An almost invariable mantra of European politics is that Europe needs “an ever closer Union”. Political centralization is commonly considered the only way out of the crisis – meaning, first of all, centralization of fiscal policies, as an all-powerful Brussels should be able to (a) put order in the balance sheets of profligate member states (the stick) and (b) put an end to the tax competition that endangers fiscal revenues of high taxed member states (the carrot).

Different perspectives are seldom heard, and often marginalized. Bruegel, a Brussels-based think tank whose supporters include EU member state governments, has now published an interesting paper by Ashoka Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University.

Writes Mody:

An alternative resting stop on the way to ‘a more perfect union’ would be based on the recognition of a de-facto decentralisation in Europe. The financial costs of the crisis have been borne almost entirely at the national level; that is unlikely to change in the foreseeable future. The alternative resting stop would, therefore, seek to make decentralisation more robust rather than wish it away. A model would be a monetary union that resembles the United States before the Great Depression. Then there was virtually no system of fiscal transfers and states’ fiscal discipline was enforced by a ‘no-bailout’ commitment. The task for the euro area is to leverage sovereign authority where it exists: at the national level.

Mody’s paper is very interesting, and I hope it shall find an audience among the European ruling classes. The debate, he argues, should take place on more realistic grounds:

If a transparent system of transfers is not politically tenable, then a forward-looking euro-area economic architecture surely cannot be built on the premise of continued official loans that will eventually be forgiven
(…) Much of the guiding philosophy today – to render sovereign debt risk-free and to reduce differences in private borrowing costs in different countries – recreates the problems that led to the crisis.

Mody does not oppose a system of fiscal transfers on ideological grounds, but he notes that such a system is very unlikely to come in place, as a preference for maintaining national sovereignty remains strong among European governments and electorates. He also points out that “a fruitless search for integration has costs”.

The European debate tends to be schizophrenic: prime ministers always preach “an ever closer Union,” electorates react to Brussels’ indecisiveness by favouring euro-skeptic forces, Brussels appears as the right place for technocratic fixes rather than for a political come together (as European federalists wish).

Mody’s paper aims to suggest a new approach to European integration that focuses on decentralization “to improve economic incentives, the speed of response, and the democratic legitimacy of the Union.” According to Mody,

These goals can be achieved by: (a) lightening centralised surveillance; (b) creating market discipline for sovereigns through a credible no-bailout mechanism; and (c) since it is particularly risky to await the construction of a banking union – because of incentives to push the hardest decisions into the future – national authorities should be encouraged to use their national bank resolution systems and pragmatic approaches to close down unviable banks.