Blogs & Comment

Canada: model for the E.U?

If the European Union wants to endure, perhaps its architects should look at how Canada keepsdisparate regions together in one union. One of the magic ingredients, as we Canadians know only too well, is equalization payments — i.e. transfers of income from the richest to the poorest provinces specifically, from Alberta and Ontario (although Ontario is faltering) to the Maritimes and Quebec.
Does the EU have the same capacity to make equalization payments? It would seem not. The Germans, who pay their taxes, are quite disenchanted about supporting Greek citizens, who, by and large, avoid taxes and have more generous social programs (e.g. 57 as the retirement age for civil servants versus 67 for civil servants in Germany).
Yet financial markets are skeptical of the current approach to dealing with spendthrift EU members — which involves bailout packages conditional on austerity measures. Those austerity measures look like they will keep a lid on economic growth in the spendthrift countries, which means little improvement in the ability to repay the loans when they come due in a few years. So, financial markets are still worried about debt defaults.
If debt default occurs and spendthrifts like Greece leave the EU, they will have their own currencies and they will let them depreciate against the euro to boost exports to the EU. This is how they will stabilize their debt problems. But what this means for the core group of EU is that they still end up having to finance the spendthrifts turnaround through the migration of jobs, industries and living standards to the wayward EU members.
Instead, the core EU group could provide income transfers to the periphery to establish a floor below which their economies would not be allowed to deteriorate as they adjust to living more within their means. Do away with excessive pay and benefits in the public sectors but help smooth the transition. If some compromise along these lines can be arranged between have and have-not EU members, the end result would be to maintain the EU. And the core members could still keep on selling goods and services to the fringe members; they wouldnt have to transfer jobs and industries.
Thats the way it works in Canada, more or less. Im not saying that it is right or wrong, better or worse. Indeed, some have made the case that it is the wrong way. A radio talk show host pointed out just this morning that Quebecs social programs are more generous than the rest of Canadas (e.g. public day care available for $7 per day) and Quebec civil servants can retire at 62. Yet, he said, Quebec gets $8 billion a year in equalization payments.
Im not saying the core EU members have to also be similarly overly generous in their transfer payments to ensure the survival of the EU. Perhaps Canada needs to realign regional redistribution of income, especially with Ontario struggling. But it cannot be denied that, so far, the system of equalization payments has been instrument in keeping Canadians under the same roof.