Monday 14 November 2011

Brief History of the European Transfer Union (1)

After the debacle of the FDP in the elections for the regional parliament of Berlin and Peter Gauweiler's defeat in the vote for vice-president of the CSU, the coalition politicians in the German Bundestag have reduced a bit their anti-European populism – it obviously doesn't pay off. However, there is still one word which keeps persistently wandering through the German public debate since it was invented around two years ago by these populists: it's the "transfer union" which, according to them, threatens to result from the measures against the euro crisis and is contrary to the "stability union" which the founding fathers of the EU strove for. This allegation is pointless for two reasons. Firstly, because the EU was already a "transfer union" when it was still called European Economic Community and people only dreamt about a common currency. And secondly, because there is no contradiction at all between transfers and stability – on the contrary, the first could even be the precondition of the second.

In the first years of the European integration process, financial transfers between the member states were in fact rather unimportant. When in 1958 the first big redistributional mechanism on a European level was established with the Common Agricultural Policy (CAP), the EC leaders attempted to have a broadly balanced position for each member state. This was a bit tricky, as the CAP was financed from a common funds, but the southern member states like Italy and France had a much bigger agricultural sector than the northern ones like Germany and the Netherlands. Finally, they found a solution by setting much higher guarantee prices for products typically produced in the North such as butter and milk than for southern products like wine and fruits. This resulted in an enormous overproduction of the northern products – the famous butter mountains and milk lakes, which only disappeared much later when the CAP was reformed. But it also made sure that the CAP only meant a redistribution from tax payers (and consumers) to farmers, and not a redistribution among countries.

That changed when in 1973, Great Britain entered the EC. Britain only had a very small agricultural sector and thus did not profit from the CAP. This provoked not only the first EC "net payer" debate, but also brought about the establishment of the European Regional Development Funds (ERDF), which assisted economically weak regions, e.g. by the co-financing of infrastructure operations. Among these regions, there were parts of Great Britain, so that the ERDF balance partly compensated for the CAP balance. However, the main profiteers were Ireland and Italy, as well as, after their entry in the 1980s, Greece, Spain and Portugal, which all had revenues from both the CAP and the ERDF (and the subsequent Cohesion Funds, which has a similar orientation). The Transfer Union was born.

And during the next years, it proved to be an enormous success. In the first place, the structural funds helped the poorer countries to modernize their economy, by which they could get rid of their dependence from the agricultural sector and, in the Irish case, even turn from net receptors to net contributors. Secondly, the expected bonanza from an EC entry also played a central role in the democratisation processes in Spain and Portugal first, and then in Central and Eastern Europe after 1990. Until today, the EU is promising its accession candidates a higher standard of living – which makes its model of political freedom and economic prosperity more plausible in countries which are just leaving behind a dictatorship.

Despite these advantages, the transfer union had no specific purpose and would not have been indispensable for the success of the EC in its other policy areas. It had resulted from the vicissitudes of the enlargement dynamics, was perceived as some kind of European solidarity, and obviously it was used strategically by member countries when negotiating the costs and benefits of some new policy measures. Arranging a fairer distribution of the gains from economic integration, it helped to legitimate the Community. But the economic core business of the EC, the Common Market, would also have worked without these redistributive mechanisms. This situation changed with the establishment of the European Monetary Union – more about this soon.

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