Behind the Greek mess – now made worse by the country’s decision to hold a referendum on the latest bailout package – lies an important, if hidden, lesson with implications for Canada.
If there is going to be a monetary union, as with the euro, and if the union is to last, the member-states have to co-ordinate their fiscal policies. The Europeans, in creating the euro, could not agree to such co-ordination. Countries went their own way; some going deeply into debt, others less so. Some attained strong levels of economic growth; others did not. Some curbed social benefits; others did not. None wanted to give substantial enough additional revenue or taxing power to Europe’s central institutions.
The euro – that is, monetary policy – was being asked to do too much.
With countries going at such different speeds, and in different fiscal directions, the strain on their monetary union grew. When the euro gained in value, some countries such as Germany could absorb the shock, others could not. Critically, there was never enough money within the union’s central institutions to redistribute to weaker regions to help their economies.
When the 2008-2009 recession/downturn struck, the euro began fracturing. Plan after plan was devised, each one more lavish and complicated than the last, all designed to cushion French and German banks that had lent money to Greece, Portugal and Ireland and to prevent the contagion of probable default from spreading beyond Greece.
If Greece were to default and leave the euro, its currency would plummet to near worthless levels. The international system would assume that other weak sisters would be next, starting with Portugal, and whatever confidence remained in the euro would be further weakened.
The European countries that formed the euro thought they could get away with creating a central bank and a currency. All they said on the fiscal side was that no country should run deficits above 3 per cent of gross domestic product. Some of them broke that target with impunity, including France and Germany – the latter, in fairness, had to absorb the costs of German unification.
The European problem offers an important, if ignored, lesson for Quebec secessionists – that if an independent Quebec tried to use the Canadian dollar, the new country would have to harmonize its fiscal policy with the bigger partner, Canada. And having yielded up all the power over the currency to the bigger partner, Canada, as well as the power to organize fiscal policy, what would be the point of separation?
If, conversely, an independent Quebec chose to establish its own currency, chances are its value would drop well below the Canadian dollar, with consequences for interest rates, debt-financing and deficits.
Put another way, the euro example shows how hard it is to run a common monetary policy between or among states without something resembling a common fiscal policy. And once countries have a common monetary policy and something resembling a common fiscal policy, they are already sharing so much sovereignty that what remains has more symbolic than real value.
The great virtue of real federalism is the sharing of risks, which is why Canada is a much sturdier federation than Europe. Canada’s central government raises far more revenue as a share of the national total than Europe’s central institutions, redistributes far more of it to less well-off regions, and takes a large share of borrowing.
In Europe, member-states must pay their entire debts; in Canada, provinces pay some of their debt, the whole country pays the rest. The difference means when highly indebted European economies falter or interest rates skyrocket, they face burdens that the European Central Bank and member-states try to ease with Band-Aid solutions.
In Canada, weaker provinces and/or highly indebted ones (Quebec and the four Atlantic provinces) don’t have to pay both their debts and their per capita share of the national debt. Ottawa pays the per capita share. The sharing of risk, opportunity, burdens and good fortune is what makes a federal system.
The European Union was never a federal structure like Canada. It worked best in sharing good fortune and some risk; it worked badly, as we now see, in sharing burdens because it lacks the central resources of a federal system.