Thursday, 29 January 2015

OMG. Mark Carney advocates fiscal union for the EZ.

Mark Carney (governor of the Bank of England) advocated fiscal union for the Eurozone (EZ) in this recent speech. As he put  it, “Europe’s leaders do not currently foresee fiscal union as part of monetary union. Such timidity has costs.”

The basic flaw in fiscal union is thus. If the people in any geographical area see themselves as being one and the same people (culturally and in other ways) then fiscal union will follow almost automatically. In contrast, if the above cultural etc union is not there, then passing laws designed to bring fiscal union just won’t work.

To illustrate, if German taxpayers saw Greeks as fellow Germans who had had a spot of bad luck, then there’d be few problems extracting taxes from Germans to support “Greek Germans” in southern Europe, EVEN IF there was no formal fiscal union. Indeed, at the time of German reunification, West Germans saw East Germans as Germans and (apart from a few grumbles) were prepared to dish out billions to help East Germany.

And for an illustration of how fiscal union doesn’t work even where two peoples are VERY CLOSE culturally etc, look at Scotland. Around half the Scottish nation doesn't want fiscal union with the rest of the UK. And that’s despite sharing the same language, race and religion. And despite having enjoyed fiscal union for over two centuries and despite having fought side by side in two world wars.

Moreover, even if German generosity towards Euro periphery countries were to increase significantly and EZ fiscal union was implemented, a decline in competitiveness in one or more periphery countries cannot go on for ever. To illustrate with an extreme example, fiscal union does not mean that people in uncompetitive areas / countries will get away with doing one hour’s work a week and expect to get the same wage as people in competitive areas / countries.

If lack of competitiveness is just a TEMPORARY phenomenon in every EZ country, then fiscal transfers will help deal with periods of uncompetitiveness in any given country. But if the tendency to corruption and awarding everyone unearned pay increases  is a PERMANENT feature in periphery countries (and that seems to be case in Greece) then fiscal union won’t spare them much pain in the long run.

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