Monday, 30 January 2012

What’s wrong with a transfer union?

The eurocrisis has introduced a plethora of strange words into our everyday vocabulary: ‘Contagion’, ‘technocrats’, ‘moral hazard’, ‘austerity’ and of course the derisive description, ‘transfer union’. This last term is used by those in Northern Europe who warn that bailing out the economies of Southern Europe will lead to a European Union where money steadily flows from rich states to poor states and the North loses out. Many argue that, in fact, this is what the EU has always been.

Such feelings are at the core of the German public’s resistance to the Greek bail-outs – emotions that have turned what is normally one of Europe’s most pro-EU countries into a relatively more eurosceptic place these days. “Why should we work hard just to see our money flow to lazy people in the south?” some Germans are asking.

Their resentment is fueled by charts like the interactive diagram below, found in the Guardian newspaper’s new ‘Europa’ section (a truly fantastic project with five other papers that I’m very excited about). It shows which countries are net ‘payers’ into the EU, and which are net ‘receivers’. The statistics are familiar and often brought up when people talk about the European Union – the biggest recipients of EU funds are in Southern and Eastern Europe while the biggest contributors are in Northern Europe.

So yes, it is an observable fact that Germany pays in more than it gets out. And it is an observable fact that Germany has a higher GDP than its Southern neighbours, that it produces more and has a much healthier economy.

But how did the German economy get to this triumphal position? A lot of Germans seem to forget that in the 1990’s their economy was a mess – mass unemployment, record low industrial output and difficulties integrating East Germany into the economic system. All of that changed starting in 1999, when Germany’s output started to skyrocket and its economy boomed. And what happened in 1999? The euro was born.

Suddenly Germany had access to the largest developed market in the world, millions of new consumers to buy German products which the thrifty domestic market had hesitated to buy, with no exchange rate fees or complications. Germany was given unfettered access to the legions of Southern Europeans who were eager to buy well-made German products.

So when some Germans say they want to abandon the Euro because they don’t want to share their success with people who haven’t worked for it, they forget that it was the euro itself that spawned that success.

After all, that is the nature of a large federal union. There are going to be richer, more prosperous and more industrious states that support less prosperous states. The trade-off is that those prosperous states get access to a large market, from which they draw the wealth that they then have to share in order to sustain that market.

What about America?

I was thinking about this last week when this chart of US state net payers and net payees was circulating around the internet.

Normally the issue of the wealth of the coastal states flowing to the interior and Southern states is not something that is ever discussed in the US. It’s just taken as a given – people in the prosperous Northeast and West Coast accept the fact that much of their federal tax money is not going to go back to them but is instead going to go to supporting the poorer states of the union. That itself is not an issue.

The grievance that resulted in this chart being circulated last week is that the political dynamic is so bizarrely skewed from the reality shown in this chart. In today’s political climate it is the prosperous states with higher levels of education that consistently vote Democratic, and it is the poorer states with lower levels of education that consistently vote Republican (the so-called “blue states” and “red states”, named after the colours they are given in election results). What has a lot of Democrats annoyed is that paradoxically it is Republicans and Republican voters who are complaining about ‘socialism’ and ‘redistribution of wealth’, insisting that everyone should be made to stand on his own two feet – even though it is the red states and their residents who are the biggest recipients of social aid.

But this resentment from Democrats, while a valid point, isn’t the subject of this blog post. My point in bringing up this chart is simply to point out that this is how a federal union works – there is an inherent trade-off. The prosperous states support the less prosperous states - who produce less for geographic, cultural or historic reasons – in exchange for having unfettered access to their markets so they can sell them things. And of course there are also cultural benefits to being in a union with these states as well - think about all the contributions these states have made to US culture.

Those of us from the prosperous states don’t gripe about being in a 'transfer union' – in fact I don’t think I’ve ever heard anyone bring this up. The reason this chart was being circulated wasn’t because the prosperous state residents want to secede from the less prosperous ones – they just want their less prosperous neighbours to get a grip on reality.

Now many people say the reason this federal model won’t work in Europe is because Europeans don’t have solidarity with other Europeans if they are from another member state. In the US, people feel ‘American’ before they feel significant identification with their state. In fact, most states don’t even have adjectival forms for their residents (can you be a Connecticutian? A Michiganer? These words aren’t used). This wasn’t always the case – 150 years ago Americans identified more strongly with their state than with the federal union. But because we’re all Americans now, someone from Connecticut doesn’t feel like someone from Alabama is a ‘foreign’ person or some kind of ‘other’.

