To federalize or not to federalize, that is the question. And what is ‘federalization’ to a European? It is a movement toward some unifying centralized control of the member states of the EU, the euro-zone in particular. It is a way of stopping the bad-bond contagion. Maybe.
It is really the let’s-not-say-it-too-loud proposal that came out of the Union’s home-study treaty revision session of late. Oh, no one went so far as to suggest anything like the United States of Europe or anything that far out. But the pressing by Germany, with a modicum of agreement from an otherwise reluctant-in-principle France, led the group to come away with a loosely threaded amalgam of New Deal non-legislation to be laid on the Euro table for approval in early March 2012.
Of course, in the end, it’s always about bonds. Bonds caused the mess --- in a way. Bad fiscal management led to bad bonds. Bad bonds led to bad debt. And that takes us to the notion of the ‘fiscal union.’ This concept, the fiscal union, does not tread on the idea of political union per se, and that’s a good thing. Instead it rests on the fiscal inter-reliance of all those culturally similar, but somehow different, nation states within the common monetary zone, plus ten.
A recent Wall Street Journal article presented an interesting look at Europe’s bond toxicity as compared with American bond behavior on a state-to-state basis. True, Euro nations and U.S. states are not the same thing; but they are similar enough in regard to individual sovereignty within a unified multi-sovereign framework. In the comparison the effects of American state bad debt produced inverse results from what is seen in Europe.
The suggestion is that a European fiscal union would work, with the intractable German view that absolute discipline is required. There are systemic protections in greater centralized fiscal control. But why then does European centralization have risks not found in the U.S. among faltering states? After all, states like California, Illinois, and Michigan have not pulled down their neighbors. In Europe, Greece’s problems reverberated immediately, first with Portugal and Ireland and on to Italy and Spain. Who is next?
The answer could be as simple as the fact that America is comprised of 50 separate states, which presents an inherently sturdier structure. A state here or there going broke doesn’t have any effect on a neighbor or another state further away. No one gets nervous next door or even down the road. A state’s sovereignty is its autonomy. That keeps it in fiscal self-quarantine, at least in theory, and, so far, in practice. One sovereign American state is just another brick in a very large wall compared to Europe.
The wall that is the entire European Union has only 27 of those bricks. More importantly, the euro-zone has a scant 17. The issue is not solidarity, it is solidity. U.S. common currency is diluted by virtue of the 50 states when it comes to bad debt in one or another of them. It is quite different in Europe. The euro has a sphere of obvious influence on those other currencies within the realm. Unfortunately, and ironically, it has an effect on the rest of the world as well.
The laboratory test to verify the anomaly that exists between Europe and the U.S. is seen in how one bad debtor in Europe causes bond rates to shoot up in another struggling member nation, while just the opposite holds true in the U.S. According to an International Monetary Fund report, increased borrowing costs in one state usually lower borrowing costs in other states. Experts have tried to explain why, but there seems to be no definitive answer.
Among the best answers is that the several U.S states are much more tightly integrated economically than the euro-zone. Borrowing costs are protectively buried among many other economic factors in the U.S. The calculated systemic risk for European bonds is high at 31%, according to a UCLA study, but only 12% for U.S. state bonds.
Fiscal union or no fiscal union ---that remains the question. No matter, it is probably not really the answer. There probably is no answer. So what else is new?