One big difference between the two models is distribution of the burden of adjustment. In the United Kingdom, one out of eight workers (3.8 million) lives in poverty as reported by the Joseph Rowntree Foundation. A study published by NCBI disclosing 2010 figures tells that close to 18 percent of U.S. households (11 percentage points working, 7 percentage points nonworking) are in poverty, which is at the top of a list of twelve OECD countries. The eurozone countries opt for keeping nominal wages relatively unchanged, encouraging people to keep looking for jobs, while mobilizing social security systems to alleviate the burden. This is illustrated by inequality measurements lower than those of the United States and the United Kingdom, with Gini coefficients at 0.394 and 0.356 respectively, compared to France (0.297), Germany (0.289), Italy (0.326) and Spain (0.344). Greece, Ireland, and Portugal all have a Gini coefficient lower than that of the United Kingdom (OECD data).

 

The eurozone adjustment policies work. Spain and Ireland are fully restored as competitive economies. Portugal still needs to do more work, but is out of the danger zone. Italy has shown lackluster growth for almost twenty years, but experience from before the single currency justifies the verdict that the situation has little if anything to do with the euro. Greece is slowly, slowly turning around to growth. Behind the curtain, a closer look discloses that, prior to joining the eurozone, overspending that inflated income per capita took place in Greece, partly facilitated by global banks to hide the truth from creditors, and Greece’s economy is still in the grip of the privileged.

 

There has not been much convergence among U.S. states with regards to income per capita. According to an analysis published by The Atlantic in May 2012, five states—California, Connecticut, Illinois, New Jersey, and New York—annually pay Missouri, Tennessee, and Kansas

between 15 and 30 percent of what these states tax people living there. The point is that this is done without much effort to restructure their economies, thus keeping them dependent on federal subsidies. It seems legitimate to ask why this is preferable to the European effort of restructuring and modernizing the economies of poorer member states primarily in the southern part of the European Union. Figures indicate that states tend to be locked permanently in their

role as net contributor or net recipient.

 

The strains on the political system of permanent fiscal transfers among states are visible in the United States. The federal budget is kept at approximately 20 percent of GDP and every effort to increase taxes hits a wall. Voters react by limiting the size of the federal budget. The result is close to fifty million Americans below the poverty line and what may be termed a minimalist state with regard to public social services. Few Europeans would like to transform the European society model into a replica of what is seen in the United States and to a lesser degree in the

United Kingdom.

 

The main problem for the eurozone is not the lack of a fiscal union limiting fiscal flows to smooth out the business cycle and in particular outside shocks, but the lack of a genuine European business space and capital market.

 

The large majority of European mergers and acquisitions take place among companies from the same nation-state or at most adjacent nation-states. Only the big ones cross borders. This has several implications. One of them is that in the long run, European small- and medium-sized enterprises may find it difficult to grow into bigger companies. Germany may be the only large eurozone country with a strong sector of small- and medium-sized companies, but one wonders how long this can go on. Anecdotal evidence is forthcoming that when current owners quit,

the handover to the next generation is difficult.

 

There are no statistics to support such a view, but common sense and observing what is happening support the conclusion that these enterprises do not see possibilities for mergers and acquisitions involving similar enterprises in member stares beyond neighboring countries. It is rare to see a Swedish company merge with a Spanish company or an Italian company merge with an Irish or Finnish company. In that respect, the European Union and the eurozone have not developed into a single market. The same goes for a capital market. Beyond the larger cities, branches of major banks are not many and they do not see themselves as part of the banking system serving regions and local communities, nor do they see a role for making the money market function inside the eurozone, that is, smoothing out economic disruptions by transferring money among branches. Inside nation-states, banks “ferry around” money to help towns or regions, but they don’t do this on the eurozone level. In reality, their role may often be pro-cyclical in the sense that branches in a region hit by an outside shock think first of avoiding

losses, which will displease the headquarters, and only after that if at all whether they can do something for the town or region. The implication is that money is drawn out instead of flowing into areas needing stimulus.

 

The fact is that the business sector and the banking system do not operate on a eurozone level as they do in the United States.

 

This is explained by a study by the International Monetary Fund. In case of “shocks” to a local community in the United States, about 80 percent is smoothed out by help from the rest of the country—the economic and monetary union. Only 15 percentage points comes from fiscal flows (lower taxes to the federal government and higher federal expenditure in the local community), while 65 percentage points can be ascribed to private sector flows.

 

In the eurozone, only 45 percent of a shock is smoothed out by help from the rest of the economic and monetary union, and fiscal transfers play a limited role.

 

This is where the main work of reforming the eurozone should be done.

 

Full article in The International Economy (subscription required)