In Europe this quite obviously isn’t the case. Few people outside of the Brussels bubble would identify themselves as a “European”. They identify with their member state. This aspect of the European project, fostering a ‘European identity’ among citizens, has failed – despite 50 years of effort. So it’s hard to get a Swede to feel a sense of obligation and solidarity to help their European brethren in Greece.

What about India?

But just because a European identity hasn't been created so far, does this mean it's impossible? The Eurosceptic argument assumes that such solidarity would never be possible in Europe because these countries speak different languages and have relatively different cultures, unlike the American states. But to me this argument doesn’t hold up if you look at the other major federal union – India.

When it was created in 1947, the new union of India brought together disparate states which speak different languages, have different histories, different religions, and had existed as independent states for hundreds of years before the British loosely united the subcontinent in the 19th century. Many Indians consider the Dravidians in the South to be an entirely different race. Yet India is a model federal democracy. Few people would say India can’t work and shouldn’t exist because its peoples are so different and speak different languages. So why do they say that about Europe?

India also has its prosperous states which pay for the poor states – and this imbalance between states is far greater in India than it is in Europe. But try telling an Indian living in New Delhi that being able to sell to a market of 1 billion people isn’t worth the sacrifice of seeing wealth transfer from rich Delhi to poor Calcutta. They would laugh at you.

Undoing nationalism

So what’s the difference between the Indian situation and the European one? Some of it is, frankly, arrogance. Europeans have a tendency to think their history and culture is far more important than the history and culture of people in Africa and Asia because their history was less recorded.

But more importantly, Europe in the 19th century was the birthplace of nationalism – the creation of nation-states linked to ‘peoples’. The height of nationalism - which gave birth in the 19th century to brand new states which had never existed before like Germany, Italy and Greece - drilled these new national identities into people’s heads. In order to solidify these new states, rigid cultural and linguistic conformity within the sometimes arbitrarily drawn borders was enforced through language bans, expulsions, population transfers and - above all – national education programs.

Europeans have spent the last century being taught that their individual nation is a distinct ‘people’, an entity which has existed for hundreds or even thousands of years and should strive for independence above all else. Indians never experienced this period of nationalism. Under the British raj, inclinations toward regionalism were discouraged for obvious reasons. And once the Indian state was created a national identity had to be created – largely through Hindu nationalism that played up religion and played down racial divisions between Aryans and Dravidians.

So 150 years of nationalistic education is hard to undo, especially when European countries have still not begun teaching students the basic principles of how the EU works. But it’s not impossible. Europe was not always this way – divided into tiny nation states where people saw themselves as fundamentally different from their neighbours. This is a creation of the modern world. If nationalism can be untaught, if Europeans can be made to see the economic benefit of a united Europe, then maybe some day the EU can get to a place where it seems natural for wealth to be transferred from Germany to Greece, just as it is transferred from New York to Alabama.


Captain Kid said...

You also forgot to mention that there are transfer unions within some of the member states. Just think of Germany, where people complain about a transfer union, but they live in a state (e.g. Berlin or North Rhine-Westphalia) that gets more money than it gives thanks to richer states such as Bavaria (which then again has political reasons) or Baden-Württemberg.

Peter Mayers said...

The issue of transfer unions and fiscal unions, and the politico-sociological prerequisites thereof, is a fascinating issue, and I hope to comment on it properly soon.

Just now, though, I'd like to address the amazing case of the "red-state" beneficiaries of the US transfer union. My brother told me a few days ago, in connection with some observations that Paul Krugman made on this topic, that it's natural for such beneficiaries to feel humiliated, and to take psychological refuge in a fantasy of self-reliance.

That struck me as an interesting point, but it also made me wonder why things work so differently east of the pond. For example, Swedes in the northern part of this country often feel resentful of the southern Swedes from whom they receive considerable assistance; however, they don't express this resentment by voting for parties which champion laissez-faire. Instead, they vote overwhelmingly for parties of the left, which are firm advocates of cross-regional redistribution on behalf of poorer regions within Sweden.

