Over the years, I have written many – possibly too many – articles on the economics of the EU and why, in strict economics terms, I believe that the EU is fundamentally flawed. Thinking about this again, and trying to translate my arguments on the economics of the EU into a more general understanding, I came up with a very simple conclusion. I am sure that many other people have already observed this, but it seems to me it is a point worth making again. The EU works through homogenising processes and interactions within the union.
At one level, this is very obvious and very necessary. For instance, trade and competition are enhanced when there are common standards governing how products are made or structured. We do not want to buy a paint made somewhere else in the EU only to discover that it is full of lead. If the trading standards bodies in different countries can agree, then life is made much easier by homogenising trading standards. You know what you are getting. But when applied more widely, this concept becomes very dangerous.
The EU is not just a trading organisation. To create a more fulsome union of European countries, homogenisation must go much deeper and into all the political, social and economic structures of the area. Furthermore, it is an ongoing process. Once a greater degree of homogeneity has been introduced in one area, then it forces other steps to be taken to secure and embed the change.
The introduction of the common currency was the most dramatic step in this process. It could be seen simply as the last major and fulfilling step in the development of the single market. But as the founding fathers of the EU realised, a common currency was not an end in itself. Rather, it was a step towards a much greater end – it was the means of achieving the ultimate objective.
The reason is simple: for the homogenisation of European currencies to work effectively, there was a requirement for homogenisation in wider monetary policy (this hardly needs stating) but also and more crucially in fiscal policy.
At the headline level, a common currency requires that there is a system for large, frequent and permanent fiscal transfers around the common currency area. These can either be obvious or more oblique – but they have to take place if the common currency is not to be permanently impoverishing to some countries.
Fiscal policy is very different to monetary policy. While there can be some targeting of monetary policy and there are differences in different monetary regimes between countries, it is difficult to use monetary policy to effect redistribution of income and wealth, except on a rather arbitrary and most often unintended basis. Fiscal policy is different. It evolves in a way that is sympathetic to and promotes the political and social objectives of the fiscal area – most obviously, but not always, the nation state.
In my view, homogenising fiscal policy, a process already underway, will become the dominant objective and theme of the European Commission. In this context, it may be considered ironic that Brexit (assuming it happens) will remove a significant impediment to this process – so it ought to be welcomed by the true-believers in the Commission. But that is by-the-by…
As this homogenisation proceeds, it will interfere more and more with national mores. As such, it will threaten what people see to be their national culture and identity. At a time when, in political terms, there seems to be a strong anti-establishment mood and a return to small is best, the EU will be moving not just towards federalisation, but cultural homogenisation and greater central authority.
I doubt that the majorities in the populations of most nation states will find this at all palatable.
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