The EU can learn from the US when it comes to fiscal rules

A comparison of the formation of the dollar and the euro

The debate over the creation of the euro and the related European fiscal rules has been going on for more than 30 years. This development is not compared to the way the dollar and its associated financial rules were developed. It is understandable that this comparison has not been made because there are important constitutional differences between the US and the EU that are politically very sensitive. After all, the US is clearly centrist in an important part of its policy and wants the EU to be a partnership of sovereign states. Nevertheless, important similarities can be found between the two formation processes. For example, both the euro and the dollar were introduced in a union with highly decentralized power relations, and as a result, were not legal tender in the union itself when they were introduced. In America, when the dollar was introduced in 1792, power rested mainly with the then-wealthy southern colonies. The Civil War changed the balance of power, and the dollar became the only legal tender thereafter. The FED was not established until 1913. Last but not least, economic integration among American states is incomplete. In this way, rich states go astray by shifting tax sources. History doesn’t really repeat itself, but the predicaments facing the EU and the euro’s growing pains are less unique than they sometimes seem.

European approach

The dilemmas described above have been resolved by the European Commission in its proposal to revise the European financial rules.New economic governance rules are future-proof‘ 26 April 2023. In this proposal, the European Commission seeks a middle ground between independent Member States on the one hand and integration on the other. As described above, the US found this neutrality only after a very long and difficult process. Viewed in this way, the creation of the euro is moving fast; We’ve been “only” for over 30 years.

The debate over the creation of the euro and the related European fiscal rules has been going on for more than 30 years. This development is not compared to the way the dollar and its associated financial rules were developed.

A middle ground between independent member states and integration is sought in two ways, namely increasing national responsibility and strengthening enforcement within the EU framework. It takes the form as follows. Member States must draw up a plan for at least four years: fiscal targets, tackling macroeconomic imbalances, reforms and investments. The European Commission is thinking together with the Member States. The European Commission provides ‘technical information’ to member states that meet deficit and debt standards to ensure they remain intact. The European Commission is drawing up a ‘technical pathway’ for member states that do not meet these standards. In this ‘technical path’ the deficit falls by 0.5 percent per year, real government spending does not grow faster than national output and the deficit and debt meet benchmarks in the medium term. These member states still have a gradual path when it comes to implementing reforms and investments. If this fails, the adjustment period may be shortened. This thinking of the European Commission is beyond binding; Not even for member states that meet deficit and debt standards.

Judgment

The approach of the European Commission described above is realistic. Because more independent member states can act against each other, for example through policy and tax competition, the overall effect is less than that of the regions. Domestic tensions weaken the EU as a whole relative to other economic blocs. By contrast, Member States’ starting positions are so different that uniform budgetary rules can easily have the opposite effect for many Member States, thus standing in the way of convergence.

But ‘New economic governance rules are future-proof‘ will not be the last word. In this way, even if a monetary union without a fiscal union is difficult, the debate about a fiscal union is avoided. Because imbalances between euro countries can only be resolved through detours – and therefore not efficiently – for example by stopping loans and credits at the ECB. As described, the United States uses a form of tax resource transfer to even out inequalities between states. Another debate that is still being avoided is the deficit standard of 3 percent and the debt standard of 60 percent. Rules, by the way, have no economic basis. Perhaps combining these two topics offers a way out. For example, the United States does not actually have deficit and debt provisions in the federal budget; After all, the debt ceiling is always raised when pressed. Last but not least, a financial union would mean that the euro would become a single legal tender in the entire union.

to quote as

Cees de Geest, “The EU can learn from the US on fiscal rules”, My judgeMay 6, 2023.

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Alex Bromos from Sydney, Australia; Carved by my Ken (talk) 00:05, 29 August 2014 (UTC), CC BY 2.0Via Wikimedia Commons