European Parliament President David Sassoli discusses the Covid recovery plan in Brussels, July 22.
Photo: Francois Lenoir/Associated PressThe European Union’s fondest fans are more or less thrilled with last week’s major coronavirus spending spree. Leaders of EU member states agreed to pour €750 billion into fiscally strapped members such as Italy.
Those fans should be warier of getting what they’ve wished for. A similar aid package is proving controversial in the U.S.—the fiscal union where Europeans mistakenly believe this sort of thing is easy.
Europeans have long looked across the Atlantic with envy. America boasts a single currency and also the ability to redistribute tax money and borrowed cash from prosperous zones of its continental economy to those that are less well-off. True believers in the EU argue their bloc requires the same to function economically and politically.
The Covid-19 pandemic has provided an opportunity for European integrationists to go for broke (figuratively and in time perhaps literally) in emulating what they think is the U.S. model. The European Commission will issue bonds backed jointly by all EU members, and then apportion the proceeds to governments partly as grants and partly as loans based on national need.
There’s only one problem. America’s fiscal system works nothing like the way the Europeans seem to think it does.
It’s true that Americans are at least somewhat willing to let the federal government spend a lot of money in a crisis—a trillion dollars here and a trillion there in a pandemic. This mostly takes the form of the sort of “stabilizers” that discerning European economists desire for their continent, meaning the suite of social-welfare benefits and federally funded public-works projects intended to smooth out consumption during a recession.
Yet while this money may be laundered through block grants to state governments, it amounts to a form of aid from U.S. taxpayers to individual fellow Americans in need. Even then Americans rarely agree on the dollar amounts and specific forms of aid, and that sort of haggling is what we pay Congress to do.
This isn’t what the EU will do under its fiscal plan. The EU lacks the political consent to create and the bureaucratic ability to administer its own continentwide spending programs. It must instead assess the need for each member state to stabilize its own economy and then weigh that government’s capacity to fund itself. Those governments found most wanting will receive the most aid.
This is the type of fiscal union the U.S. conspicuously avoids. A member country’s “capacity” to fund itself is always a function of local political decisions. Germany two decades ago undertook difficult economic reforms and then made a concerted effort to pay down its national debt; now Berlin enjoys the fiscal room to pay for a large pandemic spending spree. Italian voters and politicians did none of those hard things, and now don’t have any of their own or anyone else’s money to spare on virus relief.
The EU plan amounts to a subsidy for bad decisions made by someone else’s government. Americans almost never do this.
New York City’s bailout in the 1970s is the exception and came with the sort of strict policy conditions that annoy indebted European governments. Stockton and San Bernardino, Calif., in 2012 and Detroit in 2013 didn’t receive bailouts in the wake of the 2008 financial panic and filed for bankruptcy, as have more than 600 municipalities since the Great Depression.
This model has worked well for the U.S. Most important, America avoids the fiscal food fights that have addled Europe since it began bailing out its economic laggards a decade ago. Those bailouts always come with meddlesome policy conditions (sometimes wise, often not) designed to mollify donor taxpayers. Utah’s governor should be grateful not to have to micromanage New Jersey’s public-employee pensions in the way Germany’s Angela Merkel set conditions on Greek spending. Why New York Gov. Andrew Cuomo would welcome the sort of fiscal scrutiny once visited on Spain is a political mystery, although New York taxpayers might benefit.
Even now, a proposal by blue-state Democrats in Congress to bail out their state-level confreres is proving controversial. Democrats would love to slip such a bailout into the newest coronavirus spending spree as a sop to the public-sector unions whose bloated salaries and pensions have caused blue-state fiscal dysfunctions. Republicans are resisting.
Europeans and Americans have lessons to teach each other here. America’s long history of federalism, properly understood, could serve as a model if the European Union ever decided to create the political institutions to match its fiscal ambitions.
Europe’s more recent miserable and acrimonious fiscal debates, meanwhile, offer a timely reminder to Washington of the dangers of subsidizing bad local decision making. U.S. progressives say they want to emulate Europe’s political economy. In this regard, with apologies to H.L. Mencken, they should take care lest they get what they want good and hard.
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