Fiscal Equalisation, Indeed

Hans-Olaf Henkel, who knows perfectly well that what he proposes will never happen and who is therefore effectively calling for German withdrawal from the euro, writes:

In Germany, we already have a homegrown example of the absurdities an EU bailout fund can bestow. Under the "fiscal equalisation" system that exists between Germany's states, if Berlin, for instance, spends €1, it receives 97 cents back from the less fortunate states. However, if Bavaria saves €1, it must give 97 cents of it to other states. This has the same consequence for both: saving doesn't pay.

Berlin's mayor, Klaus Wowereit, has recently demonstrated the absurdity of this system. He decided Berliners were to be offered free kindergarten places, which makes parents in Berlin happy and more likely to vote for his party. Not so happy are those who have to stump up the millions to pay for it – the taxpayers in the other donor states who not only have to pay for their own kindergartens, but also those in Berlin. Policymakers in Bavaria, Hessen and Baden-Württemberg realise Wowereit is affording a voter-friendly luxury at their expense, so they decided to do the same. Kindergarten places will be free in our state, too! One might call this a system of organised irresponsibility.

The EU, once conceived as a community of competition in which each attempts to surpass the others in productivity and quality of life, is becoming such a transfer union, a community of redistribution in which a new competitive discipline will emerge: who can tap the others for the greatest amount.

In the long run Germany will be less and less distinguishable from other countries and, instead of standing together with the Netherlands, Austria, Finland and Luxembourg as bastions of calm, it will throw the stability culture overboard and amplify the downward trend. What this means for Europe is easy to imagine. The continent, once the engine and ideas generator of the whole world, will fall hopelessly behind the other major regional blocs.

I was once an enthusiastic supporter of the euro, and I still believe in Europe. Not in the idée fixe of the technocrats who wish to measure everything by the same yardstick, and who perceive any national deviation as a threat, but in a Europe of diversity. The competition between nations was a major reason for Europe's success. With the transformation from a monetary union to a transfer union, the countries in the eurozone will no longer reach for the skies but will coalesce around the lowest common denominator.

Having accepted the old French dream of a "common economic government", Chancellor Angela Merkel has agreed to accord greater importance to maintaining community spirit and equalisation between eurozone members than maintaining monetary stability and competitiveness on the continent.

If Europe wishes to go back to being a creative community based on competition, it will need a new approach that takes account of the prevailing economic differences that exist.

I suggest splitting the euro into two zones, reflecting the cultural differences in mentality between the countries in question – a "northern zone" centred around Germany, Austria, the Benelux countries and Finland, whose adherence to monetary stability and budgetary stability would be represented by the hard northern euro; and a "southern zone" centred around France, Spain and Italy, whose soft variant of the euro would reflect their free-spending mentality and talent for monetary improvisation. Considering that it suffered primarily from an absurd banking policy rather than a lack of budgetary discipline, Ireland should be part of the north.

The "southern countries" could retain their own competitiveness through a greater tolerance for inflation and corresponding regular devaluations. They would no longer be forced by the European Central Bank into the "straitjacket of Germanic stability phobia", as the outraged students of Athens and furious unemployed of Madrid perceive it. They could do what they used to do before the introduction of the euro: remain competitive in their own way.

Or does anyone seriously believe that Greece or Portugal can reduce their debt mountain by choking off economic growth, causing record insolvencies of corporations and inducing unemployment, thereby draining their tax base?

It is argued that German industry has benefited in particular from the euro, and would suffer from the currency appreciation that might be expected under the "northern euro". For a start, it is clear Germany has exported capital on a massive scale since the introduction of the euro – thus supporting economic growth beyond its borders. A myth has also arisen over Germany's export surplus. In fact the dependence of German exports on eurozone countries has actually declined gradually since the introduction of the common currency (44% in 2000, to 41% in 2009).

And while it is true that the creeping devaluation effect of today's euro suits German exporters, one must take into account that German imports have risen even faster since the introduction of the currency. We are now the world's second biggest exporter, but also its second biggest importer.

German industry's success was for decades tied to a strong and stable currency with low inflation. Seventeen currency appreciations not only strengthened the deutschmark, it kept the export industry on its toes. For how much longer will German industry allow itself to be seduced by the sweet-smelling poison of a devalued euro?