Martin Sandbu posed an interesting question in his Free Lunch column this week: What can a common treasury achieve that existing institutions and national authorities can not?
The question was by way of warding off French President-elect Emmanuel Macron from demanding too much by way of fiscal union when political capital could be spent more wisely.
The answer in the abstract is: the benefits that flow from commitment, enforceability, and internalising externalities.
Martin’s question could be asked of any collective. What can a national Treasury achieve that could not be replicated by tens of millions of people agreeing to contribute or accept payments from a pool of resources, depending on how their luck fared?
We have national Treasuries to implement agreed plans for contributions and withdrawals; or, more realistically, implement plans devised by people we collectively agree to give the authority to devise them. Without this central body, there would be every risk that if we were lucky, we would decide not to part with our agreed contributions toward the plight of the unlucky.
The ‘banking union’ could be replicated by a list of promises to supervise and promises to pay out/bail out/resolve wherever financial trouble emerges. But, once that happens, the similarity of interests dissolve.
The Eurozone collectively signed up to the Stability and Growth Pact at its inception. But subsequently – leaving aside the merits of it – proved unable to enforce it.
Bound up with enforceability, of course, is that there can be majority rule. Like all public contracts, a Eurozone finance ministry is a desire to implement a median fiscal policy that some won’t approve of even ex ante, let alone ex post.
On top of this, is the idea that centralised institutions can internalise externalities. An example here is the tragedy of the commons. The phrases refers to the archaic problem of preventing individual farmers overgrazing and degrading common land. Here we might think of the incentive for a single government in the EZ to over-borrow, or under-supervise its banks and free-ride on the better behaviour and tax base of the others. Central budgets and supervisors can stop that.
Formal integration institutions are not cast iron guarantees themselves, of course. States face time-consistency problems; and get taken over by those who come of the age when they can decide, having not previously had any say. But they raise the cost of changing direction.
Macron’s ambitions on fiscal union may not be feasible, but, within a currency union, they are logical. One might even argue that without further steps, such as a centralised Treasury, existing common institutions [like the small fund backing the banking union] won’t be robust enough to prevent a recurrence of the last financial crisis.
longandvariable 