The Birth of Fiscal Unions

PRINCETON – Fiscal unification is often an effective way to enhance creditworthiness, and it may also create a new sense of solidarity among diverse peoples living within a large geographic area. For this reason, Europeans have often looked toward the model of the United States. But they have never been able to emulate it, because their motivations for union have been so varied.

Desperate countries often consider such unions to be the best way out of an emergency. In 1940, Charles de Gaulle proposed, and Winston Churchill accepted, the idea of a Franco-British union in the face of the Nazi challenge, which had already overwhelmed France.

In 1950, five years after the war, Germany’s first postwar chancellor, Konrad Adenauer, also proposed a union – this time between France and Germany – as a way out of his defeated country’s existential crisis. Political unification was rejected; but economic association has had a brilliant career for more than six decades – until now.

The fundamental idea behind a fiscal union is that poorer, less creditworthy countries can gain from joint debt liability with richer countries. Indeed, one of the most fascinating proposals to this effect came at the beginning of World War I, when the Russian Empire found that its limited capacity to borrow on international capital markets and its low foreign-currency reserves left it unable to create an effective military force.