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?
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.
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.