More “Gooulish” Nonsense about European Fiscal Integration

Austan Goolsby wrote in the WSJ on May 30, “A Fiscal Union won’t fix the Euro Crisis.” I first thought that since he is a professor at the University of Chicago that we might be kindred spirits. But that is not the case. While we agree about the ineptness of a proposed European fiscal union we seem to come at this agreement from very different angles. I dislike the fiscal union because it would create too much pressure towards populist expansionary policies across Europe. He dislikes it because he thinks it won’t do enough to supply a coordinated European government stimulus.  

Here’s his reasoning. First, his data shows that a fiscal union among the 50 US states means that US states routinely subsidize each other.  For example, Minnesotans routinely bail out Mississipians through the magic of a federal government. Goolsby worries that a European fiscal treaty would allow any country to easily veto that kind of inter-state redistribution. Thus in a European fiscal union Goolsby worries the austerity hounds would win. I am concerned about the opposite.

Second, Goolsby blames the woes of Ireland, Greece, Spain and others on the monetary union. He notes that since the monetary union began German’s real wages have grown slower than productivity while the opposite happened in the peripheral countries. Thus, the monetary union – according to Dr. G (how many times can I type Goolsby?) – has made the peripheral countries less competitive. This might not be so bad but the monetary union prevents these countries from overcoming this competitive disadvantage through currency devaluation. Dr. G laments that without an exchange rate the only avenue left for these countries is “moving, inflating, struggling, or subsidizing”. Thus he wants the stronger European countries to either subsidize the weaker ones or he wants them to inflate.

Wow. Can we check the facts please? The US federal experiment succeeds because some states subsidize the rest? That is Dr. G’s main explanation for decades of US growth? The only choice for Europe to improve the lot of Italians and Greeks is inflation/subsidy from Germans and Finns? The implication is that the countries that have benefited from monetary union should be the ones doing the subsidizing and inflating. This is the secret ingredient necessary for EU growth?

From Dr. G’s analysis one should find in the years after 1998 when the monetary union began, the peripheral countries were weakened while Germany and some of the others were strengthened. I found a table of real GDP growth figures for OECD countries (  http://www.oecd.org/document/3/0,3746,en_2649_34109_2483901_1_1_1_1,00.html ) with data for the years from 1987 through 2007). There is little support for Dr. G in a pre- post- comparison of real GDP annual growth around the year 1998:

·         Finland’s growth rate was higher after monetary union (2.2% per year versus 1.7%)       

·         France’s growth rate was about the same in both time periods at about 2.2% per year

·         Germany’s average growth rate fell from 2.6% per year to about 1.6% per year after monetary union

·         Ireland’s growth rate fell very marginally after monetary union from 6.1% to 5.8% per year

·         Italy’s average annual real GDP growth also fell marginally from 1.9% to 1.6%.

·         The Netherlands’ growth was helped by monetary union – from 2.5% to 3.1%

·         Portugal’s growth rate almost halved from 3.4% per year to 1.8%.

·         Spain improved considerably after monetary union – from 2.7% before to 4.6% per year afterward.

Germany and Spain’s performances are just the opposite of G’s conclusion since Germany seems to be weakened while Spain was improved by monetary union. Using data on standardized unemployment rates across these same countries shows that except for Portugal, Eurozone countries were greatly improved by the monetary union. For example, Spain’s unemployment rates averaged well above 15% in the years before 1998. Afterward Spain’s unemployment rates averaged about 10% and fell to 8.3% in 2007. It is true that trade patterns after 1998 changed international competitiveness within the Eurozone – but these changes are not mirrored in overall economic indicators like output and employment.

The most outlandish ghoulish assumption, however, is that somehow economic growth and prosperity has much to do with national stimulus and subsidization. I know of no growth theory that supports such an unwarranted conclusion. Growth is all about marshalling inputs and using them in increasingly productive and innovative and competitive ways.  In today’s cynical and skeptical environment stimulus and subsidy are even less useful. There is a widespread concern about more stimulus since governments are deeply in debt and so little has been accomplished in the way of competitive restructuring of financial, product, and labor markets.

Back to the main point about increased fiscal integration of Europe. Dr. G is right – a tighter fiscal cooperation among the 17 Eurozone countries would not be a good idea for Europe. But the reason for the failure is not that it would bring too little stimulus and subsidy. It is precisely the opposite.  Such a democratic project among the nations of Europe would soon produce a majority for the same kind of populist policy trash that now dominates the US. I wouldn’t wish that on anyone! A fiscal union is not warranted by monetary union nor is it in the best interests of any of these countries.