EU Pact Could Be Germany’s Nightmare

by Clive Crook

Bloomberg
December 14, 2011

The remedy for the European Union’s financial crisis, EU leaders have decided, is “fiscal union.” But if the agreement they reached last week ultimately leads, in the fullness of time, to a real fiscal union, the country most likely to be unhappy is Germany, its original leading proponent.

Truly, understanding the workings of the EU mind is not always easy.

Jens Weidmann, president of the Bundesbank and a council member of the European Central Bank, made the point about fiscal union and “fiscal union” last week. This is not a union but a “pact,” he said. Sovereign rights would be preserved, and the EU would have no power to intervene directly in a country’s finances. Euro-area countries are promising to obey stronger fiscal rules of the sort they already have in the Stability and Growth Pact, with new automatic penalties (yet to be spelled out) if they fail.

Weidmann is right. Stronger fiscal rules do not make a fiscal union. A real fiscal union looks like the United States - - with federal spending, federal revenue and federal debt.

The salient characteristic of such a system is cross-border fiscal transfers. When an economic shock strikes one part of U.S. with particular force, fiscal resources flow in its direction automatically. If California slumps, its contribution to federal revenue falls and federally supported spending in the state goes up. In this way, taxpayers in the rest of the U.S. help cushion the blow.

More