Is the Problem with the Eurozone Intractable?

Deeper fiscal integration of Eurozone economies is needed to make the Eurozone work; yet at the present time, the majority of Europeans want to limit the the EU’s powers

I recently published a paper in the journal Political Quarterly arguing that the Eurozone cannot continue to exist in its present form. My argument comprised four main propositions:

The only way to make the Eurozone work is through deeper fiscal integration of Eurozone economies. Yet wholesale fiscal integration cannot be achieved in the near term, due to the fact that EU citizens continue to identify more with their own nationalities than with Europe as a whole. The Eurozone economies of southern Europe will therefore continue to flounder, leading to further anti-EU sentiment. Anti-EU sentiment may eventually increase up to the point where one or all of these countries leave the Eurozone or the EU altogether.

In support of the proposition that “the only way to make the Eurozone work is through deeper fiscal integration of Eurozone economies”, I quoted several economists who predicted the Eurozone crisis as early as the 1990s. For example, in 1997 the economist Milton Friedman stated:

The drive for the euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.

I also discussed the economic theory of optimal currency areas, and adduced evidence from economists that the Eurozone is not very close to being an optimal currency area. In addition, I noted that deeper fiscal integration of Eurozone economies has in fact been advocated by a number of senior EU politicians, including George Osborne, Giulio Tremonti, Emmanuel Macron, Wolfgang Schäuble, and now Martin Schulz.

In support of the proposition that “wholesale fiscal integration cannot be achieved in the near term, due to the fact that EU citizens continue to identify more with their own nationalities than with Europe as a whole”, I adduced survey evidence that very few Europeans identify more with Europe than with their own country, meaning that there is little public support for the sort of policies that are needed to make the Eurozone work:

A 2015 poll found that less than 25 per cent of Germans, French and Austrians supported the [Greek] bailouts. Another 2015 poll found that 53 per cent of Swedes, 61 per cent of Germans, 64 per cent of Danes and 74 per cent of Finns were opposed to any renegotiation of Greece’s debt repayments, and that sizeable majorities in each of these countries blamed the Greek crisis squarely on successive Greek governments, rather than on either ‘the troika’ (the EU, the IMF and the ECB) or on both Greek governments and the troika. In addition, a 2013 poll found that 55 per cent of German voters would not support a Eurozone fiscal union if it included permanent fiscal transfers and a common budget, whereas only 29 per cent would support such a union.

I also cited evidence that, in the United States (a rather more successful currency union), the majority of people do identify more with the country as a whole than with their own state.

(The third and fourth propositions above are admittedly more speculative, and I will not discuss them here. But you can read about them in the paper itself. Let me know if you want a pdf.)

Political Quarterly simultaneously published a comment on my paper by Dr Waltraud Schelkle of the LSE, as well as a response to her comment, written by me. In my response, I noted that two major new surveys of Europeans’ attitudes to the EU had been published since I wrote my original article: one by YouGov, and one by Chatham House. Both of these surveys found that the number of Europeans who wish to reduce the EU’s powers is far greater than the number who want to expand them. In the Chatham House poll for example, 48% of respondents said that “the EU should return some of its powers to member states”, whereas only 24% said that that “the EU should get more powers”.

Another thing I noted in my response was how the reunification of Germany illustrates the continuing importance of national identity in Europe:

since 1990, approximately €2 trillion has been transferred from West Germany to East Germany in the form of investment, subsidies and state benefits. Obtaining democratic consent for such a large transfer of money — one funded by the aptly named ‘solidarity surcharge’ — was arguably made possible by the sense of common identity that West Germans feel with their counterparts in the East. By contrast, Germans do not feel much common identity with the people of Greece. As a consequence, they were largely unwilling to fund the sort of transfers that could have propped up aggregate demand there during the crisis.

In summary, deeper fiscal integration of Eurozone economies is needed to make the Eurozone work. Yet at the present time, most Europeans want to limit the the EU’s powers. The problem with the Eurozone may therefore be intractable.