No fiscal federalism without community building

Written by Amitai Etzioni | November 16, 2011 | 1 Comment | Theme: Europe as a political economy, Global Europe

European officials are seeking to solve the grand design failure of the Euro-Zone by constructing a major facade right on top of the gaping fault line. From a sociological viewpoint, the main defect of the Euro-Zone is not that it created a common currency without forming the institutions that can fashion a common fiscal policy—but that the citizens of nations involved neither understood nor agreed that their economic fate would be conjoined. To now fashion a European finance ministry with powers to make the member nations heed zone-wide fiscal policies (e.g. keep their deficits below a defined level or veto specific spending by the national governments)—to introduce fiscal federalism—will provide some of the needed institutions but not the essential consensus on which such policies ought to draw. It is only this kind of consensus that can provide the new institutions with the essential legitimacy they require.

Fiscal federalism reflects civil service arrogance and elite snobbery, because it assumes—possibly unwittingly—that those who govern know what is good for their people and hence the people’s expressed preferences can be ignored, nor need one make major efforts to seek to change these preferences to bring them in line with the policies considered prudent. This approach ignores that one cannot run roughshod over all the people all the time. To impose fiscal federalism under these conditions will lead only to more alienation. And while one cannot predict how this alienation will express itself, one can foresee that it is going to be mightily disruptive.

One may argue that the new fiscal policies could be subjected to review and approval by the European Parliament, the European Council, or some other representative body and hence would reflect the people’s consensus. These bodies, though, have well known structural problems: Many of the potential bodies include non-Euro-Zone nations, they often reflect an aggregation of national interests but not EU-wide or Euro-Zone-wide needs, and they are not considered true representatives by many millions of Europeans. Moreover, from a sociological viewpoint, their defect runs deeper; it concerns not a democratic deficit but a community deficit. This is the case because, when a group of nations follow a common fiscal policy, this means that some will have to make sacrifices for others. Thus, if the economies of some nations are overheating, and the shared fiscal policy calls for cutting government expenditures and raising revenue—those nations whose economies were in low gear to begin with will sputter. If higher deficits are tolerated, those nations with strong credit ratings will suffer disproportionally, and so on and on.

Members of communities are willing to make such sacrifices for each other and the common good. This is the case because communities entail strong bonds of affinity, a core of shared values, and a culture of mutual commitment. Hence people are willing to make major sacrifices for members of their extended family, tribes, ethnic or racial groups, and the nation—sacrifices they are extremely reluctant to make for non-members. Thus, Northern Italians have long made major economic sacrifices for Sicily (and more generally the South) because the Northerners pay more taxes and get fewer benefits from the state. Although every once in a while some observer will complain about the considerable transfer payment involved and non-serious threats of secession are made, Northern Italians continue to indulge the Southerners because they are all members of their community; they are fellow Italians. In contrast, when Germans, French, Finns, or Brits are called upon to bail out the weaker Euro-Zone nations, there are sharp limits to the sacrifices they are willing to make.

An even more telling example is the willingness to make the ultimate sacrifice. Members of communities are willing to die for their family, ethnic or racial communities, and, most assuredly, their nation—but nobody is willing to risk even a limb for the EU or the Euro-Zone. It follows that either the Euro-Zone will build up a supranational community, one that will have some of the attributes nations currently have—or there will be limits to the sacrifices members are willing to make for each other, sacrifices that fiscal policy requires.

One may say that when people agreed to join the Euro-Zone, they agreed, at least implicitly, to make such sacrifices for one another. However, it seems that this was not understood by those who voted in favor of joining the Euro-Zone. They were persuaded to join on the grounds that a common currency would benefit all those who joined—somewhat like how free trade advocates hold that all who participate in a reduction of barriers to the flow of trade would benefit. There is no evidence that most people were told of, let alone understood and consented to, the need to make major sacrifices for other nations in the zone.

If the preceding analysis is valid, the nations of the Euro-Zone can either move to a much higher level of integration that includes fiscal federalism as well as major community building drives, aiming to bestow on the zone some attributes now monopolized by national communities—or they will have to scale back their conjoined activities, especially the common currency. They cannot stand between two steps.

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