Getting Serious About Europe's Fiscal Future
In her re-election campaign, which seems to be going well, German Chancellor Angela Merkel has so far succeeded in avoiding controversy over a potentially divisive issue: the European Union's fiscal prospects. After the election, this question will refuse to be ignored.
Two very different ideas about the EU's future are in contention. The first, advanced by France's new president, Emmanuel Macron, calls for closer fiscal integration -- in effect, to align European governance more closely with the demands of the single-currency system. The other, preferred by Merkel's Christian Democratic Union and its allies, pays lip service to the EU ideal of "ever closer union" but opposes fiscal-policy integration and the big new EU budget that would go with it.
Sooner or later, this fundamental disagreement will have to be resolved.
Merkel told reporters recently that she supports the idea of a euro-zone finance minister and a euro-zone budget. The new minister's job would be confined to making EU policy-making more coherent, and the budget would be used to disburse limited funds to countries undergoing economic reform. Consistent with this idea, Merkel also expressed support for a European Monetary Fund, modeled on the International Monetary Fund, which would provide financial aid -- conditional on policy reform -- to distressed economies.
These aren't bad ideas. But they fall far short of the system that would be needed to let the EU function well as a single-currency area. The real fiscal counterpart to the euro's fixed-exchange-rate system is a so-called "transfer union" of the kind that spans the U.S. and that operates within the euro area's separate national economies.
Such a system requires, for instance, a common unemployment-insurance program, enabling stabilizing flows of resources from regions doing well to regions doing less well. Lacking the flexibility afforded by movable exchange rates within the euro bloc, this kind of deeper fiscal integration is crucial. Without it, economic prospects will diverge too widely from country to country -- as Europe's experience since the crash shows. Those divergences then become a source of acute political stress.
There's no disguising that a fiscal system of this kind might involve persistent infusions from the union's most successful economies -- Germany, above all -- to its least successful economies, including Greece, Portugal, and lately Italy. That's why resistance to the idea in Germany is strong, and why Merkel and Macron are talking about two different things when they say "a budget for the euro area."
A European fiscal union as far-reaching as America's may be unattainable for the foreseeable future. But deliberate steps in that direction -- bigger steps than creating a minister with little power and a budget with hardly any money -- will be required to let the union prosper as it should. In the interim, moreover, greater fiscal flexibility than Germany prefers should at least be entertained for countries stuck on a path of slower growth.
For electoral purposes, a rhetorical alliance based on constructive ambiguity is fine. In building a stronger Europe, France and Germany will need real innovations and a genuine meeting of minds.