![Sample our Politics & International Relations journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/5947/TOC-Subject-Sample-2021-Politics-International-Relations.jpg"})
Abstract
Many argue that the euro is handicapped as a currency because European governments are unwilling to pool responsibility for fiscal policy in common institutions. This argument is derived from the theory of optimum currency areas and fuelled by analogy with US experience. It is mistaken. A monetary union does not need a fiscal union to work. Worse, efforts to build European fiscal institutions are likely to distract European policymakers from a more important agenda. Europe needs a fully functioning banking union with a common risk-free asset if Europeans want to stabilise the euro as a common currency. Moreover, it would need these things even if the euro did not exist and all it had was the common market. Financial stability – and not fiscal federalism – is the key to Europe's future. European policymakers should focus their efforts on building the necessary institutions.
Acknowledgements
Many thanks go to Dermot Hodson for helpful comments and constructive criticism. The usual disclaimer applies.
Notes
1 For a good illustration of this kind of reasoning, see Ash, “The Crisis of Europe”. For a more nuanced treatment of the same argument, see De Grauwe, Economics of Monetary Union, 214-7. De Grauwe’s view on this argument has evolved considerably with the different editions of his classic text and his position now is much closer to the argument made here than it was in the past.
2 See Sandbu, “Europe’s Fiscal Union Envy”, and “Money and History”.
3 Some scholars did get close. See Giavazzi and Wyplocz, “EMU”.
4 See the article by Dover in this issue, DOI: 10.1080/03932729.2016.1224545.
5 See the text box in De Grauwe, Economics of Monetary Union, 217-8. For a more general argument about the negative consequences of excessive political centralisation in European economic governance, see Hodson, Governing the Euro, 131-4.
6 See Bergsten, “Why the Euro Will Survive”. Bergsten also mentions the importance of having a ‘fiscal union’ and yet focuses primarily on financial markets and banking union.
7 European Commission, The Five Presidents’ Report.
8 Weidmann and Villeroy de Galhau, “Renforcer l’intégration européenne”.
9 European Council, “Strengthening the banking union”.
10 There are two different issues here. One is that European policymakers should not get distracted by unnecessarily ambitious reform agendas; the other is that they should focus on completing the banking union. The extent to which these ‘ambitious reform agendas’ are really a distraction may be exaggerated; such proposals do not seem to absorb much of the European Council’s attention. See Hodson, “Eurozone Governance”, section VI. That does not mean, however, that policymakers are devoting enough resources to completing the banking union.
11 For two classics, see Eichengreen, “One Money for Europe?”, and Krugman, “Lessons of Massachusetts for EMU”.
12 This data, including regression statistics, is available upon request. US Census Bureau, https://www.census.gov/
13 Again, these regression statistics are available upon request.
14 These model estimates were published on 6 July 2016 and apply to the 2016 fiscal year. Tax Policy Center, http://www.taxpolicycenter.org/model-estimates/baseline-share-federal-taxes-july-2016/t16-0102-share-federal-taxes-all-tax-units.
15 Internal Revenue Service, http://www.usgovernmentrevenue.com/federal_revenue_by_state.php?chart=Z0&year=2014&units=h&rank=t.
16 The Pew Research Center, http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/03/federal-spending-in-the-states-2005-to-2014.
17 See Levinson, “Balanced Budgets and Business Cycles”.
18 The hedging in this sentence has to do with the effectiveness of the balanced budget constraints and the use of fiscal policy for counter-cyclical stabilisation. The bottom line is that the evidence is still ambiguous that the constraints are all that effective or that fiscal policy is used counter-cyclically. See Canova and Pappa, “Does it Cost to be Virtuous?”.’ For the purpose of the argument made here, it is enough to show that fiscal stabilisation is ambiguous.
19 See Mann and Orenstein, It’s Even Worse than it Looks; Hacker and Pierson, American Amnesia.
20 Boren, “Scottish independence”; Dearden, “Scottish independence”.
21 See “Scotland a Year on from the Referendum”, BBC, 14 September 2015.
22 See Jeffery, “Non-Reform of German Federal System”; Reuzsch, “German Idiosyncracies”.
23 The classic reference here is Kenen, “Theory of Optimum Currency Areas”.
24 This critique is developed further in Jones, “European Fiscal Policy Coordination”.
25 For the range of national experiences, see the essays in Hardie and Howarth, Market-Based Banking.
26 For more on this process of policy learning, see Jones, “Reconsidering the Role of Ideas”.
27 See Jones, “Forgotten Financial Union”.
28 “Rebooting the Eurozone: Step 1 – Agreeing a Crisis Narrative”, VoxEU, 20 November 2015. http://voxeu.org/article/ez-crisis-consensus-narrative.
29 See Van Rompuy, Europa in de Storm, chap. 3.
30 See Epstein and Rhodes, “The Political Dynamics”.
31 See Jones et al., “Failing Forward?”.
32 This argument is prominent in De Grauwe, Economics of Monetary Union. See also Jabko, “The Elusive Economic Government”.
33 See questions 36-44 of the official transcript: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-financial-affairs-subcommittee/completing-europes-economic-and-monetary-union/oral/25948.html.