Saturday, May 2, 2020

Federal histories

After the global financial crisis, I read two articles that explained very well which were the challenges and difficulties of European federalism as compared to that of the US. In "The euro crisis: some reflections on institutional reform," Jean Tirole (2012) argued that it was very important to combine solidarity and market discipline, and that this was not easy given the inequalities of income per capita across European countries. He suggested though that we might learn from the evolution of federalism in the US since the eighteenth century. An article he recommended was "Fiscal Federalism: US History for Architects of Europe's Fiscal Union," by C. Randall Henning and Martin Kessler (2012). These authors emphasize the importance of both state-owned fiscal responsibility, and a federal budget. The federal government in the US does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider that maintaining a capacity for federal (European) countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify (as it is slowly doing) bank regulation and create a common fiscal pool for restructuring the banking system.
These days not only comparisons between American and European federalism become relevant, but also comparisons between reality and plausible counterfactuals in large regions. For example,
"The America's More Perfect Unions," by Joshua Simon (2014) is a fascinating article which highlights the direct and indirect economic effects of the success or failure of the political unions established after independence in both the United States and Latin America. It demonstrates that influential political theorists throughout the hemisphere understood the developmental advantages to be gained from unifying former colonies and employing the political authority newly at their disposal to abolish the stifling institutional legacies of European rule, suggesting that if Spanish America’s unions had endured, or conversely, if the United States had collapsed, the two regions’ economies might not have diverged as dramatically as they subsequently did. For example, the autor quotes the "liberator" Simón Bolívar saying: "The states of the Isthmus of Panama as far north as Guatemala will perhaps unite in federation. This magnificent position between two great oceans could become, with time, the world’s emporium, its canals shortening global distances and strengthening commercial ties between Europe, America, and Asia, bringing tribute to this happy region from the four quarters of the globe. Maybe here alone it will one day be possible to establish a global capital, a new Byzantium for the modern world!"
In his last book "Capital and Ideology" also mentions other missed opportunities for federalism in Africa and Europe in the twentieth century. Now we are again at a critical juncture, let's hope and let's make everything posible so that we can keep making progress towards a better federalism in Europe. This will have to combine enhanced fiscal powers to manage debt and taxes for the federation, market and political discipline for the states, and mechanisms of solidarity that make the compact politically sustainable.  If we succeed, the future is to persist in a slow federalist evolution (like in the US history). If we fail (we won't, right?), our future will be closer to a politically unstable combination of small fiscal havens and failed states.

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