think this discussion will occur in the foreseeable future (and I generally like the EU project).
This is, for the space, a clear understandable analysis. I had not understood the nature of liability for Eurobonds.
From the outset of the Euro, experts pointed to the problem of monetary Union without fiscal Union. It is an obvious flaw. The solution is to create fiscal Union - central tax & spend. It is by no means abhorrent, although some European states may dislike the prospect of paying out more than they receive; a much multiplied version of the current transfer payments.
From the analysis, I remain uncertain that all is well, given I am not an economist.
1. An Individual government borrower is solely liable without recourse to the EU. If there were default, it would not directly hit other states but it could destroy the defaulting country as no lender would lend again; while intra EU cross border trade would be seriously harmed. The credibility of other EU countries could be undermined as well.
2. ESM bonds create limited liability on each EU state; but, if there is any realistic chance of default, lenders would withdraw: no new loans and every effort to recover existing loans. I do not know how lenders have allowed for this risk.
3. SURE & NGEU: joint & several liability on every EU state. More likely that lenders will be accommodating, but on the other side a Guarantor state such as Germany is unlikely to allow a deterioration towards this.
Overall, every EU state is taking a risk of heavy ‘excess’ liability. As such, states such as Germany will likely step in when there is a realistic prospect of some liability, stopping further contingent liability from ever increasing new Debt; refusal to give a guarantee for new loans as they roll over on maturity. I suggest that lenders and countries like Germany will not be equanimous and sit back.
A fascinating subject. The current approach is likely to survive, but not without unforeseen consequences. Since 2003 we have seen that ‘North’ states resent the profligacy of the ‘South’, while the South resents the North for constraints on Southern spending.
Japan (persistent high Debt/ GDP) is not a like for like comparison. Japan has (1) a positive balance of trade, (2) a high % of Bonds held by Japanese rather than overseas lenders, (3) a single Yen currency which is strong.
"seize to exist" should probably be "cease to exist"?
Yes, absolutely. I have corrected it now.
I actually liked "seize". It's similar to "cease", but stronger.
Thanks, especially for the well-made points on unified fiscal policy.
One of the EU‘s founding fathers allegedly said that „the project will advance one crisis at a time“, or words to that effect - so we may get there in the end.
One question, again on fiscal unification: doesn‘t Switzerland also have some degree of wealth transfer between towns (in the same Kanton) and between Kantons?
Yes, both Germany and Switzerland have a wealth transfer system between Cantons and Laenders that helps balance inequalities in tax income.
It's the holidays so here's a long one...
I can understand countering UK opinions on the euro and EU is not unwarranted since it seems most EU criticism functions to produce a better looking UK. (Though early eighties warnings by Labour - they even visited the EU commission back then to find out how one leaves the EU - and James Goldsmith's words on globalisation both seem rather on target).
Still, this longevity pov of the EU/eurozone then would be ‘The Financialized States of Europe’
I would argue:
1 The US (back then neurotically capitalist and democratic - my interpretation of Tocqueville) grew together as it grew economically, and it experienced (and fueled) gigantic steps forward in productivity. (It also produced the world’s first industrial war before 'completion'...). The demographically young US was protectionist until its economy benefited more from free trade.
The pro-free trade EU (for now, i wonder how their clean energy & carbon-taxed-products policies are going to play out internationally), is aging, especially in the least productive member states. In other words: EU laggards are literally dying and euro membership does not seem to make any difference.
2 The eurozone does not seem to inspire a (more) optimistic ie risk taking mindset in member states where it should matter most. Italian politicians in the late nineties publicly said they hoped joining the euro would grow Italian productivity and modernize the economy. I.e a foreign entity/structure should achieve what they could’t (anymore). But the euro mostly numbed them / Italy. Productivity growth rates kept up nicely in the north (though they are worsening now vs the US) but down south you see them decline after 2000 and flatten post 2010. I don't think the euro is very ‘schumpeter-friendly’ there where it should stimulate exactly that in order to make the eurozone a success.
3 Apart from economic and financial matters, dominant EU politicians / parties express a narrow-mindedness and groupthink which results in policies that imo do not exactly underwrite a political shelf life of 50 to a 100 years. On topics like climate, immigration, foreign policy, energy politics i.e. energy security (do they know what that means?) they show a unified vision that renders all wef conspiracy thinking pointless. They don’t conspire, they’re simply utter clones. The people with some kind of individuality left in their circles wisely keep their mouths shut.
