Germany’s Next Steps: Can you say “transfer union”?

By Steven Hill, IP Journal (Berlin), April 3, 2012

Europe and Greece are out of the immediate headlines for the first time in months, the financial markets apparently soothed. While the calm is likely only temporary, it’s a good time to take stock of where Europe is heading.

At this point, there seems little doubt that some sort of United States of Europe is slowly emerging. For some observers, it’s kind of exciting, like watching a new planet condensing from the clouds and dust of the cosmos. Yet its final form will take years to consolidate, so for other observers it’s also pretty nerve-racking. Continental integration is not for the faint hearted, as a young United States of America learned two centuries ago.

But once a critical number of member states have ratified the recently-negotiated pact for stricter fiscal and budget rules—becoming more like America’s member states, nearly all of which are charged with balancing their state’s budgets—then come the next crucial steps. First, a consensus is forming around the need for job creation and economic growth, and clearly the current austerity regime will not produce that. So we are likely to see some stimulus spending and other policies targeted to help struggling member states.

Then will come a Hamiltonian-like assumption of continental debt, in which Europe will deploy Eurobonds, a debt assumption role will be taken by the European Central Bank, or some other form of debt sharing. The end result of this integration process will be some sort of transfer union, in which the better-off states will subsidize the worse-off nations, much like West Germany has done for East Germany and Western Europe for Eastern and Central Europe. The ceaseless conveyor belt of integration is pulling everyone inexorably in the same direction.

But what will a European transfer union look like? A look at the United States of America gives a flavor of what is to come. The chart below shows how many dollars of federal funding is received by various American states for every dollar it sends to the federal government in taxes:

States receiving the most federal funding per tax dollar paid: 1) New Mexico: 2.03; 2) Mississippi: 2.02; 3) Alaska: 1.84; 4) Louisiana: 1.78; 5) West Virginia: 1.76; 6) North Dakota: 1.68; 7) Alabama: 1.66;8) South Dakota: 1.53; 9) Kentucky and Virginia: 1.51; 10) Montana: 1.47.

States receiving the least federal funding per tax dollar paid: 1) New Jersey: 0.61; 2) Nevada: 0.65; 3) Connecticut: 0.69; 4) New Hampshire: 0.71; 5) Minnesota: 0.72; 6) Illinois: 0.75; 7) Delaware: 0.77; 8) California: 0.78; 9) New York: 0.79; 10) Colorado: 0.81.1

A couple of points are worth noting. First, the order of these lists has not changed very much over time. The Good Samaritan states have been forking over beaucoup dollars to their less-fortunate brethren states for decades. And there is no end in sight to this relationship.

Second, one of the peculiar ironies of the American situation is that the tax transfer states which fork over the most cash—California, New York, New Jersey, Illinois—are some of the most left-leaning states. And those receiving the most charity—Mississippi, Louisiana, Alabama, New Mexico, Alaska, the Dakotas—tend to be the most conservative states. Even more outrageous, if you are from a Good Samaritan state, is that the conservative states are the most vociferous critics of government and welfare and like to throw mud in the faces of their benefactor states on a regular basis.

Gazing into my crystal ball at Europe’s future transfer union, it is pretty clear that Greece, Portugal, and Italy (though perhaps not so much Spain and Ireland) are positioned to be the Mississippi, Alabama, and Alaska of Europe. Many of the newer democracies in Eastern and Central Europe will continue to need assistance as well. And Germany, Austria, France, the Netherlands, Denmark, and Northern Europe in general will be like California, New York, and Illinois, perpetually paying out as the price for gaining a union.

Yet that does not mean the Greeks are going to be eternally grateful to the Germans. Quite the contrary, as in the United States, those shaking the tin cup seem to need to save some face by regularly biting the hand that feeds them.

Given these realities, I am not surprised that the Germans, Dutch, and others have grave doubts about committing to a long-term fiscal relationship in which they will be forever bailing out other member states, or that they would insist on certain conditions before doing so.

But in time, even the Germans will come to recognize that Germany is greater inside a continent that is stable, not only at its core but in its periphery as well. After all, prospering member states will be importers of German exports. And given Europe’s history, in which weaker regions of the continent have become the epicenters of conflict, Germany would not thrive in a sea of failing member states. The European neighborhood must be maintained by all according to everone’s abilities or else the whole will suffer.

Already the German political class, both left and right, is coalescing around this judgment. The center-left Social Democrats have committed to some form of United States of Europe, as have the Greens. Even Germany’s former conservative Chancellor Helmut Kohl has spoken up.

Angela Merkel herself increasingly uses the rhetoric of integration, though the devil is in the details and she is not (yet) there in terms of taking decisive measures toward an effective transfer union or expanded ECB mission.

But that hardly seems surprising. It takes time and a crisis or two (or three) to focus people’s minds and move attitudes. Merkel, to her credit, has been an important transitional leader; the European pilot holding a steady hand on the helm, plowing forward in rough seas while the rest prepare themselves for the necessary sacrifices. Now Europe is halfway across, and everyone agrees they cannot turn back.

The only way forward is some kind of transfer union with a central bank or financial authority that has the mandate as well as the capacity to guarantee the debt of member states. That will also eventually spawn a redesign of some of the European Union’s political institutions to ensure increased levels of democratic accountability and legitimacy. It is just a matter of time.

The ride is going to be bumpy, with important elections in Germany and France ahead, a referendum in Ireland, and who knows what else. So fasten your seatbelts.

STEVEN HILL is a political writer who is the author of Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age (www.europespromise.org). His website can be found at www.steven-hill.com.

1.      Tax Foundation: http://www.taxfoundation.org/taxdata/show/266.html.