Tuesday, September 3, 2013

You really believe fiscal union will solve Europe’s problems?

You've been told a thousand times something to the effect that “Europe’s mistake was to implement monetary union without fiscal union”. And you believed it, didn’t you?
And 99% of Europe believes it, because wishful thinking is less effort than real thinking. By real thinking, I mean thinking through exactly how fiscal union will work and hopefully so as to avoid “Greek tragedies”.
So how would fiscal union deal with a country, like Greece, that awards itself excessive pay increases and or allowed prices to rise too far with the result that the country becomes uncompetitive?
Well for a while the problem could be masked by employment subsidies or investment subsidies for firms in uncompetitive regions / countries. Britain (a “fiscal union”) dealt with high unemployment areas in the UK since WWII via those sorts of subsidies (amongst other things). Same goes for various other countries.
But there would inevitably be limits to the generosity of Euro countries funding such subsidies. If excessive pay / price increases in uncompetitive countries continued, then the Euro authorities would have to impose public spending cuts and/or tax increases on uncompetitive countries. Unemployment would rise, followed by protests and riots. Sound familiar?
Of course the above sort of subsidies could smooth the transition from uncompetitiveness to competitiveness. But had the recent banking crisis not intervened, the EXISTING SYSTEM for dealing with lack of competitiveness (deflation designed to bring internal devaluation) would not have been thust down the throats of periphery countries in such a sudden and brutal manner.
So would fiscal union be a big improvement on the existing system? I’m not betting on it.

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