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Love Thy Neighbour, Keep Thy Money

As long as the powerhouses of Europe prefer austerity over economic solidarity, we must remain pessimistic about the future of the continental union.

Sixteen years ago, the Italian economist and Harvard Professor Alberto Alesina forecasted that the Euro would not help to achieve a “political union in Europe”. To the contrary, Alesina wrote, "with all probability, contrasts between European countries would increase together with the tendency to coordinate monetary, fiscal and other policies. Forcing countries with different cultures and traditions to uniform their policies […] is a useless and potentially very dangerous operation”.

Alesina also outlined why the US dollar work but the Euro doesn’t. American salaries are more flexible and people tend to move more freely between states. In Europe, cultural nationalism is dominant in the workplace. Or can anyone imagine a Frenchman leading a top German company, or a German leading an Italian business? (In a way, the answer is yes: Many Italian companies are already owned by German or French holdings.)

Mobility and flexible salaries compensate for what Alesina calls “regional asymmetrical shocks”: if a state is in a crisis, its people move and salaries are reduced. Moreover, “for every dollar less in disposable income, around 30-40 cents are paid back through fiscal compensations”. This means that eventually booming California may transfer money to crisis-ridden Oregon.

The idea was that the same could happen with Europe, yet Alesina was right once again: the opposite has occurred. The fight over the EU budget for the 2014 to 2020 fiscal years has been a clear sign of the problems. Bureaucratic meetings to negotiate budgetary terms are almost reminiscent of the “Five-Year Plan” discussions in the former USSR.
They are long, boring, and rather secretive. More worrying is the fact that the latest rounds of talks focused primarily on reducing transfer funds.

Budgetary cuts are advocated most actively by the British: Across the English Channel, skepticism is on the rise, and the new conservative Tory campaign focuses on a possible British exit from the EU, and on making political borders congruent with geographical ones. Yet the British may also be content if the current gridlock remains unsolved, if the disequilibrium of economic power between the North and the South of Europe continues. A fragmented Europe is a blocked Europe, observers in London note with a certain delight.

In contrast to the American situations (where California might aid Oregon), Germany does not accept the idea of transferring wealth to Spain or Greece. If money is spent on those countries, it usually results from pressure that forces Germany to act. This is understandable: if Oregon were in crisis, its citizens – besides accepting fiscal transfers – would normally accept deep reforms as well. This is not the case in European crisis countries, which have been forced to accept “austerity” as the sole response to crisis. Austerity aims to save the day without upsetting corporate interests in Southern Europe. But of course, cutting state budgets during a crisis makes reforms impossible. Europe has thus stalled: Germans are afraid that if they open their wallets now, no further reforms will be introduced in Greece, Italy and Spain – not to mention the outright fear of Berlusconi’s reappearance on the streets of Rome.

But even if Greece, Italy and Spain committed to reforms, would Germany have a difference stance? I do not think so.

On a domestic level, Germany faces a similar dilemma: Southern Germany is fed up with feeding Berlin with cash. Berlin, the country’s capital and a city-state, relies on subsidies from Bavaria and Baden-Württemberg for around thirty percent of its budget. Each resident in Berlin bears the equivalent of 18,000 Euros of municipal debt. Huge sums of money have been wasted for the construction of an airport whose opening is constantly delayed and which may never open, according to the German newspaper “Bild-Zeitung”. Instead of feeding Berlin, Bavarians are more interested in helping their own left-behind areas. Yes, there are a few of those even in Southern Germany.

The surprising element is how much Germany’s internal problems are mirrored in Italy. Like Bavaria and Baden-Württemberg, the producing areas of Northern Italy transfer much of their budgetary surpluses to other regions. In Italy, the transfer is from the North to the South. The nagging problem of the Euro is that “political borders” are not congruent with “economic borders”. Lombardy, Veneto and Emilia Romagna have much more to share – in terms of business and economic culture – with Bavaria and Baden-Württemberg than with beautiful Calabria and Apulia. Joining up forces to solve the structural problems of Europe may bring long-term and endurable advantages. Yet, if we trust Alesina’s predictions, this does not seem to be the most likely option.