A Short Note on the German-French Proposals for Strengthening the EMU

I visited Sendai in 2004.  It is sad to see the destruction inflicted on the city by the 2011 earthquake/tsunami.  I salute the spirit of the Japanese people and their sense of civic responsibility in such extraordinary times.

Yours, thinking about the European-experiment Analyst,

AA

This post is with reference to a recent news item in Reuters.

Essentially what the article states is that France and Germany, the EMU-G2, are pushing for a fiscal union, tax union and a benefits union [1]. 

Where there are proposals there is opposition.  A sampling is here:

* Southern Europe is opposed to the idea of the abolition of inflation-indexed wages.  Inflation in Eastern European nations has structural causes though their muted response on this matter is keeping in line with their political weight in the EMU.   

* Cross-border tax arbitrage vis-à-vis continental Europe has been critical to the success of Ireland's corporate sector and thus it is opposed to floors on corporate tax rates.

* Countries with a strong center-left political constituency are opposed to raising the retirement age (for most people above 62 an increase in retirement age would mean no work or significant underemployment and yet, a delayed onset of benefits).

* The proposal by the EMU-G2 that EMU sovereigns adopt laws that place a cap on their sovereign debt is rather amusing - it has never worked in the past as a sustained institutional practice in any part of the world except in cases where the control of debt accumulation process was handed over to another sovereign.

However the proposals are sound - no monetary union can survive crises without fiscal coordination and a common defense policy.  The latter has become and continues to remain a non-issue as a result of the fall of the Berlin Wall and the subsequent re-orientation of Russia's approach towards outward projection of power.  Thus the EMU-G2 must sow the seeds of a fiscal union in order to perpetuate the EMU.  The only problem is that the ability to set tax rates, the ability to control transfer payments and the ability to respond to political crises with fiscal measures are essential ingredients of sovereignty.  A complete fulfilment of the EMU-G2 proposals will therefore not just make EMU's financial system robust but also put an end to the sovereignty of the EMU member states.  Which is fine except that I do not know of any time in history when a larger state emerged from individual components solely on the basis of a shared notion of common economic destiny and financial stability.  Banks do not make sovereign states.  Economics does not make a sovereign state.  Period [2]. 

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[1] A welfare state is a post-WWII construct and thus the emergence of importance of alignment in benefits policies is a historical oddity.


[2] I am not suggesting that Germany is attempting to create a state in this manner.  At an appropriate time (if it comes at all), Germany will lay the foundations of such a state in the shared cultural values.  A discourse on this matter is way out of scope of this short note.