How do you police without a force?

April 25, 2013

–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

You will often have heard it said that the euro zone cannot ultimately survive without fiscal union. This is complete nonsense. The truth is that, even with a full fiscal union, it cannot survive – at least, not with any form of fiscal union that one can imagine all the members signing up to.

This may be culturally difficult for Germans to understand. It is not that they lack experience of the problems of controlling spending by sub-central governments, because German Lander certainly do get into financial difficulties – three or four are virtually bankrupt at the moment, including the City of Berlin, no less. The problem is that this experience is not relevant to the euro zone for two very important reasons.

First, the willingness of frugal Lander such as Bavaria to subsidise a spendthrift like Berlin may not be unlimited, but it is undoubtedly far greater than the willingness of Germans (or Dutch, Finns or Estonians) to subsidise South Europeans. Secondly, on the whole, Germans are people who accept almost unquestioningly the categorical imperative to obey the law, even when, as in the case of the internal finances of the Bundesrepublik, the law is so complex that nobody except the experts understands it.

To see what happens to a fiscal union when these conditions are absent, consider how different things were in Britain under the late-lamented Mrs. Thatcher. In the mid-Eighties, as the Westminster government struggled to control local authority spending, it faced a rebellion by councillors who, when expected to implement budget cuts, resisted in very much the same way as would the anti-austerity campaigners in Greece, Italy and Spain today, if they were in power. In the end, of course, Westminster won the battle, but it had to go so far as to impose fines (so-called surcharges) on the recalcitrant councillors, backed up by the threat of sequestration and ultimately prison for non-payment.

In other words, even in a fiscal union as old as Britain, the ability of the centre to impose its will on the periphery depended ultimately on the brute force of the unitary state, or on what Max Weber called the monopoly on violence.

Now the question is this: without the threat of force, is it really likely that the Greeks and Italians will simply fall in line with spending limits imposed by Germany via Brussels?

Fiscal integration would make a refusal to balance the books far more damaging than it is now, because the “nuclear” option of letting the recalcitrant government go bankrupt would either be impossible, or at least far more complicated and painful for all the other countries than it is in the looser union of today.

Far more serious is the danger that, if the German political class ever convinces itself that a “full” fiscal union will rescue the euro zone, they will almost certainly succeed in selling it to their electorate – after all, this whole sorry euro-mess only happened because Kohl, Genscher and co. managed to convince reluctant Germans to give a green light to monetary union, much against their better judgement.

If that happens, the Germans will wake up to find they are locked into the nightmare of a Europe turned Latin American. Whereas they are currently trying to impose internal devaluation on the Southern Europeans – getting them to reduce costs and raise productivity so as to make themselves more competitive – Germany will have to accept new rules that point in absolutely the opposite direction.

The name of the game will become internal revaluation, raising wages and public sector spending and reducing taxes, because the logic of the welfare state is the same at international level as at national level – you are either a welfare recipient or a worker, a giver or a taker. Fiscal responsibility will become a mug’s game, so Germany will have to resign itself to bankrolling the festivities forever more or itself join the ranks of the feckless – at least until hyperinflation and devaluation of the euro bring the party to an unhappy end.

The bitter irony is that Germans were sold the idea of monetary union as the final instalment of the price of post-war redemption. Yet the predictable outcome has been cartoons in Greek newspapers of Nazis in jackboots and tanks. Germans are quite justifiably outraged. The final irony is that the only way to stop the proposed fiscal union from degenerating into Latin American-style hyperinflation would indeed be to send the tanks into Athens and Rome.

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