Fault line at the heart of Europe can’t be closed
London may be happy to bankroll the North – but Germany won’t pick up the bills for Greece
What does it take to achieve a stable economic and monetary union? As Europe has discovered to its cost, it’s about quite a bit more than a unified currency and interest rate. Perhaps more than anything else, success depends vitally on the willingness of richer regions to subsidise poorer ones, or at least to bail them out when the going gets tough. Without these so-called fiscal transfers, monetary union will always be prone to political and financial crisis.
Such transfers are taken for granted within national borders; they are part of the cement that binds a country together. But they become much more problematic when one nation is expected to pay for another.
New figures from Britain’s Office for National Statistics, published this week, are a timely reminder both of the scale of what’s required and of just how far Europe has still got to go before it achieves the supposed promised land of sustainable monetary union.
The big takeaway from the ONS analysis is that London and the South East essentially bankroll the rest of the country. This should scarcely surprise; what’s so striking is rather the sheer magnitude of it. London, the South East, and just recently the East of England are the only British regions which last year produced a fiscal surplus, with London generating £3,070 more in tax revenues per head than its share of public expenditure. Everywhere else consumes more than it pays, and in the more extreme cases, far more.
Scotland, by the way – sometimes thought of as irredeemably attached to the London teat despite its attempts to break free – is by no means the most extreme example, consuming “just” £2,824 more in public spending per head than it generates in tax revenue.
Much worse is the North East at £3,827, Wales at £4,545, and Northern Ireland at an astonishing £5,437, roughly equal to 30 per cent of per capita GDP. This seems to make the province the biggest recipient of fiscal subsidy anywhere in the advanced world, and makes the notion of eventual Irish reunification – reinvigorated by Britain’s vote for Brexit – seem somewhat questionable. Never mind diehard Unionist sentiment; the Republic of Ireland would not take kindly to such a liability, even if affordable, which it is unlikely to be for such a small economy.
Virtually all nation states will have some version of these transfers, which occur because spending on public services and welfare is applied uniformly across the country as a whole even though income and tax payments vary considerably.
The ONS numbers tell two overarching stories. One is just how dangerously dependent the country has become on the economic powerhouse of London and the South East. London is the goose that laid the golden egg; in leaving the EU, we damage its economy at our peril.
If the rest of the country could be more like London, Britain’s economic problems and its mountainous public debts would be things of the past. Alternatively, if London could decouple itself from its dependents, its citizens would live like kings while all around were reduced to penury. But of course nobody seriously suggests divorce; the public policy challenge is rather to make the nation as a whole as successful as London.
Some other countries seem to do better at addressing these regional disparities than us. Hundreds of billions of euros have been poured into the former East Germany since reunification in 1991, financed in part by a special tax on prosperous West Germans – the so-called solidarity surcharge. This has helped lift per capita GDP in the East from 42.8 per cent to 72.5 per cent of West German levels over the past 25 years. That’s quite a catch-up, even allowing for mass migration from East to West. Our own fiscal transfers seem to have been less effective in closing the gaps.
The other lesson to be drawn concerns the euro, whose incomplete nature Emmanuel Macron, the new French President, has likened to “half pregnancy”. Good luck with making it whole, because the fiscal transfers that are just about tolerated by West Germans as a price worth paying for reunification are anathema when it comes to Greece, Italy, Spain or even Germany’s new best friend, President Macron.
Shared history, language, culture, welfare systems and institutions make such transfers perfectly natural within countries. They become politically toxic when it is another tribe. Solidarity works at a national level, even if in Britain it is being sorely tested by the widening gulf in entitlements brought about by devolution. But when applied across national borders, all it does is stoke resentment and division.
By the skin of its teeth, the single currency has managed to survive its first serious economic downturn. It may even weather the next two, given the weight of political capital vested in it. But the transfer issue will always be there, a giant fault line at the heart of the project, and eventually it will prove its undoing.