The EU crosses the Rubicon as it inches toward fiscal union

Things didn’t turn out quite this way. There has indeed been convergence on inflation, where the differences between eurozone members are now minimal. And, of course, the gaps between interest rates and bond yields in different member countries, although they occasionally flare up, are also minimal.

But in other matters there has been anything but convergence. Perhaps most dramatically, while the economies of the prosperous north have grown reasonably well – albeit not spectacularly – since the euro was formed, Italy has hardly grown at all. That’s right; virtually zero growth in 20 years – even before coronavirus struck. Figures for unemployment in different countries of the zone are similarly divergent.

With regard to government debt, in Germany, even after the hit from coronavirus, the ratio of government debt to GDP in 2021 will be about 70pc. The equivalent figure for Italy will be 160pc. The underlying divergences in institutions, practices, productivity and inflationary tendencies have been squeezed out of numbers such as the inflation rate and diverted instead into GDP, unemployment and debt. The net result is that, if the EU were to push on to full union the cost to the north of accepting its share of the debts of the south is now far greater than before. Moreover, it has also increased the likely size of continuing one-way fiscal transfers.

Meanwhile, the EU also has to face ambiguities in its legal structures that have been there from the beginning but which have been glossed over. The European Court of Justice clearly believes that its authority trumps all other legal bodies in the EU. But the German Constitutional Court does not agree. If the latter wins the dispute then it will be impossible for the Bundesbank to take part fully in the European Central Bank’s bond buying programme which underpins the euro.

The third issue concerns the question of how the EU will be structured while several of its members remain outside the single currency. The EU has dealt with this by pretending that it was only a matter of time before all EU members would join the euro, even though key non-euro member countries have shown no sign of wanting to join.