Thursday, July 19, 2012

More on transfer unions...

All champions of a possible future European transfer union should take a look at the video which is at the bottom of this link (in German). The Bavarian TV had as guest to its regular round-table discussion the Bavarian Finance Minister to talk about the domestic German transfer union.

The German Constitution (Grundgesetz) stipulates that comparable living standards must be assured in all federal states. To achieve that, the differences in economic power of the individual states must be equalized. The respective law defines the methodology which is supposed to be used. The present arrangements expire in 2019.

All transfers together amount to 7,3 BEUR. Of that amount, the State of Bavaria (one out of 16 states) has the distinction of having to cough up slightly more than half of it (3,7 BEUR). Elections are coming up in Bavaria next year, so this is as good a time as any to start threatening a veto to the next transfer regulation.

What is so fascinating in the discussion is that the argumentation of the Bavarian Economy Minister is the same as that of Germany would be in a European transfer union. Just one soundbite: Berlin, the largest recipients of transfers, has instituted a "welcome grant" for new students. Bavaria, as one of the measures which it had instituted years ago to beef up its finances, had introduced a "tuition fee" at universities. So the Bavarian Economy Minister asks: "Why should we charge our students a tuition fee if that money is used by Berlin to give away a "welcome grant" for new students?" Right away, the moderator innocently asks whether this isn't the time to think of national German interests instead of egotistic state interests...

The Bavarian Finance Minister goes even further: "If we impose austerity measures on countries like Greece, we have even more reason to impose austerity measures on our fellow states!" Not a bad argument! He wants to tell his fellow states what they can spend money on and what not!

There are a couple of big differences between the domestic German transfer union and what a European transfer union would be. First of all, all the negotiators speak the same language; German. Secondly, they are all Germans and share the same national heritage. Call it "of the same blood", if you will.

Now, if you picture a future day where ministers from all EU-countries sit around a table to hash out the formula for calculating payments in the transfer union, my prediction would be that that discussion will be even more interesting than the one shown on Bavarian TV the other day!


  1. Dear Mr. Kastner,

    It is understandable that a German wouldn't want to have his money flowing out of his country or region without understanding why or feeling the obbligation or feeling secure about that being the proper thing.

    The thing is, either this in a way will happen (ex. through redirecting investments, like in US) or the EU will sooner or later start falling apart due to euro-scepticism.

    In Italy, the discussion of "should we return to the lira?" is no longer a taboo. Politicians try to defend the euro (more those of the center-left), but accademics are out in the open and aren't shy of crossing swords. And frankly, i have heard some who make the perfect analysis on why it is better for Italy to exit.

    I recently heard an economics professor of the Catholic Milan University, ex managing director in Deutsche Bank too.

    At some point he said: "If you look at our imports you will see that as time was passing after the euro, we were falling, as was everyone else, and Germany was eating all. Now, this because for merits of Germany, but it's like the "cucoo's nest", where you have the first-born cucoo bird, which is stronger and no matter how the later born try, he gets to eat the best from cucoo mother.If i can get at the same money a german car and an italian car, i will buy the german, it's better, it's more reliable, whatever you want. But if i have the italian 20% cheaper, then not only will i buy the italian, but i will also have many others abroads buy the FIAT. Germany says "do internal devaluation". But that can't be happening everytime the euro goes up and you will have many,many angry people on the streets and this is bad for the economy, bad for the goverment.

    He made the paragon between a nothern industrialized region and a southern agricultural one, Calabria. He says "Calabria, if you put her at the same rules and conditions with Lombardia, no matter how much Calabria tries, can't compete with Lombardia, never will or maybe after some cataclysmic events in 100 years will. So, if you want to keep Calabria in Italy, you have to redirect funds to her. The other way, would be actually the way to have Calabria emancipated itself, would be to let Calabria have her own currency. This way she would attract all the medium-low income Italians that prefer nothern beaches".

    Needless to say, he is in favour of Italy leaving the euro. Also of Greece leaving the euro, as bad as may be. His position for Greece is very realistic: "It's needless to tell them that reforms will save, it won't. Investments will. Either you treat them like a bombarded country and make a Marshal plan to accompany reforms or, if, as all shows, you don't feel generous in giving them free money, you cut their losses and let them default and back the drachma, where at least they will have a new start".

    He is also very logical about the euro and current policy:

    "Austerity will save all and euro isn't the problem. Ok. Then you have Ireland, a country that needed no labour reforms and had ridiculous debt and being "celtic tiger", example for all, having junk rating. And you have Britain, that lives out of world finance, which is the one in trouble, banks are in trouble, but has AAA rating. How so? Why the paradox? Because the markets treat differently Britain that has the POUND. Because Britain can control the pound. Same story with Spain. Spain had less debt than Germany,Mr. Rahoy was praised by Mr. Schauble for making austerity. Markets closing up on Spain, Spain on risk of default. Everyone to praise Monti, italian basic financial indexes fine,wide production basis,exporing country, running already primary budget surplus, Italy is paying 6% interest, 2 levels above junk rating and worsening. Japan has 200% debt, fine rating, low interests for her bonds". What is the common denominator? The presence or not of the euro.