Republican states in the US, on the other hand, are voting for a party which calls for poorer regions to be left twisting in the wind. That's the part that's really strange here. It would be one thing if the conservatism in question were simply of a cultural and "hot-button" kind -- you know, guns and God, militarism and machismo, etc. Conservatism of that kind is perfectly compatible with being economically deprived. And in Europe, surely enough, conservatism of a broadly similar kind is not infrequently exhibited by economically deprived sections of the population (including the inhabitants of deprived REGIONS). However, this kind of cultural conservatism is typically combined with a rather welfarist attitude on socioeconomic issues (except to the extent that the welfarism in question is -- or appears to be -- focused on assisting various immigrant and other minority groups, in which case conservatives of this variety display their Social-Darwinist fangs quite readily).

So what's going on here? Why makes northern Swedes so different from the inhabitants of "red states" in the US? Maybe the difference can be explained in part by the fact that many of the inhabitants of northern Sweden feel exploited by the southern and south-central regions of the country. That is, they often feel that profits deriving from the northern extractive industries (forestry and mining, most classically) get sucked out of their region and then pumped into the Stockholm area. In which case, they feel, it's only right that the tax-and-expenditure system then funnels some of the loot back to them. After all, such a policy simply compensates them a little for the profits that were sucked out of the raw materials in their region in the first place.

Of course, a good many Stockholmers don't see it that way. But never mind that: the main thing here is that many northern Swedes, for the above-mentioned reasons, don't feel embarrassed by the cross-regional redistribution that takes place in their favor.

Peter Mayers said...

Perhaps another reason why northern Swedes behave more rationally than US red-staters is that rugged individualism is a lot less prevalent in Sweden than in the US. Swedes in general tend not to be ashamed of using social-welfare benefits (although the picture here is a bit complicated, above all because it depends on WHICH social benefits and services we're talking about: i.e., parental leave or supplementary income assistance? the national health service or a special program aimed at alcoholics?). In general, Swedes tend to regard their social benefits as a right -- as nothing to be ashamed of (indeed, as something to be proud of). Again, it depends on which benefits we're talking about, and the same can in fact be said of the US (how many Americans feel ashamed of receiving retirement income from Social Security, for example?). A big part of the difference on the "shame" front, then, doubtless reflects the different STRUCTURE of many or most social-welfare programs in Sweden, as compared with that of many or most social-welfare programs in the US.

Still, when all is said and done, the difference in attitudes on the question of "self-reliance" -- i.e., the much heavier tilt towards rugged individualism in American culture -- probably accounts for a fair part of the difference. If living on the dole is especially embarrassing for you, on account of a deeply ingrained strain of rugged individualism, then you may well respond by voting for a party which champions rugged individualism very loudly. Besides which, such a posture is probably made easier by the fact that, for a variety of reasons, it's much easier to detect that an individual or family is living on the dole than to detect that a region is so doing.

Peter Mayers said...

Or let's take a British comparison instead, which naturally enough is more familiar to Americans than is the case of Sweden:

Do the inhabitants of Wales, Scotland, and northern England express their resentment of those fancy Londoners and other southeasterners by voting Conservative? In a word: nope, nope, and nope. Do the Tories sweep the boards in Yorkshire or in Liverpool, in Welsh mining towns or in Glasgow? Not quite. Indeed, almost any Brit would find such a proposition jaw-droppingly weird.

Peter Mayers said...

Maybe I can describe what's puzzling me this way:

In the Old World (or at least most of it), political divisions usually make socioeconomic sense. Essentially and basically. Political divisions on this side of the pond are substantially rooted in socioeconomic divisions. The former reflect the latter fairly well, at least in most cases.

That's also true in the case of the present eurozone mess. Said mess is really quite nasty, I think; indeed, I'm inclined to believe it defies sensible solution. All the same, the various antagonisms and divisions that arise in connection with said crisis are almost all perfectly predictable from a socioeconomic standpoint. The euro crisis may be virtually insurmountable, but for the most part it's perfectly intelligible.

The US is different in this regard. Something or some things are getting in the way of any reasonably straightforward expression of socioeconomic divisions within the political field. Said divisions are hardly absent from US politics, of course. Oftentimes, however, they take a very peculiar or even backwards expression.

Any theories? Any provisional explanations for why US politics is so divergent in this respect?