The European Union, to be accurate the Euro Zone, keeps on next to the abyss. The straight meetings, the ECB’s measures and so on, have absolutely not finished solving the problems of which many lie in the design of monetary union. Despite lots of advice in the past, Europeans wanted to join faster than the magnitude of the project allowed.
The flaws in the design are closely linked with the Theory of the Fiscal Federalism. This theory tries to show what the optimal level of choice is inside a multi-government structure. The summarized conclusions are the following:
Resources assignments: The theory asserts that the optimal level is decentralization.
The reason here is due to the fact that the efficiency of this sort of measures are linked with an assessment of the situation. Therefore, proximity is a key point.
Income distribution: The optimal level is centralization.
The main point is looking for convergence among places of the area through a tailored resource allocation.
Macroeconomic stability: The optimal level is centralization.
As well as the reasons of homogenizing both monetary and fiscal policies across countries, states or whatever, it is necessary that the decisions are adopted in the market size, i.e. European market.
From here, it seems easy to figure the flaws of the integration out. In the first years of the Euro, these flaws were overlooked because of the healthy global economy but at this time they are on the table. Thus, the Euro Zone as a whole and its state members have to make a choice. The options can readily be explained by “the trilemma of the global economy”.
The economic theory asserts the integration as desirable because of efficiency:
- It allows taking advantage of the economies of scale due to the fact that the market size is bigger. This often translates to lower prices.
- It allows widening of the kinds of products.
- It makes the market more competitive and it allows for better allocation of the resources.
The national sovereignty (the Nation-State) reflects the fact that the problems of the state must be solved by the state powers.
And in the third corner, the democratic politics are the political contracts between the policymakers and the society in terms of social protection and macroeconomic stability.
The picture and the explanation of the corners above show the options of the states members in the Euro Zone. With insight it can be seen that there is a trade-off between the alternatives. The states must choose two of the three, but they can never have the three fully. This is due to the fact that the asymmetry between the economic-financial sphere and socio-political decisions is increasing with integration.
So, what can we do?
In my own opinion, I consider that Europe should walk toward more integration if it wants to play a key role in the global economy. It should become a federal Europe handing over the national sovereignty to an upper level, the European level, in order to embrace the postulates of fiscal federalism theory.
