Some Brief Thoughts on European Federalism

It is widely appreciated that Europe's monetary union is problematic because it was not accompanied by fiscal union.  Transfer payments are very limited.   At the end of the day, and despite what you may you may recall from geography classes, Europe is a political and historical construct.    It is the western peninsula of the great Euroasian landmass.    The construction of Europe is a work in progress.  

Just like nationalism destroyed the globalization of the late 19th and early 20th centuries, it would seem to threaten this version of globalization as well.  Integration in Europe is primarily an elite project and that elite seems divided and jealously guard their sovereignty.  Europe has not created Europeans.

However, it seems to run even deeper than this.  Consider that the richest German state Bavaria seeks to roll make the transfers its makes to the rest of Germany.   If Bavaria does not want to subsidize Berlin, for example, how can they be expected to help non-residents?  

The problem is not limited to Germany.  The tensions and political fault lines between northern and southern Italy reflect a similar problem.  It is also evident in Spain.   The head of Catalonia today met with Prime Minister Rajoy.  Essentially Catalonia argues that the reason it is having debt/deficit issues is not because of economic mismanagement, but because it transfers about 9% of its GDP to Madrid.  Catalonia accounts for about a fifth of Spain's GDP.  

The point is that federalism is not just missing at the euro-area level, but it does not seem particularly strong within countries.  The crisis is so profound that increasingly the only relationship that matters is creditor and debtor.  This is true within as well as between countries.  And the weakening of the former bodes ill for the latter. 

Many investors and observers still worry that when push comes to shove, the creditors within the euro area rather than the debtors, are the ones to break from monetary union.  I remain skeptical.  One of Germany's greatest fears is to being isolated and being held responsible for the break-up of Europe. A new division in Europe would signal a failure on Germany's part to solidify its role as Europe's hegemon leader. .