Washington refuses to rescue near-bankrupt statesby C Randall Henning / June 20, 2012 / Leave a comment
Europe should look to America, where California’s crisis does not threaten the union
The euro crisis has now entered a decisive stage, a moment of truth for the governments of the troubled currency bloc. Countries with sound public finances, led by Germany and its chancellor Angela Merkel, have been demanding progressively more intrusive control over the budgets of crisis-stricken members to guarantee that their financial support will not be abused. In this debate about how far Europe should move towards federalism, European officials often allude to the financial constraints that the 50 states accept under the federal system of the United States.
But the comparisons risk misunderstanding the nature of the financial discipline at the heart of the American model. The plight of California offers some hope to Europeans: it shows that a union of many members can survive when some are profligate, and without resorting to bailouts by the financially stronger members, or by a central federal government. In all the anguished debate in California, there is no serious prospect that the US federal government will bail out the state. Nor does anybody in the US really doubt that California will remain part of the US monetary union—the dollar. But the second lesson demands further action from Europeans: this overall robustness, and the ability to be tough towards profligate members of the union, is possible only when the costs of government and of protecting banks are shared to a far greater degree than the eurozone has yet accepted.
California has been in a budget crisis for years. It entered a new, acute phase in May when estimates of its budget deficit in 2013—the gap between its projected revenue and its spending for that year—were revised sharply upwards. The state’s politics are famously dysfunctional. Major tax increases require the support of two-thirds of both houses of the state legislature, which is frequently at odds with the governor regardless of who occupies that office. Critical fiscal decisions are often the subject of statewide referendums—a repeated test of whether voters will actually back cuts and personal discomfort in pursuit of more stable finances for the state overall. To close a $15bn budget gap, Governor Jerry Brown has placed a referendum before the electorate for a vote in November that proposes a combination of a 0.25 per cent rise in the sales tax and higher tax rates on incomes over $250,000.