Why 'More Europe' Won't Solve Europe's Fiscal Quandary

(Bloomberg View) -- To a certain cast of people, the solution to every problem in Europe is “more Europe” -- even, or especially, those problems that have been caused by Europe.

The economic crisis that began a decade ago has exposed many flaws in the European economic model. The solution? Some are calling for a euro-zone budget and a euro-zone finance minister.

France’s new president, Emmanuel Macron, is dedicated to the idea. Berlin has signaled conditional support. And Brussels is always happy to accrue more power.

The idea makes superficial sense: Monetary union, most people now accept, doesn’t really work without fiscal union. The European Central Bank is constantly under pressure to loosen monetary policy to help the weakest euro members, and to keep it tight to help the strongest. But currency is a blunt instrument. The “more Europe” thinking is that if the EU had a large budget, it could redistribute wealth to more directly help struggling members. (This is what happens in the U.S.) A powerful finance minister would oversee member countries to keep deficits and debts down and prevent debt crises.

Except that that doesn’t make much sense: As the Financial Times’s Martin Sandbu points out, the U.S. federal budget, hovering at around 20 percent of GDP, isn’t enough to act as much of a macro-economic stabilizer, and nobody contemplates an EU budget of even that scale in the foreseeable future.

Regardless, the so-called debt crises in the euro zone were not ultimately caused by deficits and debts as such, but by monetary phenomena. The euro made Mediterranean countries uncompetitive, leading to slow growth and debt and deficits, and the interest on those debts spiked only when the implicit euro-zone-wide guarantee on those debts was called into question by Germany. Those countries’ debt spiked as Berlin compounded monetary austerity with enforced budgetary austerity, hammering growth and widening deficits further.

But still, just as some keep arguing that Stalin’s and Mao’s famines were not caused by communism, but rather by not enough communism, Macron clearly believes with all his heart that Europe’s problems are caused by not enough Europe.

Hence his economically short-sighted drive to meet the arbitrary European 3 percent deficit target in order to earn “credibility” within the euro zone, as if France’s centrality were in question.

Hence also his call for an EU budget and EU finance minister. The EU budget would aim to stabilize the European macro economy through redistribution. The idea of euro bonds, which would be backed by all euro-zone countries -- meaning in practice Germany -- to bail out more indebted countries, is anathema to Berlin and has been preemptively ruled out.

Macron wants the new rules to provide for fiscal harmonization, meaning that euro-zone countries would have to have roughly similar taxation levels, which would help French competitiveness within the euro zone but is sure to be make low-tax countries such as Ireland scream, so such proposals would have to be watered down.

What of Germany, which is essential to any EU reform effort? Germany historically, and Angela Merkel especially, has always been keen on more European integration -- but also doesn’t want to pay for it. German Finance Minister Wolfgang Schaeuble has favored the idea of an EU budget -- with a little-noticed but all-important asterisk. EU countries’ access to a European macroeconomic stabilization fund would be conditioned on “the bailout fund having more say over national debt and budgets,” he told the German Bild newspaper. In other words, Germany would be happy to pay a little something toward a macro-economic stabilization fund in exchange for having practical control over the budgets of all the euro-zone countries. The commitment to pay into the fund is probably not daunting, because the budgetary orthodoxy rules Germany would come up with would be unattainable, and the money would probably never be spent.

In other words, Macron and the “more Europe” camp are willing to hand Germany control over the euro zone’s finances, in exchange for … well, perhaps nothing.

It’s an offer that Merkel can’t refuse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Pascal-Emmanuel Gobry is a Paris-based writer and fellow at the Ethics and Public Policy Center.

To contact the author of this story: Pascal-Emmanuel Gobry at peg@peg.im.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.