Invisible Redistribution to Weaker Economies? The Case for EU Automatic Stabilizers

March 29, 2012

On March 29, 2012, the American-German Institute hosted a lecture by DAAD/AGI Fellow Dr. Dorothee Heisenberg. Dr. Heisenberg’s lecture addressed the use of automatic stabilizers as a long-term solution for the structural inequalities between European states. Dr. Heisenberg argued that if the EU is to remain a central currency unit, it must link distributive funds to individuals rather than to states in order to preempt the centripetal forces resulting from continued political debate on explicit redistribution through lump-sum transfers.

Dr. Heisenberg began her lecture by highlighting the political improbability of the implementation of her recommended reforms, characterizing her work as an attempt to begin a discussion on long-term reforms of the transfer union rather than as an immediate policy recommendation. Dr. Heisenberg then compared Greece, as a weak state within the otherwise strong EU economy, to Mississippi, which has a similar position in the U.S. economy. The difference in treatment of the two stems primarily from the nature of their redistributive mechanisms. In order to make up the Greek deficit, European states have approved a series of highly visible and contentious bailouts, approved by national parliaments and granted to the Greek government through the EU. The Greek government is then expected to reform its economy and use the bailout funds to cover the cost of interest from accrued debts.

Mississippi, on the other hand, receives no explicit bailout from Washington, D.C. Instead, the federal government compensates Mississippi’s economic malaise with direct transfers from the federal government to residents of the state through programs such as Social Security and Medicare. Because Mississippi has a higher proportion of individuals who receive these benefits, these “automatic stabilizers” are essentially invisible transfers from U.S. states with healthy economies to Mississippi, comparable to the Greek bailouts in scope but politically palatable due to their systemic rather than explicit redistribution. By excluding both the donor and recipient state from the transfer process, “automatic stabilizers” prop up Mississippi’s economy while avoiding the heated debate experienced by European states discussing bailouts of fellow Member States.

Dr. Heisenberg drew a similar example from Germany’s Länderfinanzausgleich, a mechanism through which Germany’s wealthier states finance Germany’s economic laggards. This mechanism consists of both invisible and explicit redistributors. First, the states all share revenue from the value added tax, essentially redistributing tax funds from states with healthy economies and high consumption to those which lack the same consumer base. On the visible level, wealthy states are required to transfer a proportion of their budget to states with budget deficits. Because of these explicit transfers, the Länderfinanzausgleich remains controversial, earning criticism from wealthier states regarding the “moral hazard” of financing their weaker partners.

In addition to the difficulty arising from explicit transfers, Dr. Heisenberg criticized migration as a non-viable option for redistribution from wealthier to poorer economies. Immigration between Member States in the EU remains very low despite worsening economic conditions in periphery states and significant institutional hurdles reduce the ease of migration within the Schengen Area. Because neither costly, crisis-based bailouts, nor migration can ease economic inequities, Dr. Heisenberg argued that, in the long term, “automatic stabilizers” paid from Brussels to individuals is the most viable option for the monetary union. According to Dr. Heisenberg, the EU could successfully manage its structural inequalities by using invisible redistribution to weaker European economies, thereby depoliticizing the redistribution process and ensuring the longevity of the monetary union.

About the presenter: Prior to joining AGI, Dr. Dorothee Heisenberg was the Associate Director of the International Studies Program at the Johns Hopkins University. Before that she was the S. Richard Hirsch Associate Professor of European Studies, Johns Hopkins University School for Advanced International Studies (SAIS), in Washington, DC. Her book, The Mark of the Bundesbank, analyzed why the euro was constructed to look so much like the Deutsche Mark; she has also written on the European Central Bank, the EU Council of Ministers, and European decision-making more broadly.

AGI is grateful to the German Academic Exchange Service (DAAD) for its generous support of this event.


Kimberly Frank