Thu Aug 9th, 2012 at 05:46:50 AM EST
Bloomberg has an editorial that seeks to reassure Germany and the richer Eurozone countries on the costs of a transfer union.
Fixing the Euro Would Be Cheaper Than Germans Think - Bloomberg
Like it or not, the euro area will need a similar risk-sharing system [afew: to the US]. Economists have long warned that the member countries’ economic cycles are too far out of sync to coexist without some kind of stabilizing mechanism. Inflation and unemployment rates diverge wildly, and European workers aren’t mobile enough to compensate by moving to where the jobs are.
So what would it cost to turn Europe into a better fiscal union? Let’s try a thought experiment.
The first step is to figure out what kind of fiscal transfer system best suits the euro area. Equalizing income levels need not be the goal -- trade and investment can play that role. What matters for the currency’s viability is diverging growth rates. So, the transfers should be aimed at smoothing them out.
To get a sense of how this could work, imagine a fictional European Stabilization Fund. Countries experiencing relatively fast growth (more than 2 percent, adjusted for inflation) would contribute to the fund. Countries in recession would receive payments equal to 40 percent of their loss in income, a cushion at least as generous as that in the U.S. If the 12 countries that have been in the euro since 2001 all participated in such a fund, how would it have worked out?
Nothing catastrophic for the core, Bloomberg's calculations say. In fact, based on GDP growth, Spain would have been a higher contributor to the fund than Germany...
Which makes one wonder if GDP growth would be the best criterion for such a scheme. What transfer or stabilising system would work best?