Early EU exit may pay us dividends

Can the euro really unite divergent states or will it lead to the union’s implosion?

IWOULD venture a guess and say that the European Union (EU) is the most widely trafficked example of the successful creation of closer economic ties among geographically proximate countries. And I would venture another guess, that the Eurozone is most often portrayed as the gold standard for monetary unification. Despite the apparent success of the European integration effort, I, however, remain sceptical about the bloc’s potential for further integration. On occasion I have even toyed with the idea that a lack of further integration, coupled with economic stagnation, may eventually cause the union to disintegrate. Why? Because I view the achievement of fiscal unity among member states as a chimerical proposition. And why does this matter? Well, any introductory economics textbook will emphasise the proper coordination of fiscal and monetary policies as a prerequisite for a well-functioning economy. In other words, how can the EU properly coordinate monetary and fiscal policies in the absence of a coherent, binding and overarching fiscal stance, which is periodically informed by a major central budget? In short, it can’t.

Even EU policymakers will concede that fiscal coordination and rules among decentralised national fiscal policies are essential. But this, by all appearances, remains elusive. By and large, most decisions about taxes and expenditure remain at the national level. Moreover, the much vaunted “common stabilisation mechanism”, which has achieved totemic significance as a precursor to deeper fiscal integration, is undermined by frequent fiscal delinquency. What’s more, perennial fiscal offenders agitate for regionally redistributive EU budgets and common EU debt issuance, whereas the disciplined, frugal northern states, such as Germany, resist these ideas.

Why the resistance? Because fiscally prudent member states get annoyed about having to cross-subsidise spendthrift ones. Take for example the divergent views on how to fund the bloc’s response to the Covid-19 pandemic – stark divisions between pennywise northern members and poorer eastern members, on the one side, and highlyindebted, profligate Mediterranean members, on the other side, are well documented. And, the strict enforcement of new fiscal rules, as per the EU’s fiscal surveillance framework, will not find fertile ground among the more highlyindebted countries. But most of all, I don’t see a willingness among member states to give up their fiscal sovereignty – spending and taxation policies are too important an election tool to sacrifice for the greater good of the union.

Am I alone in my dire prognostications? No, not at all. When, as far back as 2005, the Foreign Policy magazine asked its contributors “to name one taken-for-granted thing that they thought was overrated or would not last”, the late Christopher Hitchens selected the euro (this, despite the fact that he was an ardent pro-EU campaigner). Hitchens argued then that the euro system had become a “two-tier one” and that the bottom tier was occupied by countries like Greece, Portugal, Spain, and Ireland – a recipe for discontent. Word on the street also suggested that the membership of these “quasi-indigent and thriftless banana republics”, made a top-tier country, like Germany, hark back to the heady days of the deutsche mark. Was his prediction wrong? No, only ill-timed.

And in 2021, Nobel laureate, Joseph Stiglitz, maintains that the EU and the euro are doomed projects because the original conception of the euro was economically bankrupt, the EU leadership’s reaction to Brexit was too antagonistic (i.e. threatening retribution on anyone else wishing to leave), and the EU project works for corporations and not for ordinary citizens. Stiglitz also believes that the underlying operational framework of the EU is fundamentally pro-German, and that Germany wields her resultant power in an economically erroneous and politically impervious manner, which is leading to economic divergence instead of convergence, and the eventual penury of many EU states (already Greece has a 25 per cent unemployment rate and a 50 per cent youth unemployment rate). Stiglitz offers the Eurozone’s abandonment of the implementation of burden sharing measures, such as the issue of Eurobonds, as hard evidence of Germany’s policymaking hegemony. In summary, Stiglitz foresees a future of a sequence of EU crises, a stagnation of economic activity, and possibly a break-up.

I know this discussion will not soften Brexit’s financial blow for embargoed UK fishers and farmers, or alleviate the frustration of bureaucracy-addled, paper-chasing UK importers and exporters. Neither is it a gleeful expression of schadenfreude. But in the end, I can’t help myself asking whether you and I will end up celebrating the fact that the UK had taken the early exit option, and had dealt with the attendant trade and travel difficulties, instead of later on dealing with the far worse consequences of a forced separation due to the EU’s implosion?

Fiscal coordination between EU states remains elusive, despite a common currency, says Mario Du Preez