More for Europe and More from States

We must strengthen the resources of the European Union’s institutions and stop controlling and interfering in states’ public policy, restoring them to a level of greater fiscal autonomy.

The EU’s newest leaders have a great opportunity to advance toward an “even more close-knit union” of European nations, as the functioning treaty states. Those appointed or nominated to fill the five highest positions present a notable national and political balance: a Democratic Christian German for the Commission, a liberal Belgian for the Council, an Italian progressive for Parliament, as well as a Spanish socialist for Foreign Affairs, and an Independent Frenchman for the Central Bank. Three men and two women. But what is most consequential is that all have a clearly federalist vision, with fierce support from the French-German core, and with a notable advantage of matching criteria and objectives with respect to the former quintet.

Reinforcing the EU’s finances is the greatest democratic challenge that the EU should confront. The current paradox is that, due to the fact that European public finances are so limited, the EU has had to intervene, control and, eventually, rescue the public finances of member states − an experience that many have considered anti-democratic. The EU is too interventionist because it is too weak. The alternative is to strengthen the resources of the EU’s institutions and stop controlling and interfering in states’ public policies, restoring them to a level of greater fiscal autonomy. It would have to abandon the idea of a “fiscal union” of states and give, on the other hand, more resources to the Commission. Fiscal autonomy at every level of government, of states and of the Union, as well as local and regional governments, is the only viable basis for democratic union.

One can take a lesson the United States, which built the first modern union of states on a vast continent inspired by democratic principles. When it began 200 years ago, the U.S. federal government was extremely weak, so weak that it could be the current EU in terms of financial resources. The majority of expenses, including two wars against the British, fell to the states, which had claimed sovereignty before signing the Constitution.

After the military crises, the U.S. Treasury decided to share the enormous debts of its states; that is, to create a federal debt capable of absorbing state debt − like the EU does now. Later, Washington’s institutions made important direct investments in infrastructure during the country’s westward expansion − like Jean-Claude Juncker’s plan intends to do in Europe. The federal government also reinforced itself with the creation of a federal income tax to finance the Civil War, which signaled the end of state sovereignty.

But the process developed over a long period of time. The U.S. federal government did not control the majority of total public expenses until 1940, some 150 years after the federal government was founded, and did so as a result of new public sector expansion in response to the Great Depression. Only since then has Washington had sufficient financial resources to develop ample federal defense, infrastructure, social security, healthcare, intelligence and development programs. Unlike the EU, the U.S. federal government has also been able to put in place ample stimulus against recessions, most recently in 2009.

The other side of the story is that, throughout this process of strengthening resources, the United States federal government stopped giving economic support to states or cities which were going bankrupt − like the EU should do now. Thousands of local governments went bankrupt, especially after the Civil War, during the Great Depression and, most recently, during the Great Recession, in California, Illinois, and Detroit, for example. This is unlike the situation in Europe, since mid-19th century state and local debt in the U.S. was never shared, and states and cities can go bankrupt without a lifeline or rescue from the federal government. In this context where the federal government lacks responsibility for state finances, almost all U.S. states have adopted criteria for maintaining fiscal responsibility, including adding amendments for balanced budgets to their constitutions.

Despite some appearances, currently the U.S. federal government regulates its states less than the EU does. Since Washington has many more resources than do institutions in Brussels, it is much more capable of developing its own policies on a grand scale and it is not necessary to monitor, supervise, protect and meddle in state policy as much as Brussels does in Europe.

The United States process suggests steps that the EU should take to give more power to the Union and more autonomy to the states. The EU should recognize that it learned its lesson from how it dealt with the Great Recession and not provide bigger bailouts to countries in crisis. The reluctance of the European Central Bank’s new president, Christine Lagarde, to have the International Monetary Fund participate in bailouts of Greece and other European countries anticipated the shift.

To improve the EU’s fiscal responsibility, no recent idea has been more successful than the creation of Europe-wide taxes on big corporations and international technology platforms, including Amazon, Apple, Facebook and Google, which now avoid fiscal regulation by the states. If this continues, a financially stronger and less regulatory EU will allow states to develop their own policies in areas in which they decide to do things differently, in particular, civil rights and public spending. States would be autonomous to the point of being responsible for their own finances. They should be capable of implementing their own laws and constitutions that enact balanced proposals without needing to be monitored by the EU. But they should also have the liberty to go bankrupt without waiting to be bailed out by the EU at the cost of the other contributing member states.

As in the Roman Empire, the democratic European empire will have to give unto Caesar what is Caesar’s, and to the states, as well as to the regions and cities, it will have to give to each of them according to the tasks that they assume responsibility for.

Josep M. Colomer is an economist and political scientist affiliated with the Barcelona Graduate School of Economics and Georgetown University.