Why fiscal union won’t work in the Eurozone

Every man and his dog old premier are now patting the Eurozone leaders on the back for coming up with the idea of ‘fiscal union’ for the Eurozone. This was something that was opposed under both Thatcher and Blair, even with strong pressure from the rest of the EU.

Having fiscal union makes no sense at all. Fiscal union basically means that all the ways in which the government can influence demand and inflation, such as taxes, interest rates, money supply, are the same across the whole of the EU.

The reason we are in the crisis we are in is because countries like Greece, not only being economically unstable, suffered high inflation when joining the Eurozone, and the single interest rate meant it’s economy was growing and contracting at a different rate to the rest of the Eurozone due to lack of ability of its government to influence money supply because it couldn’t keep to the ‘growth and stability pact’.

I think that the single interest rate is however important – it sets a ‘base-line’ for which all the EU counties and their inter-country regions can work towards in order to converge their local economies with the rest of the EU over the long-term.

I believe, as I have for nearly 10 years that fiscal policy needs to be set at a regional level and not a national one, so certainly not at a supranational EU-wide level.

One just needs to look at the UK to see why this should be the case. Because fiscal policy in the UK is based around what is good for the South East of England, then this is making it difficult for Scotland, Wales and Northern Ireland to grow their economies. If however the economies of these countries were run on the basis that their local tax policies were for the purpose of adjusting taxes to take account of the single interest rate, then there would be greater economic convergence over a longer period which would bring economic benefits to the regions in terms of equal prosperity in terms of wages, lifestyles and goods prices.

A policy moving towards harmonisation of fiscal policy for the whole of the Eurozone without first achieving economic convergence will only make problems worse. This is because a single fiscal policy could only ever work if each part of the Eurozone economy was fully converged. As we know the economies in Greece, Germany, France and Italy are so different that centralising fiscal union rather than decentralising it further will only make matters worse.

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