Europe’s shared currency shouldn’t entail Germany bankrolling a debt union
GEORGE Osborne and François Hollande want Angela Merkel to support Eurobonds. These would pool debt issuance among Eurozone governments, allowing them all to fund their spending at the same borrowing rate. The more creditworthy Eurozone governments would thereby subsidise the spending of the less creditworthy.
Merkel thinks that subsidising the spending of profligate governments is a bad idea. Osborne thinks she is being illogical. On Sunday he claimed that “the Eurozone needs to follow the remorseless logic of monetary union towards greater fiscal integration and burden sharing”.
Logic cannot feel remorse or any other emotion. But Osborne should feel remorse for peddling this nonsense. Monetary union does not require “fiscal integration and burden sharing”.
My neighbour and I are in a monetary union. We both use sterling. But this does not require him to guarantee my debts. And should I fail to honour them, perhaps by defaulting on my mortgage, there is no reason why I should be forced out of this union: no reason why I could not go on using sterling.
Nor are governments different from individuals in this respect. The state government of California may soon default on its debt. But both the Californian government and Californian residents will surely continue to use the US dollar.
Or, if you insist on a national government case, consider the fact that Zimbabwe has “dollarised”; both its citizens and government now transact in US dollars. Does this require fiscal integration and burden sharing between the US and Zimbabwe? Not long ago, most countries used the same currency: namely gold. Yet there was no global fiscal integration or global burden sharing.
Trading nations benefit from a common currency because it transmits accurate price signals. “Floating” national currencies do not. Consider sterling. If foreign sales of British-produced goods increase, then demand for sterling and, hence, its value also increases. This reduces the profits that exporters would otherwise earn and so dampens the price signal that would otherwise direct more capital and labour to these successful industries. And vice versa. If exports fall, sterling loses value, which lessens the loss to exporters and slows the proper reallocation of resources.
A single currency avoids this systematic perversion of resource allocation. But this benefit is more than offset by the cost of treating a monetary union as a debt union. Merkel is right about the folly of subsidising governments’ borrowing costs. Because it makes non-voting foreigners pick up the tab, a debt union encourages politicians to spend wastefully on their domestic voting populations.
There is no logical connection, remorseless or otherwise, between sharing a currency and sharing debts. Turning the Eurozone into a debt union has the simple political motive of grabbing German wealth. It will push Europe even faster along its path of waste and decline.
Jamie Whyte is a senior fellow of the Cobden Centre.