Why Germany shuns Canada’s debt model | John Ibbotson | Aug. 13, 2012 | The Globe and Mail

Mutualization (or equalization) is a system design decision by jurisdictions on pooling debt, that may not be tied to entitlements.  Sustainability of the whole requires a balance between inflows and outflows agreed commonly;  sustainability of the parts could be more feasible with local decisions enabling a degree of variety not possible in a more universal collective.  The situation in Europe can be compared to the history of equalization across provinces within Canada.

To prevent a possible collapse of the euro zone, a growing number of European economists and politicians are calling for the mutualization of debt. In essence, at least some of the debt of the nations in the euro zone would be pooled, with the richer countries guaranteeing the loans and helping to pay them down.

Ms. Merkel is strongly resisting the idea, and with good reason. Germany and other northern European “have” states could end up bleeding money year after year to “have not” states in southern Europe. The euro zone could become, in effect, a mirror image of Canadian federalism, with the Mediterranean playing the role of Quebec and the Maritimes.

The various rescue packages that have been put together to solve the crisis, however ineffective they might be, at least come with conditions. In exchange for loans and guarantees, indebted governments are expected to balance their budgets by cutting social programs, laying off public-sector workers, and loosening regulations in order to encourage private enterprise.

By mutualizing debt, the conditions attached to the loans could be weakened or disappear. Countries such as Germany that keep their entitlements in line with tax revenues would annually subsidize governments that spend money on things they can’t afford.

Much the same thing happens in Canada. It’s called equalization. The federal government sends transfers to poorer provincial governments, which spend the money on social programs that would otherwise be beyond their means. Some of those programs – such as Quebec’s daycare and tuition subsidies – are more generous than programs in provinces that don’t qualify for transfers. This is exactly what German taxpayers are warning Ms. Merkel they won’t put up with.

And once debt is pooled, entitlements become pooled as well. Everyone in the euro zone would come to expect certain basic levels of heath care, education and other social services, whether or not they could pay for them, just as Canada’s Constitution guarantees a similar basic level of services across the country.

The Economist warns of exactly such a danger in this week’s issue. “A transfer union across the existing single currency zone based on the Canadian model would seek to make governments’ revenues more equal,” its writers predict. They estimate such a system would cost Germany the equivalent of 3 per cent of GDP annually.

Sounds about right. Ontario loses an estimated 2 per cent of its GDP each year in transfers to other provinces, according to a recent Ontario government report, while Alberta pays considerably more.

But no one has the power to compel have-not provinces to balance their budgets and trim their spending or face a cut-off in transfers. Only the governments themselves and the bond-rating agencies that assess their lending risk have any real say.

Quebec’s debt currently sits at about 55 per cent of the province’s gross domestic product. If Parti Québécois Leader Pauline Marois had her way and Quebec became an independent nation, assuming along the way its share of the national debt, the new country would start life with a debt-to-GDP ratio of just under 100 per cent, instantly making it one of the world’s most indebted countries.

Why Germany shuns Canada’s debt model | John Ibbotson | Aug. 13, 2012 | The Globe and Mail at http://www.theglobeandmail.com/news/politics/why-germany-shuns-canadas-debt-model/article4478005/.

Why Germany shuns Canada’s debt model - The Globe and Mail