Ifo Viewpoint No. 138: Alliance of the Unequal

Hans-Werner Sinn
Munich, 10 October 2012

The motto of the United States of America is: “E pluribus unum”: “Out of many, one”. Europe’s motto is “In varietate Concordia”: “In diversity harmony” which is officially translated as: “United in diversity”. It is hard to express the differences between the US and the European model any more clearly than this. The USA is a melting pot. Europe, on the other hand, is a mosaic of different peoples and cultures that has developed over the course of its long history.

These differences raise the question of whether a United States of Europe is worth striving for. Many refuse to accept this concept because they do not believe in the possibility of a unified European identity. A single political system like the USA’s presupposes a common language and a single nationality.

Perhaps the idea of a United States of Europe, the dream of by post-war children like myself, can never be realized, but I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, an infrastructure that does not end at national borders and, not least, common security interests.

Banking regulation is the most topical area in which collective action makes absolute sense. If banks have to abide by do’s and don’ts established at a national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards so as to avoid driving business away to other countries, and lure it away from them instead. Regulatory competition thus degenerates into laxity competition since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world.

There are many other similar examples from the fields of standards, competition policy and taxation that are also applicable here. So there are several fundamental considerations that speak for deeper European integration, extending to the creation of a single European state.

The danger of following such a path always lies in the fact that collective decision-making bodies not only provide collective services that are useful to everybody, but also may abuse their power to redistribute resources between the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To stave off this threat, democratic bodies invariably need special rules to protect minorities such as the requirement of qualified majority voting or unanimous decision-making.

The fiscal decisions taken by the ECB Council are a particularly dramatic example of this problem, since they are taken by simple majority by a body that is not even democratically elected. The Council’s decisions lead to a massive redistribution of wealth risks between the Eurozone’s member states, as well as from stable countries’ taxpayers with no stake in the crisis to investors directly affected by it from around the world. The ECB has been providing virtually all of its refinancing credit to the five crisis-stricken countries of the Eurosystem: Italy, Spain, Portugal, Greece and Ireland. All the money circulating in the Eurozone originated in these five countries and was then largely used to buy goods and assets in the Northern countries of the Eurozone and redeem foreign debt taken from there. The US Fed would never be allowed to conduct such a regionally imbalanced policy. The Fed cannot even provide credit to specific regions, let alone states on the verge of bankruptcy like California, for example.

And now the president of the European Council, van Rompuy, backed by most of the troubled Eurozone countries, is again proposing eurobonds and debt mutualisation schemes. These ideas go way beyond the system that exists in the United States of America and the kind of fiscal integration and centralized powers proposed do not even remotely resemble those of the US. Van Rompuy’s proposals are extremely dangerous and could destroy Europe. The path towards a union based on joint liabilities, which the Eurozone is rushing along against the wishes of large parts of its population, is not leading to a federal state in the true sense of the term, i.e. not to an alliance of equals, who freely decide to unite and promise to protect each other.

Furthermore, this path also cannot lead to a United States of Europe simply because a large part of Europe isn’t joining in. Europe is not identical with the Eurozone. It contains many more countries than those that introduced the euro. As useful as the euro potentially could be for the prosperous development of Europe if its obvious flaws were corrected: the way the Eurozone now is developing will split the European Union and undermine the idea of being united in diversity.

The assertion that the Eurosystem could be transformed into the United States of Europe is no longer convincing. The path towards joint liability that has now been embarked upon is far more likely to lead to a deep rift within Europe. For anyone seeking to turn the Eurozone into a transfer and debt union that can even prevent the insolvency of any of its members should be aware that this will require more central power than currently exists in the USA.

Published in a shorter version under the title “Ein Bündnis der Ungleichen”, Handelsblatt, No. 194, 8 October 2012, p. 48, and under the title “Europe’s Path to Disunity”, by Project Syndicate. The text comes from the book “Die Target-Falle” (“The Target Trap”) published by Hanser.

Prof. Dr. Dr. h.c. mult. Hans-Werner Sinn
Präsident a.D. des ifo Instituts