EU fiscal union

Here\’s a question: love to know the answer.

OK, so, the euro, it can only really continue with full and proper economic and fiscal union.

The necessarily leads to fiscal transfers: just as within the UK or within the US. The rich regions (London, SE) have to cough up to pay for the poor (Wales, Tyneside).

It will be the rich, Northern, European countries that have to cough up for the poor.

Now, note, I\’m not talking about sorting out the current debt. I\’m talking about decades, generations, long transfers of year by year money. As within the UK or US (and do note that over generations the direction of flow can change. The UK\’s North arguably subsidised the SW in the 19th cent, Michigan is arguably being subsidised now when in the 1950s and 60s it was doing the subsidising).

But the thing I\’d like to know is, how large do those transfers have to be? 0.5% of GDP would hardly be noticed in the rich countries: that\’s less than the current EU budget which, while we complain about it, isn\’t in the grand scheme of things much more than a rounding error (no, I don\’t regard the net payment into the EU as the UK\’s major problem with the EU….I\’m much more worried about the net transfer of the bureaucratic and Napoleonic Law system of the continent to the UK).

But 0.5% of GDP is indeed less than the current EU budget and so won\’t be enough to gives us fiscal union, the amount of redistribution necessary for it, for the obvious reason that we\’re already spending that and haven\’t got the necessary amount of redistribution to make fiscal union work.

So how much is needed?

5% of GDP? 10%? How much is redistributed from London and the SE to Wales and Tyneside? That would be the absolute minimum I would think: the difference between Greece and Sweden is higher than that within UK difference isn\’t it?

And, given that in N Europe the State already takes 40-50% of GDP, do we really think there is room to plonk another 10% (or whatever the number is) on top?

Alternatively, which parts of the current State in N Europe will have to be sacrificed in order to pay for the transfers to the poorer parts of Europe?

So, to the main question: does anyone know what levels of fiscal transfer will be needed in order to make fiscal union work?

10 thoughts on “EU fiscal union”

  1. I think this is misunderstanding the issue. If you believe fiscal transfers are needed (which in itself is a slightly strange position for you to hold, I think) it’s not because one region is poorer than the others. It’s because one region is suffering a cyclical downturn. There’s no reason why a poor country can’t share a currency quite happily with a richer one.

    Tim adds: Two misunderstandings here. Firstly, I’m not saying that I want fiscal transfers: rather, that if we assume that the euro is to continue then that is what has to happen.

    The second is that, well, if we’re only talking about cyclical downturns, what the hell is the Barnett Formula all about?

  2. “OK, so, the euro, it can only really continue with full and proper economic and fiscal union.”

    Why?

    The current problems are *not* because there has been incomplete union. They are because regions have been propped up and spared the need *and ability* to compete with other regions.(And the same is true on member state levels) Spending has been badly managed. Politicians have become too unaccountable.

    Let member nations and regions in member nations compete with each other for income. That’s all that they need to do. Localise tax raising and spending. The ECB and others don’t need to ‘run’ the economy. They are bad at spending our money so should stop. Let trade redistribute wealth.

  3. 1. I realise you aren’t calling for them, I’m saying that I thought perhaps you would be sceptical about the economic stimulus offered by fiscal transfers.

    2. The Barnett Formula has nothing whatsoever to do with providing fiscal transfers seen as necessary in a monetary union. I think the social security system is what you are thinking of?

  4. One problem is that the flows would be reasonably transparent. Within Britain, it’s not even clear who’s subsidising whom – my own guess is that London is largely subsidised, not subsidising, but it seems very hard to find out. The figures I see in the papers from time to time are obviously bogus.

  5. Why do you think London would be subsidsed? Govt buildings, bank bailouts etc?

    I think it’s a bit unlikely in more normal year as tax revenue must be very high – VAT in shops, stamp duty on properties, City salaries etc.

  6. Another misunderstanding: it’s not the monetary union that forces transfers from the rich to the poor. It’s the political union. Sweden pays for Spanish and Irish subsidies even though it did stick with the krona.

    I agree with dearieme that it’s not always so trivial to figure out who is subsidising who in a country. Between countries the monetary transfers are much clearer because of real bookkeeping. It’s hard to tell, for any country, how much the capital region and other administrative centers are subsidized through tax-funded jobs, civil servants’ salaries, etc.

  7. Surley it is not the same in the UK as counties do not issue currency nor debt in any significant manner. Maybe this is what the EU had in mind all along, though – countries becoming regions with no sovereignty.

    “Those pesky countries cannot be trusted”

    To me the solution is Free Banking in Ireland. The govt moves to the Pound, the country stays Euro or follows – up to them.

  8. The short answer is that it depends. Assuming you’re happy to say that people are equally entrepreneurial regardless where they are, then the factors you’re looking to correct with fiscal transfers are based on structural factors rather than pushing cash into a region by itself, as Labour tended to do. All that ended up doing was raising the relative income levels of, say, Tyneside, giving them more scope to consume – but not overcoming the structural reasons why no-one was producing goods for consumption there in the first place. Even if you have a substantial service sector, purchases of non-service goods will lead to a net outflow of cash. Labour’s fiscal transfers were akin to trying to fill a bathtub without a plug.

    While there are tremendous structural factors affecting the relative levels of prosperity within the EU, many of them are legalistic in nature (i.e. working time constraints) rather than physical. It’s possible that the fiscal transfers required to make union work would need to be relatively slight compared to the regulatory changes required.

  9. The only sense in which London is subsidised is a very, very lefty Marxist sense – the Real Hard Working Labour takes place elsewhere, whilst bankers, head offices and marketers in London take their cut of the working man’s toil. While that’s not a completely incoherent point, it’s not one that I’d normally expect Dearieme to be making.

  10. A few years ago I wrote a book calling for the UK’s immediate withdrawal from the EU (“The Future is a Foreign Country”).

    I used these quotes:

    In just the ‘20 years since the rebate was negotiated’, Britain has forked out £170 billion to the EU budget and lost another £220 billion because of our permanent trade deficit with the
    ‘Union’. ‘Our annual financial transfer to the EU is equivalent to the entire Home Office budget. If we stopped our payments, we could give the whole country a 60 per cent cut in council tax. Or, if we preferred, we could abolish capital gains tax and inheritance tax and still have enough left over to scrap stamp duty.’ Source: The Spectator magazine, 12.2.05.

    ‘As the EU takes over more and more of the duties formerly undertaken by the nation states, the need for such a sum is not inconceivable as the continental countries already routinely take 45 to 55 per cent of their annual income in tax. In the USA, a nation which imposes a far lower tax burden on its citizens than European states do on theirs, central government or ‘federal’ spending routinely reaches 20 per cent of GDP. See: http://www.euro-know.org/articles/eumembership.pdf, Pages 1 and 52, and European Commission: Report of
    the Study Group on the Role of Public Finance in European Integration, (“McDougall
    Report”), Official Publications of the EC, Luxembourg 1977, Page 13.

    The latter quote is referring to 25% of GDP, a sum estimated by McDougall in his 1977 report. I have a paper copy of this and copies of my book are available.

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