    1. Northern and Southern Italy; West and East Germany --- the same issue but totally different from an EU transfer union because here you are talking about the same nationialities; as I called it: "of the same blood". Also, for an EU transfer union you would first need to have "EU-taxes".

      The answer, at leat to me, is a "voluntary transfer union". What do I mean by that? Well, a union where the South may run structural current account deficits for quite some time but where those deficits are not financed by loans (particularly "forced loans") but by private investment instead. That is what has been happening in the US for decades. Americans are overspending abroad gigantically but they get the money back largely in the form of foreign investments because they are an attractive place for investments. As long as they can offer attractive opportunities for foreign capital, they can go on overspending.

      If Greece were to become, overnight, the "hottest" place in Europe for investments because the regulatory environment, etc, are uniquely wonderful, so much money would flow into Greece that Greece could tell the Troika to go fly a kite.

      BTW, I have referred before to the impossibility of comparing the US with other countries: the US can print the money in which it has issued its foreign debt and it can print the money with which it pays for imports (and that money is the reserve currency). No comparison with anyone else!!!

    2. On the way, we agree. When i wrote: "The thing is, either this in a way will happen (ex. through redirecting investments, like in US)", i basically mean the same.

      The problem will be exactly find a US-like way, but without being exactly like US. And the problem is political. How much of their budget freedom and tax freedom are individual members prepared to conceed to Brussels (and hence to the stronger countries). This is serious political problem, since the EU isn't gaining any popularity contest right now. On the other hand, the clock is ticking. I am not sure whether the EU has the luxury of time to agree on who will conceed at the end what. Mrs. Merkel wants german-like fiscal union. France doesn't seem to want that. I am not so sure about the rest. Again, time is ticking.

      Maybe at the end, history will prove, that the only way to have so different economies coexist with one currency, is the american way, the one that is impossible... Or as Paul Krugam said, in order for the euro to survive, one of 2 impossible things must happen :)

      The EU is trapped in a situation where not only has neglected the economy, but also the political integration. In order to pass measures of further integration, you will need again political support from the public. Possibly referenda too in some countries. Will they succeed? There isn't much time.


    3. I am linking below something I had written about Chile some time ago. Chile's economy, after Allende, was in much worse state than Greece's is today. Within 5 years or so, the new economic management succeeded in making Chile a "darling" of foreign investors. Believe me, not for possible political motives to show support for the then regime. Exclusively for business motives. Actually, business motives had to be more convincing than normally because one had to justify why one invests in that "brutally ruled" country. My own bank employer was one of those investors.

    4. Mr. Kastner, you don't need to convince me about the potential of Greece. I am Greek :) And i know how underxploited Greece is. Even in things that needed no money at all and are blatant even for a small child. A small child that sees television asks "dad, does Greece have oil"? Greece does, in small small quantities in known positions and probably more in suspicious positions. And probably gas in big quantities south of Crete. Greek state only now decided to give drilling permits for exploration to foreign companies, who do it all on their expense. Even Albania is currently pumping oil from the Adriatic and has made many surveys. In Greece the geological estimates have been sitting in a dusty drawer. Will Greece become Saudi Arabia? No. I mention it only as a blatant example that happened to me asked by a child to me. Even the child watching television understood that there was something wrong.

      Even tourism is a joke. Tourism is disorganized, leaves fat wallets go elsewhere and is costrained in just 3 months. I have spoken with an Italian official of the Italian office for regional development and we agreed on a simple reality: Greece, if had exploited full time tourism and targeted specific tourism, would have huge economic income.

      Buraucracy alone and tax madness is a whole different chapter. Greece hasn't even taken advantage of blatant strategical position. They invested 10 bln euros in the wasteland called Olympic venues, instead of investing in Thessaloniki's port for example.

      In Greece you don't know where to start. The problem is that the current political elites are not used to govern. They are used to sit idle and give money. If i thought that ND was able to save the country, i would have voted them. I didn't not just because they have responsibility, but also because "you can't teach an old dog new tricks". The bulk of them can't think differently. They have rusted mind.

      You have 1.500.000 unemployed, and you have yet to make "0 cost starting business" like the US does. They had this logical idea of giving idle state land to new aspiring farmers, but they are soooo slooooooow, as usual! And yet, you see that the first who jumped in, are youngster who have university degree in agricultural studies (i don't know the english word), who are thus, experts on how, when and what to cultivate and it's almost certain they will make a good use of the land you give them. Insted, the state has huge idle land, which is usually tresspassed by illegal villa constructions or shepards who bring their flock to eat grass.

      Dimiourgia Xana for me was obvious choice, because they are fresh people with fresh ideas and none previous politicians.And most are businessmen, so they know what stops them from doing business, which is what the traditional politicians can't grasp. All they know about business is giving without competition contruction deals to a few friends (like those who built the Olympic venues).