1. What the eu Needs Is a Copy of “The Federalist” Papers

Los Angeles – It may be indelicate for an American to point out, but now that the start-up of Economic and Monetary Union has accelerated the European Union's pace toward full economic integration, the US experience may provide some useful lessons. Not that we do everything right or that we provide a precise model for the working of a somewhat similar economy, but some long-standing American economic interactions do resemble those developing on the old Continent.

In at least three areas of economics – monetary policy, taxes, and fiscal policy – we've been there, done that. Together, the three may also provide some hints about political confederation.

• In the realm of monetary policy the European Central Bank can learn from the Federal Reserve, if it is willing to. The Fed's ability to maintain its integrity while paying due deference to the democratically elected authorities with which it works provides a model more appropriate to a complex economy than does the haughty independence of the Bundesbank. The single-minded Bundesbank ideology – price stability-uber-alles – cannot work in a Europe where recession threatens to increase already high unemployment; the Fed's pragmatic willingness to bring growth and employment into the balance can.

• The lessons for tax policy are less direct. What is thought of, as tax policy in the United States cannot exist in the European Union because the EU levies no taxes of its own? It is financed by contributions from the member states, which use their tax revenues to support the EU budget as well as their much larger national needs. Although political infighting over relative contributions is inevitable, EU members have also been squabbling over “harmonization” of national taxes – setting EU-wide rules for rates and regulations.

The American experience suggests that this is quite unnecessary. The US Constitution provides few constraints on the ways in which the states may raise revenues: they can legally levy income taxes, corporate taxes, sales taxes and property taxes on their individual and corporate residents at any rates they want, and they do. State taxes vary, but the variations stay within limits because the citizens and the companies in the states compete with one another.

The limits are imposed by economics, not legislation; they work and cause few quarrels. Similar natural limits are in fact becoming visible in Europe; the squabbles are unnecessary.

With monetary policy in the hands of the European Central Bank, fiscal policy – budget deficits and surpluses a la Keynes – is the remaining tool with which the member states of European Economic and Monetary Union, or EMU, can affect their own growth and employment. But such national autonomy is illusory however; the rules of monetary union limit deficits, and economic reality reinforces the rules. Before EMU a state could finance a deficit by borrowing from its own central bank. No longer.

The US model is again illuminating. The American states cannot run persistent deficits because they cannot borrow to finance those deficits, except at prohibitive interest rates. The federal government, however, can borrow from the Federal Reserve to finance immense deficits, has done so, and surely will again when economic downturn calls for fiscal stimulus. Except for one crucial difference, the government of EMU could similarly borrow from the central bank when dictated by Europe's needs – the difference, of course, being that there is no government of EMU.

This leads to the possible lesson for political confederation. When recession suggests a continent-wide need for stimulus, the pressure will be on the member states to create some sort of joint fiscal decision-making mechanism. Such a mechanism will not be called a confederation but it will be a major step in that direction. It will raise the question of whether the mechanism should be used for making other joint decisions. That in turn should reraise the question of the “democratic deficit”; in particular, should the one body elected by European individuals, the Parliament, be given more power over such decisions?

The move will be on. At that point, an American might even have the temerity to suggest that Europeans read “The Federalist” papers.