Wolfgang Schäuble’s Politically Unrealistic, Economically Useless Fiscal Union

German Finance Minister Wolfgang Schauble
German Finance Minister Wolfgang Schauble talks to the press prior to an Eurozone Council on June 21, 2012, at the Kirchberg conference centre in Luxembourg

Photo by Georges Gobet/AFP/Getty Images.

Earlier today I made a referrence to “America’s fiscal union,” meaning a system in which federal fiscal policy creates large place-to-place transfer payments. It’s important to understand that when members of Angela Merkel’s government talk about their desire to create a European “fiscal union,” they’re talking about something else.

Indeed, as elucidated by Finance Minister Wolfgang Schäuble, a “fiscal union” would have none of the attributes that make America’s single currency work combined with a level of centralization that even the United States lacks:

Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up to the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?”

This is, again, a much greater level of centralization than we have in the United States. American states and localities make their own fiscal policies autonomously. Municipalities declare bankruptcy every now and again, and though it’s been a long time since a state defaulted, it did happen in the 19th century and in principle might happen again. And states decide for themselves what kind of borrowing they want to engage in, and face the consequences from financial markets accordingly. It strikes me as deeply implausible that Finland and Portugal are going to tie themselves more closely together in this regard than Vermont and New Mexico.

But the really goofy thing here is that Schäuble’s plan still doesn’t do anything to fix the problem of differential shocks. All it does is codify into law the principle that if something bad happens to push Finland’s unemployment up, that the Finnish government will have to respond by implementing fiscal policy that exacerbates the recession.