FISCAL POLICY AND THE EURO

That fiscal policy is considered off-limits is one of the few things all of the E.U.'s Member States can agree on. If a national government can't make its own decisions on how to tax its citizens and residents, and on how to spend the proceeds, then what is it good for? That is the main reason why even today (and despite forests of populist newsprint suggesting otherwise) the E.U.'s budget still represents only a tiny part of E.U.-wide GDP.

That consensus meant that when the Euro was established at the beginning of the noughties, it included a centralised monetary authority, the European Central Bank, but not a concomitant centralised fiscal authority. The ECB could set Euro-wide interest rates, but there would be no European Revenue Authority to levy taxes.

Unfortunately, those decisions ignored history. In the Middle Ages, few people used money; or, if they did, they used various forms of money. Over time, emerging states gradually adopted a single currency. However, in doing so, they also built up fiscal authorities that could accept payment in that single currency. Monetary and fiscal institutions grew together.

The technocratic architects of the single currency knew that there was a gaping hole in its structures. However, given the political opposition of Member States to fiscal coordination at the time (the 1990's), they judged that half a loaf was better than none. Besides, at first it didn't seem to matter. The early years of the Euro took place against a background of the growth and rising prosperity of the noughties. Strong countries like Germany ended up issuing bonds with virtually the same interest rate as laggards like Greece and Portugal. Fiscal coordination remained off-limits.

That idea has been blown out of the water by the financial crisis of the past three years. People now realise that the obligations of laggards are in no way the same as the obligations of the strong. True, the means to bridge the gap are called borrowing or a European Stability Mechanism or something similar. But since all borrowing by Governments ultimately has to be paid for by some form of taxation, we are now in the world of fiscal policy.

Indeed, so great is the gap between the weak and the strong of the Euro area that it stands at a crossroads; go back to national currencies or plough ahead with ever greater fiscal coordination. And since the former would be almost impossible, the only real option is the latter. Nowhere is this change of heart more noticeable than in that most Eurosceptic of countries, the United Kingdom. In a speech given at a business conference before Friday's meeting of E.U. Finance Ministers in Poland, Chancellor George Osborne said that "my European colleagues need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration".

What is startling about this quote is that the U.K. is not in fact a member of the Euro, but retains its own currency, the pound. People on the wilder fringes of the Conservative Party believe that the crisis in the Euro area is a once-in-a-lifetime opportunity to redefine the country's relationship with the rest of Europe. However, Mr. Osborne is advised by the clever folk in the Treasury, who know that Britain needs the Euro to survive if it is to survive itself. To take but one fact, Britain exports more to small, wobbly, property-devastated, Euro-member Ireland than to Brazil, Russia, India and China combined.  

So, the emergence of a crisis looks like leading to the very result that everybody swore that they wouldn't accept, namely greater fiscal coordination. Perhaps, therefore, I should withdraw my comment about ignoring history. Because history also shows that that is the way the E.U. has always developed. Those technocratic architects were cleverer than we thought.

Walter Blotscher