A very negative view of a solution to the EZ troubles being found

This post argues that “Rich Germany” is already questioning it´s transfers to “poor Germany”. What about transfers to “poor others”?:

If I asked you how the structural problems of the Eurozone may be resolved, I am sure that the suggestion of a fiscal union in which transfer payments will be made by the “rich” Northern member states to the “poor” ones in the South of Europe would rank amongst the top answers. I’ve been wondering for a while if the member states could ever agree upon major fiscal transfer payments and if it would indeed lead to greater degree of convergence within the Eurozone. I feel that we have come closer to an answer to my questions this week. And I am not referring to the issues around Cyprus.

Yesterday the German federal states Hesse and Bavaria filed a lawsuit against the existing mechanism of fiscal transfer between the federal states of Germany, the so-called “Länderfinanzausgleich”. The German constitution states that the objective of this fiscal transfer mechanism is the convergence of the financial power across its federal states. The current system consists of vertical payments between the German state (“Bund”) and the federal states (“Länder”) as well as horizontal payments from federal state to federal state. The eligibility for transfer payment receipts is determined by an index (“Finanzkraftmesszahl”) which indicates the relative financial power of the federal states. Bavaria, Baden-Württemberg and Hesse are currently the only net contributors, while Berlin is the biggest net recipient of these fiscal transfers.

Bavaria and Hesse argue that the current mechanism does not create any incentives for the net recipients to improve their financial position. It is said that sanctions for fiscal mismanagement are missing, while the net contributors are discouraged to consolidate their finances further as long as they have to redistribute their wealth. Basically, one rich German state is arguing why it should transfer its fiscal revenues to a poor (and arguably irresponsible) German federal state. If you already see significant opposition against a redistribution mechanism of wealth within a country, how is it possible to picture Germany, the Netherlands or Finland agreeing on major fiscal transfer payments to Southern Europe?

4 thoughts on “A very negative view of a solution to the EZ troubles being found

  1. Basically Im against any transfers, but this is funny because Bavaria was one of the main recipients before it became one of the wealthiest Länder/net payers.

    • If you want a monetary union, a fiscal union has to come along. And in a fiscal union there are automatic transfers. Look at the US. On the other point, “everyone wants to forget he once was a beggar”!

      • I understand that. For me, the optimum would be no euro at all, even though it was a rare opportunity for economists to look at an actual “experiment” on a such great scale.

  2. A fiscal union in the Eurozone sound quite Well. But I can not see how it would be possible without a minimum political coordination – if not a total union. What I see imposible for many non economic reasons.
    Really, Germans are very nationallistic, more than French people. They are devoted of saving, as Marcus note. They fall Well with a permanent externas suplus. Perhaps a monetary union is not feasible between countries with a so high difference in propensity to save. Among other reasons…

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