If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.
But looking to Europe might be even more accurate.
For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”
And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.
The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.
Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.
This is nonsense.
The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.
And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.
Heck, the evidence is very strong that decentralized fiscal systems lead to much better outcomes.
So why is Europe’s political elite so enamored with a fiscal union and so opposed to genuine federalism?
There’s an ideological reason and a practical reason for this bias.
The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).
The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.
In the case of Italy, both reasons probably apply. Government debt already is very high in Italy and growth is virtually nonexistent, so it’s presumably just a matter of time before the Italians will be looking for Greek-style bailouts.
But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.
The Italian finance minister…served as former chief economist of the OECD.
You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.
But here’s the man-bites-dog part of the story.
The German government also seems open to the idea, as reported by the U.K.-based Independent.
Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?
As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.“
But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.
The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, called for a euro zone parliament (not elected, but comprising European Parliament members from euro area countries)
and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.
And since the German approach is disliked by the Greeks, then it can’t be all bad.
Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.
But “can’t be all bad” isn’t the same as good.
Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.
So you can see why Europe’s political elite may be even more foolish than their American counterparts.
Germany + Finland + Holland = ~105 million people.
Italy + Spain + France= ~173 million.
That is the fundamental arithmetic that will decide the issue.
And as you can see there is a very high proportion of voters favoring integration in the taker nations, while the giver nation electorates are almost split. So the electoral competition is even more uneven.
Once these Northern European countries give the south a vote in supranational government, they are done — they have crossed the rubicon.
As a matter of fact they already have, more or less. Not only is the southern majority in favor of a new layer of inter-country wealth transfers, but virtually the entire Brussels bureaucracy is also in favor — what a surprise! They that is what they manage!
Hence their destiny is sealed.
Already declining all by themselves, growing at rates that barely match half the world average, these countries are going to give the key to their wallets to a majority that is growing at a quarter or less the world average.
What do you think is going to happen? Does one have to be a genius to figure this one out?
Internal redistribution inside each one of the northern European countries has already demotivated people to the extent that they cannot even grow half as much as the world average. Now, as a solution ! (lol) they propose an additional layer of inter-country permanent transfers!
The innate propensity of the voter-lemming towards suicide, in all its glory.
In practical terms,
That “eurozone parliament”,
That “budget commissioner”,
Those “certain set of rules agreed by eurozone members”,
…are they all going to be german creations? Even if so, for how long?
Germany may have good initial influence at the initial creation of these entities (as a precondition to acquiescing to them), but in the longer term parliaments, commissioners and rules will be controlled by the European majority. French will vote for parliamentary members, the commissioner will be Italian, and the rules will be more Greek and Spanish. The German minority will have to yield to the pan european majority.
And the majority will communitize whatever is left of the German wallets. I say whatever is left, because Germany herself seems to be growing at barely half the average world rate. Hence she’s in decline all by herself — even before the Italians and French get in the game of sharing wallets.
This has already happened.
Germans thought that they would give up their strong currency for a euro currency made in the image of the strong mark. Yes,… initially. Now a mere decade has passed and the Italian head of the ECB is already printing money in larger proportions than the century old Fed. Why? Because a majority of eurozone governments/citizens want to print. It is after all an indirect and slower motion method to transfer wealth from German savers to the consuming south. People do not understand the economic mechanics. People just ask for unearned wealth and politicians and economists find ways to provide it. For as long as it lasts. Hoping the decline will be gradual and they will not be blamed or someone else in a future political term will eventually catch the heat. And heat for what? They did, after all, what a majority of people wanted.
One way or another, Germans are poised to give control of their wallets to the southern supermajority.
Perhaps it’s a coincidence perhaps not, but Germans seem to have this fatalistic tendency. They build wealth only to eventually ruin it all in one big collectivist idea. This will be the third time now they do this. Their latest collectivist idea is the EU. Merging into a majority that cannot even grow at half the average world rate-AND- inevitably give them electoral power over their wallets. Mighty idea that is…
[…] the only really interesting thing about German policy is whether the country’s politicians will be dumb enough to underwrite the profligacy of some of their […]
[…] bottom line is that Macron should drop his statist European-wide proposals and put all of his focus on fixing […]