The Founders’ primary goal was a separation of powers so that no single branch of government, or even a single chamber of Congress, could dominate. Their vision still works well.
Not far from Independence Hall is Citizens Bank Park, a stadium where arguably the best team in baseball, the Philadelphia Phillies, play. Citizens is a subsidiary of RBS, 83% owned by the British taxpayer. Hopefully the Founding Fathers would have been proud that, armed with renewed fervour for the concept of “no taxation without representation”, I asked for free admission to the ballpark.
Taxpayer benefits
Maybe that was a bit cheeky. But what exactly should taxpayers expect in return for the largesse that they have provided to assorted beneficiaries in the past three years?
This is certainly a very live question in Europe where there has already been some, relatively small scale, fiscal transfer involved in the bail-outs of Greece and the setting up of the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).
But what if the German taxpayer ends up owning 83% of Greek debt? My anecdote suggests that they won’t be given free admission to the Acropolis. But should they be given seats in the Greek Parliament? Clearly that will not happen either.
Yet these are legitimate questions to ask given the eurozone has arguably reached a critical stage in its development. Having avoided a messy Greek default (replacing it with a well-managed Greek default) it is now facing up to the fact that with Italian and Spanish bonds yielding more than 6%, the long-feared contagion is upon us.
It seems that markets are testing to see how much further policymakers in Europe are willing to push integration. One problem with the announcements that came out of the EU summit on 21 July was that there was no increase in the size of the EFSF. Its firepower of €440bn is nothing like enough to support the €1.6trn Italian bond market.
Logically there have now been moves by the ECB to buy distressed sovereign debt, at a premium to the existing market price. This will, by definition, reduce the yield on the distressed debt – only the ECB has the resources to do this as it can print the money. Of course, this seems an unlikely course of action for a central bank that has only an inflation mandate, and that has been raising interest rates since April.
Eurozone govvies
What may therefore be needed is the issuance of eurozone government bonds backed collectively by each member state. But this is a move to a much closer fiscal consolidation than has so far been seen. It would appear that such a bond would need to be backed by euro-wide institutions including a eurozone Treasury.
At that point the electorate will realise that it is indeed possible for a German taxpayer to have those taxes spent by other European countries. This will be a real test of the support for the euro.
Up until recently, the eurozone has only been visible to individuals within it as a currency. Within the periphery it is becoming clear that there is a price to be paid for having that currency. But in the core, there have been huge benefits from the single currency. Not least in Germany where, some estimates suggest, the local economy is benefitting from a currency that is at least 30% undervalued relative to what a standalone deutschemark would be trading at.
If that is understood, then perhaps the taxpayers of the core can be persuaded to move towards greater fiscal transfer. One suspects that persuasion needs to start happening very quickly to avoid a serious renewed bout of jitters about debt sustainability in Spain and Italy.
