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Kevin O'Rourke: A Summit to the Death
One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

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... fiscal union is an essential counterpart to monetary union. If the gumbo industry goes into decline, driving the US state of Louisiana into a recession, residents will pay fewer federal taxes and receive more fiscal transfers. These financial flows are a natural counter-cyclical mechanism that helps local and regional economies to weather bad times. In a hypothetical European fiscal union, there would certainly be transfers from Germany to the periphery in 2011, but a properly designed setup would have ensured flows to Germany in the 1990's, as it struggled to cope with the costs of reunification with East Germany.

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With this in mind, the most obvious point about the recent summit is that the "fiscal stability union" that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a "fiscal union," as some have done, constitutes a near-Orwellian abuse of language.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 05:11:47 AM EST
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