United States of Europe: The Next Step

The tension of the interregnum is almost unbearable. A United States of Europe is slowly evolving, like a new planet condensing from the clouds and dust of the cosmos. Yet its final form will take years to consolidate. Once a critical number of member states have ratified stricter fiscal and budget rules — becoming more like the U.S.’s member states, which are all charged with balancing their state budgets — then comes the next step. That will be a Hamiltonian-like assumption of continental debt, in which Europe will deploy eurobonds, or a debt assumption role for the European Central Bank, or some other form of debt-sharing.

Then will come some stimulus spending and other policies targeted to help struggling member states. A consensus is forming around the need for job creation and economic growth, and clearly the current austerity regime will not produce that.

The end result of this integration process will be some sort of transfer union, in which the better-off states will subsidize the worse-off, much like West Germany has done for East Germany and western Europe for eastern and central Europe. Completion may have to wait until after the 2013 elections and a change in Germany’s government, but its trajectory is unmistakably clear. The ceaseless conveyor belt of integration is pulling everyone inexorably in the same direction. What will a European transfer union look like? A look at the United States of America gives a glimpse:

States receiving the most federal funding per tax dollar paid: 1. New Mexico ($2.03), 2. Mississippi ($2.02), 3. Alaska ($1.84), 4. Louisiana ($1.78), 5. West Virginia ($1.76), 6. North Dakota ($1.68), 7. Alabama ($1.66), 8. South Dakota ($1.53), 9. Kentucky and Virginia ($1.51), 10. Montana ($1.47).

States receiving the least federal funding per tax dollar paid:

1. New Jersey ($0.61), 2. Nevada ($0.65), 3. Connecticut ($0.69), 4. New Hampshire ($0.71), 5. Minnesota ($0.72),

6. Illinois: ($0.75), 7. Delaware ($0.77), 8. California ($0.78), 9. New York ($0.79), 10. Colorado ($0.81), according to www.taxfoundation.org/taxdata/show/266.html.

A couple of points are worth noting. First, the order of these lists hasn’t changed much over time. The Good Samaritan states have been paying for their less-fortunate brethren for decades.

Second, one of the peculiar ironies of the American situation is that the most populous tax transfer states which fork over the most cash — California, New York, New Jersey and Illinois – are the most left-leaning states. And those receiving the most charity — Mississippi, Louisiana, Alabama, New Mexico, West Virginia, the Dakotas – tend to be conservative states. Even more outrageous, "red-staters" like to throw mud in the face of their blue-state benefactors on a regular basis.

Gazing into my crystal ball at Europe’s future transfer union, it’s pretty clear that Greece, Portugal and Italy (though perhaps not so much Spain and Ireland) are positioned to be the Mississippi, Alabama and New Mexico of Europe. Many of the newer democracies in eastern and central Europe will continue to need assistance as well. And Germany, Austria, France, the Netherlands, Denmark and northern Europe in general will be like California, New York, New Jersey and Illinois, perpetually paying out as the price for gaining a union.

Yet that doesn’t mean the Greeks are going to be eternally grateful to the Germans. Quite the contrary, as in the U.S. those shaking the tin cup seem to need to save some face by regularly biting the hand that feeds them.

Given those realities, I’m not surprised that the Germans, Austrians, Dutch and others have grave doubts about committing to a long-term fiscal relationship in which they will be forever bailing out other member states. Or that they would insist on certain conditions before doing so.

But in time, even the Germans will come to recognise that Germany is greater inside a continent that is stable, not only at its core, but in its periphery as well. Prospering member states will be importers of German exports. And given Europe’s history, in which weaker regions have become the epicentre of conflict, Germany would hardly be able to exist in a sea of failing member states.

The European neighbourhood must be maintained by all, each according to their abilities, or the whole will suffer.

Already the German political class is coalescing around this judgment. The centre-left Social Democrats have committed to some form of United States of Europe, as have the Greens. Even Germany’s former conservative Chancellor Helmut Kohl has spoken up.

Chancellor Angela Merkel herself increasingly uses the rhetoric of integration, though the devil is in the details and she is not (yet) there in terms of launching an effective solution toward an effective transfer union or expanded ECB mission.

But that hardly seems surprising. It takes time and a crisis or two or three to focus minds and move attitudes. I believe Merkel eventually will be seen as an important transitional figure in Europe’s trajectory. She has been the leader holding a steady hand on the helm, plowing forward in rough seas while the rest prepared themselves for the necessary sacrifices. Now Europe is halfway across, and everyone agrees they can’t go back.

The only way forward is some kind of transfer union and some central bank or financial authority with the mandate and capacity to guarantee the debt of member states. That also will eventually spawn a re-design of some of the EU’s political institutions to ensure increased levels of democratic accountability and legitimacy. It’s just a matter of time.