Brief History of the European Transfer Union (1)

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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.

What happens if Europe becomes German

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As the German federal government appears to be both decided and capable to impose its models of economic policy to the rest of the eurozone, we should pose the question what purposes it aims at and in which way it is planning to solve the debt crisis. Of course, it is not entirely sure whether the federal government has any plan at all – but supposing it has, its demands from the other member countries allow the following conclusions on the German strategy for Europe:

The guiding concept of the German reform approach appears to be the mercantilist idea that imports are bad and exports are good. If a country buys many goods from abroad in order to consume them, it has to pay for them, becomes poorer and has to incur debts. If, on the contrary, it sells many goods to other countries, it will get foreign exchange, so it will gain wealth; and, moreover, thanks to the foreign demand its production will rise, so that new jobs are created. Thus, in order to escape from an economic crisis, a country has to increase its exports and lower its imports as much as possible.

Strategies of economic policy – and why it matters who decides

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If this is not a case for the European Parliament, then what is?

If a country (or let's say, a continent) is at the same time in an economic depression and a massive sovereign debt crisis, there are only two possible ways out. One of them consists in fighting the debt crisis by raising taxes and cutting expenses – in the hope that this public austerity will bring back market confidence and the economic crisis will resolve itself. The other consits in revitalising the economy by a publicly financed stimulus package – in the hope that the restored economic growth will also increase tax income, solving the sovereign debt crisis.

Which way for recovery: saving or spending money?

Both strategies are based on different economic theories. A neoclassic will doubt the effectiveness of stimulus packages and therefore prefer the austerity option. A Keynesian, by contrast, will argue that business confidence doesn't rise out of nothing just because the state spends less money, and therefore defend an expansionary policy in order to raise aggregate demand. At the same time, both strategies have their own characteristic risks: if austerity fails, the economy will sink even deeper into depression, enteprises will go bankrupt, unemployment will grow and due to lower tax revenue also the public debt itself. On the other hand, if the economic stimulus fails, the government has just increased its debts even further and possibly also fueled inflation by the additional spending.