Compared to national politics they seem to reproduce clones at a much faster rate, i.e. they seem to be much better insulated from the preferences of electorates. In other words: insulated from the preferences of the boots on the ground. This friction will imo lead to ever greater attempts at media influencing and straight-out censorship.
The writing has been on the wall for a number of years now: any discontent right of center or ‘nativist’ is deemed ‘populist’ * or framed as the result of foreign meddling. This is the EU saying ‘it wasn’t us’. Just like national politicians are eager to blame the EU for unpopular home-measures. In the US Washington may also be (very) unpopular in states, but there it's mostly culture wars where the fights are over, not economics or what the FED is doing - apart from some posturing economically rep's & dem's are almost the same.
The EU is now adding to its arsenal of discontent US culture war-items like DEI and other expressions of fundamentalism - recently the Dutch police has decided it is ''institutionally racist'...While one of the new highly inclusive political parties driving critical theory in the NL has collapsed when it turned out to be 'racist', 'sexist' and of course also 'toxic' & 'unsafe'. And these days one's opinion on the right level of nitrogen emissions determines where one apparently can be found on the political spectrum... It seems EU 'emotional unification' has to happen in an highly divisive environment where voters for major Dutch parties feel more aligned with foreign parties' voters with similar views (and education, employment etc) while they allow themselves to be disgusted (publicly) with local rivals. That is not the healthiest of circumstances.
It's still the national level that can make or break EU unity. And because the national level is fracturing, and with significant segments of society that do not seem to have their pov expressed through Brussel's policies and cultural stances, imo therefore EU media intervention is not only allowed, it's ‘crucial to protect our (our?) democracy’...(I can’t stand the EU and my national gov deciding for me which websites i can see and which are verboten. I don’t think i’m the only one). I cannot see the EU holding things together without it trying hard to create an information 'straightjacket'.
The financial economy may not kill the euro that fast (though good old economic items like productivity (growth) and demographics may kill EU coherence sooner), and i can envision the ECB trying hard to save politicians’ **s forever but…
EU politics - an insulated minority that mixes groupthink with hubris and shows signs that it prefers to cut out about one third to over half of national electorates - are the short term risk.
* For populism i would like to refer to Thomas Frank (What's the matter with Kansas). Here in this interview he points out that with the nice left and the center saying goodbye to blue collar voters it’s not that hard to understand why they end up in the feared ‘populist’ camp. Where else should they go?
SH: Which candidate or president in recent history was most responsible for this turn?
TF: I think Bill Clinton was the pivotal figure of our times. Before he came along, the market-based reforms of Reaganism were controversial; after Clinton, they were accepted consensus wisdom. Clinton was the leader of the group that promised to end the Democrats’ old-style Rooseveltian politics, that hoped to make the Democrats into a party of white-collar winners, and he actually pulled that revolution off. He completed the Reagan agenda in a way the Republicans could not have dreamed of doing—signing trade agreements, deregulating Wall Street, getting the balanced budget, the ’94 crime bill, welfare reform. He almost got Social Security partially privatized, too. A near miss on that one.
https://bit.ly/43GSttY
And i'd point to John Gray, 2023, on Andrew Sullivan podcast: John Gray On The Dusk Of Western Liberalism
Populism as liberals/leftists see it is in reality resistance of working classes against the results of liberal policies…
https://andrewsullivan.substack.com/p/john-gray-on-the-dusk-of-western
Great article, thanks for writing!
I'm much more bullish on the EU and the Eurozone, but it's non-rational all sentiment-driven.
As an Italian (and also a professional in the complex Italian tax system), I can confirm a couple of things that might be overlooked by non-Italians. Italy is a "fractal" piece of Europe, meaning that even after more than 160 years, economic differences persist from region to region, from north to south, just like in Europe, and even in terms of language. While Italian is the official language, countless dialects have survived, and if I move just 60 km to my wife's hometown, I can hardly understand what is being said in the local dialect. Nevertheless all doubts about the possibility of uniting a country with nothing unique have been brushed aside once it happened.
Second point: the resources obtainable through taxation. In Italy, the underground economy, and I'm not talking about organized crime, is still substantial and involves legal activities of professionals in all fields, businesses, and even private employment. I don't want to exaggerate, but in my opinion, a realistic estimate would be at least 20% more GDP than what is officially declared. So, while Italy may be the sick man of Europe in terms of debt, the introduction of new technologies (e.g., state blockchain for transactions) could be a good forced remedy. I hope I've been clear in expressing my point. Therefore, from my perspective, I am almost certain that the European Union will still be here when my children retire.
