Goolsbee: Europe Badly Misunderstands How A Fiscal Union Should Work

Austan Goolsbee

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In December the leaders of the EU agreed to a fiscal compact, which Ireland will vote on tomorrow. It would sanction countries that spend too much or don’t sufficiently cut their debt. Former Obama economic advisor Austan Goolsbee says that’s not the sort of fiscal union Europe needs, and it won’t work for them. EU policymakers don’t understand what’s behind the success of the fiscal union in the United States he writes.

In a Wall Street Journal editorial, Goolsbee says that fiscal union in the United States has been “primarily an engine of subsidy”. In Europe, Northern states like Germany are unwilling and perhaps politically unable to subsidise the periphery.

From the editorial:

“The U.S. fiscal union has worked, in no small part, by enabling subsidies to the Mississippis without requiring the approval of the Minnesotas. It creates an important form of insurance. When Texans suffered from the collapse of the oil market in the 1980s, they could rely on the fiscal union to help them. When Texas boomed with rising oil prices in the 2000s, it contributed to the union to help harder hit regions.

Giving Northern Europe a veto over Southern Europe’s budgets will not hold a monetary union together. The euro zone will continue to need the weaker countries to stomach decades of high unemployment to grind down wages.”

Goolsbee goes on to argue that there are some other options for Europe, including much greater labour mobility from the south or higher inflation. Language barriers and German opposition make either difficult, leaving “suffering or subsidies” as the only options. 

Read the entire article at The Wall Street Journal

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