Federalism or bust for Europe? - by Jean Pisani-Ferry

August was quieter than feared on the European bond markets. So, while resting on Europe’s beaches and mountains, policymakers could take a step back from the sound and fury of the last few months and think about the future. Is the eurozone sleepwalking into becoming a United States of Europe? Is it exploring uncharted territory? Or are its constituent nation-states drifting apart?

To answer these questions, the best starting point is the US. The model of a federal union that emerged from its history consists of a single currency managed by a federal agency; closely integrated markets for products, labour, and capital; a federal budget that partly, but automatically, offsets economic disturbances affecting individual states; a federal government that assumes responsibility for tackling other major risks, not least those emanating from the banking sector; and states that provide regional public goods but play virtually no role in macroeconomic stabilization.

This model served as a template for the European Union’s architects, notably for the creation of a unified market and a common currency. But, in several respects, Europe has diverged significantly from the American model.

First and foremost, Europe has not established a federal budget. Back in the 1970s, there was still hope that common spending would eventually amount to 5-10 per cent of EU GDP, but this dream never materialised. The EU’s budget today is no larger than it was 30 years ago: a meagre one per cent of GDP.

Unlike in the US, where federal public spending grew as a consequence of the creation of new expenditure programmes throughout the 20th century, public spending was already high at national level when Europe began to integrate. Significant federal spending programmes could have emerged only from the transfer of existing national programmes to the European level. Not surprisingly, such transfers were strongly resisted.

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