In an economic and monetary union, the most prosperous countries are eventually doomed to solidarity

It has long been known that in an economic and monetary union, the member countries tend to become more heterogeneous over time. This is because the elimination of currency risk enables the countries to fully exploit their comparative advantages, leading to divergence in productive specialisations and, as a result, in income levels. If the most prosperous countries with the highest relative income levels reject solidarity with the countries with the lowest relative income levels, the latter will eventually leave the economic and monetary union to regain economic policy leeway (currency devaluation, fiscal deficit monetisation, deregulation, etc.) and under pressure from an increasingly anti-Europe public. To avoid this scenario, the most prosperous countries have to agree to income transfer policies to reduce the heterogeneity of the economic and monetary union. They do so for a completely selfish reason: to protect their economy against the effects of a break-up of the euro. With regard to the euro zone, this is probably what we are seeing today with Germany (see Angela Merkel’s most recent statements) and probably with the northern European countries (see the 21 July agreement on the European recovery plan).