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Does Europe Really Need Fiscal and Political Union?

Summary:
There is a growing sense in Europe, among conservatives and progressives alike, that fiscal and eventual political union is necessary to maintain the euro without damaging economic performance or democratic values. But there is also an alternative, much less ambitious view, according to which only banking union is needed. CAMBRIDGE – Greece’s combative former finance minister, Yanis Varoufakis, and his nemesis, former German finance minister Wolfgang Schäuble, were at loggerheads on Greek debt throughout Varoufakis’s term in office. But they were in full agreement when it came to the central question of the eurozone’s future. Monetary union required political union. No middle way was possible. The Year Ahead 2018

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There is a growing sense in Europe, among conservatives and progressives alike, that fiscal and eventual political union is necessary to maintain the euro without damaging economic performance or democratic values. But there is also an alternative, much less ambitious view, according to which only banking union is needed.

CAMBRIDGE – Greece’s combative former finance minister, Yanis Varoufakis, and his nemesis, former German finance minister Wolfgang Schäuble, were at loggerheads on Greek debt throughout Varoufakis’s term in office. But they were in full agreement when it came to the central question of the eurozone’s future. Monetary union required political union. No middle way was possible.

This is one of the interesting revelations in Varoufakis’s fascinating account of his tenure as finance minister. “You are probably the one [in the Eurogroup] who understands that the eurozone is unsustainable,” Varoufakis quotes Schäuble as telling him. “The eurozone is constructed wrongly. We should have a political union, there is no doubt about it.”

Of course, Schäuble and Varoufakis had different ideas regarding the ends that political union would serve. Schäuble saw political union as a means to impose strong fiscal discipline on member states from the center, tying their hands and preventing “irresponsible” economic policies. Varoufakis thought political union would relax creditors’ stranglehold on his economy and create room for progressive politics across Europe.

Nevertheless, it is remarkable that these two officials from opposite ends of the political spectrum arrived at an identical diagnosis about the euro. The convergence is indicative of the growing sense of the need for fiscal and eventual political union if the euro is to be maintained without damage to economic performance or democratic values. French President Emmanuel Macron has advanced similar ideas. And the leader of Germany’s Social Democrats, Martin Schulz, has also thrown his weight behind a “United States of Europe” in recent days.

But there is also an alternative, much less ambitious view, according to which neither fiscal nor political union is needed. What needs to be done instead is to de-link private finance from public finance, insulating each from the malfeasance of the other.

With this separation, private finance can be fully integrated at the European level, while public finance is left to individual member states. This way, countries can reap the full benefit of financial integration while national political authorities are left free to manage their own economies. Brussels would no longer be the bogeyman, insisting on fiscal austerity and drawing the ire of countries with high unemployment and low growth.

Dani Rodrik
I am an economist, and a professor at the Harvard Kennedy School. My most recent book is Economics Rules: The Rights and Wrongs of the Dismal Science (Norton, 2015). I was born and grew up in Istanbul, Turkey. I still follow Turkish politics very closely, as you will find out if you spend any time with this blog.

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