A Model for a Fiscal Union? What Europe Can Learn from the German Experience

AuthorThomas Straubhaar,Thorsten Schramm,Alfred Höhn
DOIhttp://doi.org/10.1111/1758-5899.12059
Published date01 July 2013
Date01 July 2013
A Model for a Fiscal Union? What Europe
Can Learn from the German Experience
Alfred H
ohn
PricewaterhouseCoopers
Thorsten Schramm
PricewaterhouseCoopers
Thomas Straubhaar
Hamburg Institute of International Economics (HWWI) and the University of
Hamburg
Abstract
The euro has strengthened the economic differences between a more aff‌luent north and a struggling south, which is
the core problem of the current crisis in the euro zone. A potential solution to this problem could be to transform the
monetary union into a f‌iscal union. This article sketches two different models for f‌iscal unions: a federal structure like
that of Germany, where federal revenues and expenditures are controlled in signif‌icant part by federals laws, which
has an extensive bailout system built in; and a confederal system like that of Switzerland, where Cantons are autono-
mous in their f‌iscal policies but clear bankruptcy rules are implemented. The article describes the reasons for which
the German arrangement, one that strongly relies on income equalisation, have not proven successful in harmonising
the f‌inancial position of the L
ander and municipalities and why bailouts have become rather the rule than the excep-
tion. In consequence Germany has introduced a debt brake that does not allow expenditures to be structurally higher
than revenues. Although it is too early to evaluate the sustainability of such a mechanism yet, the debt brake seems to
be a promising means for preventing an unsustainable built-up of debt under normal economic conditions. This article
concludes that as long as debt brakes are not fully implemented and further f‌iscal harmonisation cannot be expected,
the European Union will still have to rely on market-based regulatory instruments and the disciplinary function of inter-
est rates, possibly culminating in a bankruptcy procedure.
Policy Implications
The German experience with the f‌inancial arrangement between the Federation, the L
ander, and the Municipality
suggests that frameworks that rely on income harmonization and the threat of intervention in case of severe bud-
getary imbalances easily fail in achieving a sustainable budgetary policy in each territorial authority.
A debt break that includes a strict expenditure rule is a promising approach to avoid the built-up of such imbal-
ances in the f‌irst place.
Whether such a debt break can be lastingly enforced in Germany and in the countries that signed the Fiscal Com-
pact remains yet to be seen - particularly in times when shocks outside the government sector (like banking crises)
put pressure on government income and expenditures. Until the enforceability is proved, market-based instruments
that rely on the disciplinary function of interest rates are still needed.
The euro crisis of the 2010s is helping to bring Europe
closer together. Albeit driven more by problems than by
visions, the European economic and monetary union is
gradually moving towards a f‌iscal and transfer union.
Thus, a fundamental shortcoming of the euro is being
corrected because, as we know, the European sovereign
debt crisis revealed the design f‌laws of the euro in full
effect. When the euro was introduced, there had been
©2013 University of Durham and John Wiley & Sons, Ltd. Global Policy (2013) 4:Suppl. 1 doi: 10.1111/1758-5899.12059
Global Policy Volume 4 . Supplement 1 . July 2013
58
Research Article

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