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Initiating a bold effort on February 4, 2011 at a summit of the European Council (composed of heads of the state governments) to strengthen the euro by coordinating fiscal policies among the 17 states that use the currency, the German Chancellor and French President laid down far-reaching plans to deepen economic and political integration for the group of states within the EU. From the standpoint of the US, a subset of states relatively integrated federally seems strange, though perhaps such flexibility will obviate a war between EU states in the future. In other words, Americans ought not dismiss the arrangement out of hat. This is not to say that bringing fiscal policy up to the EU level to join monetary policy will be easy, even for just seventeen states.  The particular interests of the latter must be balanced against the interest of the ECB (the EU's central bank) for some degree of fiscal coordination and accountability.

According to The New York Times, “France has long wanted the euro zone to be on a basis that made it more important and the Germans have now accepted that logic.”  Deutsche Welle reports German Chancellor Angela Merkel as saying, "We want to bring in a competitiveness pact and step by step bring about a more linear, shared growth." The New York Times reports that Merkel and Sarkozy “appeared to have reached the conclusion of many critics of the single currency who argue that the financial crisis exposed a flaw in the design of the euro by creating monetary union without either economic convergence or political union.”  However, even mentioning “political union” to the heads of the state governments is like bringing a lightening rod into a crowded elevator car during a thunderstorm. Even if monetary union is itself political and requires further political and economic integration, efforts to do so will face a strong headwind at the state level.  Whereas in the U.S. the objections of states to further political integration are typically easily dismissed by the U.S. Government unless a branch of that government acquiesces (e.g., the Federal Courts that have declared the Affordable Care Act’s health insurance mandate to be unconstitutional), such objections in the E.U. typically have the edge because of the power of E.U. state governments relative to the E.U. Government.  For one thing, whereas the U.S. state governments are no longer directly represented in the U.S. Government through the congressional Senate, the E.U. state governments sit as the European Council and the Council of Ministers.  In vital areas including taxation, approval in these “senatorial” bodies must be unanimous.  With 27 states in the EU as of 2010, each state government has enormous power in deciding whether to retain fiscal policy or shift still more sovereignty over to the E.U. (in which the state governments participate via the councils, albeit under qualified majority voting on all but the most important matters).

The criteria identified in a German policy paper that circulated before the summit meeting included items that the state governments have hitherto sought to retain for themselves. According to The New York Times, the approach proposed by France and Germany is “controversial because it touches some of the most sensitive areas of policy — like taxation and wage policy — where many nations guard their sovereignty jealously.” The items identified include abolition of state-level wage indexation systems, the creation of a common base for assessing corporate tax, the alignment of pension systems and legally binding commitments to tough fiscal policies. According to Deutsche Welle, “Germany's ideas also include raising the pensionable age depending on a country's demographics, limiting wage increases, and agreeing a common tax base for corporations.” The plans also strengthen the rescue fund for the euro zone by allowing it to lend its full, €440-billion ceiling figure, and perhaps use its funds more flexibly.  Lastly, with regard to stricter fiscal discipline, the plans also include the idea of a "debt brake" that would establish a constitutional limit on deficits—the existing limit of 3.5% of GNP having been essentially ignored even by Germany.

The proposal was greeted with criticism from governments that fear they may have to raise corporate tax rates or scrap deals that link annual wage increases to inflation. “I totally disagree with the current proposals,” Leterme of Belgium said. "There must be more economic cooperation, but member states must be left the room to carry out their own policies," Leterme affirmed. "Each member state has its own accents, its own traditions. We will not allow our social model to be undone," he added. To be sure, such diversity is part and parcel of a federal system, which is essentially “unity in diversity.”