A More Perfect Monetary Union

WARSAW – The eurozone is often considered an experiment – a monetary union without political unification. Those who make this claim seem to have in mind a model of a single state, which possesses two relevant features: limited fiscal sovereignty for regional and local governments and a substantial common budget from which regions hit by asymmetric shocks can receive transfers.

Those who claim that “political union” is necessary for the eurozone appear to focus on the second feature, despite the fact that fiscal constraints on local governments are clearly a typical and important component of single states. In this sense, they ignore the fact that the European Union’s Stability and Growth Pact has been in principle an important component of political union, not its substitute. Indeed, the eurozone’s current fiscal problems do not result from the lack of a large common budget, but from weak enforcement of the Pact.

More fundamentally, monetary unions – in a broader sense – have existed not only within single states, but also in groups of sovereign states, the gold standard being the most notable example in history. The experience of such monetary unions offers two lessons. First, they required fiscal discipline in the member states, which was true under the gold standard, with its informal norm of balanced budgets. Second, they existed without any fiscal transfers from a common center, because such a center did not exist. Instead, a great deal of flexibility, including within their labor markets, facilitated adjustment to asymmetric shocks.

It is clear that there is no scope in the foreseeable future to extend the EU budget in order to increase fiscal transfers to eurozone members affected by sharp declines in consumption. This would require an enhanced level of European identity, something which the Union’s political elites cannot generate artificially.  But the crucial point is not that a large common budget in the eurozone is politically impossible to achieve, but rather that it would not address the main problem: the weakness of the mechanisms safeguarding fiscal discipline in the member states.