Your blog is morphing into a must-read periodical.
I enjoyed reading your presentation of the EU/Euro comparison to the USA and Switzerland states. One of the interesting aspects of this structure is to have monetary policy solely outside the state (in the central bank), but fiscal policy inside the über state (and the sub-state). With current central bank structures, in practice that means Bureaucrats control the money and Politicians control the spending.
In the USA most states have "balanced budgets" meaning that the issue no state level debt. Some do not. But Counties and Cities issue both "revenue bonds" (tied to revenue associated with a project, like airport revenue to build an airport) and "general obligation bonds" tied to taxing ability. With the EU I believe no state requires a balanced budget (and as you suggest, doesn't want to give up that right). Brussels twisted Greece's arm to force them closer to a balanced budget posture by requiring spending cuts.
I suspect that long term maturation of the EU will require something similar with member states required to have balanced budgets, and limiting sovereign debt to revenue projects, and transferring the ability to issue "general obligation bonds" to Brussels.
The truth is that Germany used the Euro to decrease their export prices to remain competitive on the backs of countries like Greece and Italy.
Great article. I would argue against the feasibility of the second backstop that you mention. The minute the EU even hints at levying taxes to citizens of each country, to repay debt mostly incurred by others, I'd bet you get more than one Brexit-like movement that fractures the union. I'm sure Brussels could argue all they want regarding the fact that it's best for the stability of the EU and that the debt was actually incurred by all of the members, but don't think it would fly by many regular, angry folks.
Hmm, note how the anti-EU movements have all gone away in the wake of Brexit. Neither the AfD in Germany, nor RN in France, etc. advocate for leaving the EU anymore. And while that may change again once the EU imposes taxes on all countries, the legal process would have to be one, where each member country would have to pass local tax laws to levy additional taxes for the EU. In Germany that has been done after reunification in the form of the Solidaritatszuschlag (wonderful German word...), which was an extra tax to help rebuild the East. Originally raised in 1991 for one year, it exists to this day.
I can easily picture a scenario in which anti-EU movements resurface from the levy of additional taxes, which doesn't mean they'll succeed. But my point is that it's very unlikely those taxes would be approved in a good number of countries without <very> strong opposition. A bit different for Germans to approve a solidarity tax to spend within Germany, than Czechs agreeing to pay more taxes to bail out Spanish or Italian debt, while they struggle at home. Although I don't think this discussion will occur in the foreseeable future (and I generally like the EU project).
This is, for the space, a clear understandable analysis. I had not understood the nature of liability for Eurobonds.
From the outset of the Euro, experts pointed to the problem of monetary Union without fiscal Union. It is an obvious flaw. The solution is to create fiscal Union - central tax & spend. It is by no means abhorrent, although some European states may dislike the prospect of paying out more than they receive; a much multiplied version of the current transfer payments.
From the analysis, I remain uncertain that all is well, given I am not an economist.
1. An Individual government borrower is solely liable without recourse to the EU. If there were default, it would not directly hit other states but it could destroy the defaulting country as no lender would lend again; while intra EU cross border trade would be seriously harmed. The credibility of other EU countries could be undermined as well.
2. ESM bonds create limited liability on each EU state; but, if there is any realistic chance of default, lenders would withdraw: no new loans and every effort to recover existing loans. I do not know how lenders have allowed for this risk.
3. SURE & NGEU: joint & several liability on every EU state. More likely that lenders will be accommodating, but on the other side a Guarantor state such as Germany is unlikely to allow a deterioration towards this.
Overall, every EU state is taking a risk of heavy ‘excess’ liability. As such, states such as Germany will likely step in when there is a realistic prospect of some liability, stopping further contingent liability from ever increasing new Debt; refusal to give a guarantee for new loans as they roll over on maturity. I suggest that lenders and countries like Germany will not be equanimous and sit back.
A fascinating subject. The current approach is likely to survive, but not without unforeseen consequences. Since 2003 we have seen that ‘North’ states resent the profligacy of the ‘South’, while the South resents the North for constraints on Southern spending.
Japan (persistent high Debt/ GDP) is not a like for like comparison. Japan has (1) a positive balance of trade, (2) a high % of Bonds held by Japanese rather than overseas lenders, (3) a single Yen currency which is strong.