Ready or not, Transfer Union here we come

By Steven Hill, Social Europe Journal, February 21, 2012

The tension of the interregnum is nearly unbearable. A United States of Europe is slowly evolving, like a new planet condensing from the clouds and dust of the cosmos. Yet its final form will take years to consolidate. Once a critical number of member states have ratified stricter fiscal and budget rules — becoming more like America’s member states, which are all charged with balancing their state’s budgets — then comes the next step. That will be a Hamiltonian-like assumption of continental debt, in which Europe will deploy eurobonds, or a debt assumption role for the European Central Bank, or some other form of debt sharing.

Then will come some stimulus spending and other policies targeted to help struggling member states. A consensus is forming around the need for job creation and economic growth, and clearly the current austerity regime will not produce that. So these things will come to pass because Europe really has no other choice. The ceaseless conveyor belt of integration is pulling everyone inexorably in the same direction.

The end of this stage of the integration process will result in some sort of a transfer union, in which the better-off states will subsidize the worse-off states, much like West Germany has done for East Germany and western Europe for eastern and central Europe. Completion of the current evolutionary stage may have to wait until after the 2013 elections and a change in Germany’s government, but its trajectory is unmistakably clear.

What will a European transfer union look like? A look at the United States of America gives a flavor of what is to come – and also why the German, Dutch and northern Europeans in general have been wise to take their time before plunging into this. Look at the chart below, which 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: $.61 2. Nevada: $.65 3. Connecticut: $.69 4. New Hampshire: $.71 5. Minnesota: $.72 6. Illinois: $.75 7. Delaware: $.77 8. California: $.78 9. New York: $.79 10. Colorado: $.81

(info from Tax Foundation http://www.taxfoundation.org/taxdata/show/266.html)

A couple of points are worth noting. First, the order of these lists hasn’t changed very much over time. States move higher or lower by a few notches from year to year, but the general order remains the same. The subsidized American states have been receiving handouts from their fellow member states for decades. And those Good Samaritan states have been permanently forking over beaucoup dollars to their less-fortunate brethren states. There is no end in sight to this relationship, it will stretch onward in perpetuity.

Second, one of the peculiar ironies of the American situation is that the most populous tax transfer states which fork over the most cash — California, New York, New Jersey and Illinois – are the most left-leaning states. And those receiving the most charity — Mississippi, Louisiana, Alabama, New Mexico, West Virginia, the Dakotas – tend to be conservative states. Of the 22 states that voted for Republican presidential candidate John McCain in 2008, 86 percent received more federal spending within their state than they paid in federal taxes in 2010; the states that contributed more in federal taxes than they got back in federal spending were more likely to have voted for Barack Obama (though there are some exceptions, like subsidized New Mexico, a rural Democratic state. See this link for details).

So there are distinct political dimensions to this American transfer union. In U.S. political parlance, the blue states bail out the red states, even as the red states whine and complain about “big government.” And it’s not just the grandstanding conservative politicians, as a recent New York Times article illustrated: the red state denizens don’t want to give up the Social Security checks, Medicare benefits, and earned income tax credits that provide their safety net, even as their conservative lawmakers complain about government deficits. Even more outrageous, red staters like to throw mud in the face of their blue state benefactors on a regular basis.

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

Yet that doesn’t mean the Greeks are going to be eternally grateful to the Germans. Quite the contrary, like in the US those shaking the tin cup seem to need to save some face by regularly biting the hand that feeds them.

Given those realities, I’m 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. Given Europe’s history, in which weaker regions of the continent have become the epicenter of conflict, Germany would hardly be able to exist in a sea of failing member states. The European neighborhood must be maintained by all, each according to their abilities, or the entire neighborhood 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 which together are the frontrunners for forming the next government. Even Germany’s former conservative Chancellor Helmut Kohl has spoken up, indirectly criticizing his former protégé, current Chancellor Angela Merkel. Merkel herself increasingly uses the rhetoric of integration, though the devil is in the details and she is not (yet) there in terms of launching the final solution 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. I believe Merkel eventually will be seen as an important transitional figure in Europe’s trajectory. She has been the leader holding a steady hand on the helm of the boat Europa, plowing forward in rough seas while the rest of the crew and the passengers prepared themselves for the necessary sacrifices. Yet now Europe is halfway across that stormy sea, and everyone agrees they can’t go back.

The only way forward is some kind of transfer union and some central bank or financial authority that has the mandate as well as the capacity to guarantee the debt of member states. It’s just a matter of time.