When people talk about fiscal union in Europe – and today they talk of little else in the bierkellers and tavernas – they do not really mean fiscal union. The Dutch and the Austrians will not be persuaded any time soon to merge their tax structures and authorities with those of Greece and Italy. Nor does anyone expect them to adopt common benefit levels or health systems. “Fiscal union” means common rules for budgetary discipline across the eurozone.
Formal constraints on state budgets have been adopted widely. The modern debate began with the Gramm-Rudman-Hollings Act, which Congress approved in 1985. The legislation required that the US federal budget be balanced annually, and imposed automatic expenditure cuts if this aspiration was not fulfilled. The Act had no effect on the behaviour of the US government, which continued to run large deficits. In 2002, Dick Cheney famously summarised the experience when he said that Reagan proved that deficits don’t matter.
A range of devices achieved technical compliance with the legislation. These devices continue to prove useful, most recently in enabling the US government to keep functioning during the debt ceiling discussions. The federal budget did finally move into surplus in the late 1990s, the result of economic growth rather than legal obligation. There is, perhaps, a lesson there.
As Chancellor of the Exchequer, Gordon Brown introduced two principles to British public finance. Debt should not exceed 40 per cent of gross domestic product. Much effort was then devoted to ensuring that public investment was taken off balance sheet. Current revenues and receipts should match over an economic cycle. Like the new European Union agreement, this was an attempt to reconcile prudence with policies to sustain growth, by focusing on avoiding a structural deficit. When the long economic cycle seemed to approach its end, it was successively redefined so Mr Brown could assert his obligations had been met. When the credit crunch hit in 2008 and meeting the targets was clearly impossible, they were abandoned without further ado.
Britain and the US lead the world in accountancy, both conscientious and creative. They have an independent judiciary, honest statistical services and relatively honest politicians. But they have been unable to enforce self-imposed rules of budgetary discipline. We are now asked to believe that countries with weaker political structures will reliably implement budgetary disciplines imposed from outside.
They might if there were powerful sanctions. The International Monetary Fund has enjoyed some success in making borrowers bend to its will. But the IMF is backed by the world’s governments, and run by technicians whose advancement depends, not on the applause of an electorate, but on the approval of their colleagues. The IMF can walk away from clients by withholding funds, and this threat is credible. On many occasions, though perhaps not sufficiently many, it has let backsliders flounder.
The EU, however, is managed by squabbling politicians with diverse interests. The purpose of the planned mechanisms is to avoid a break-up of the eurozone and the measures will fail in their purpose if they do not offer a reassurance that no member will be allowed to fail. But the necessary consequence of providing that reassurance is that Europe loses its only effective leverage against recalcitrant members.
After all, rules for imposing budgetary discipline across the EU already exist. The Maastricht criteria require that member states must hold deficits below 3 per cent of GDP and borrowings below 60 per cent of national income. At my last count, this requirement was met in three states among the eurozone’s 17 members – Estonia, Finland and Luxembourg. The sanctions permitted by the treaties have never been enforced and you would have been naive to have imagined otherwise.
Financial markets are an effective discipline on profligate individuals and states because markets cannot easily be bullied or lobbied, and their threat to make the cost of funds prohibitive is effective. Fiscal rules have none of these advantages, however ingenious their construction and however lofty the political rhetoric that accompanies them. To fail to recognise these facts is to ignore the repeated lessons of recent history.