Why did the EU not unify the financial systems when the Euro was created?

Question

It could be argued that many of the problems plaguing the EU in the recent years stem from a lack of integration among the various countries in the union.

These missing "integration points" include, but probably are not limited to, financial (starting from the taxation), judicial/law, political, and military systems.

The creation of the Euro, I think, could have been a good occasion to move forward with a financial/taxation integration.

Why was this not done? Was it deemed "too soon"? Or are there more complex reasons that I am currently overlooking?

Answer 1

It wasn't deemed required; for example the Director of the IMF’s European Department writes:

In sum, the euro’s architecture was built on the premise that market forces, combined with minimal coordination of policies, would suffice to align economies, discipline fiscal policies, and allow countries to withstand idiosyncratic shocks.

The gist of that is echoed here:

what I recall from discussions at the time was the belief that two factors would make the adjustment problems manageable. First, countries would adopt sound fiscal policies, and thereby reduce the incidence of asymmetric shocks. Second, countries would engage in structural reforms that would make labor markets— and, presumably, wages—flexible enough to cope with such asymmetric shocks as occurred despite the soundness of the fiscal policies.

And this paper mentions:

The proponents of the second perspective, which has been dubbed the ‘endogenous currency area’ (ECA) argument (alternatively, the ‘self- validating currency area’ argument) [..] assert that the creation of a currency area can itself induce changes that actually enable the participating countries to achieve a sufficient degree of integration [..] ex post to make a currency area viable [...]. ECA proponents argue that greater optimality arises because adopting a single currency typically has expanded trade dramatically with other currency union members .

and the ECB reported in 2002:

If national fiscal stabilisers work in the wake of adverse shocks, the need for other types of adjustments -- such as supranational transfers, international risk sharing through the financial system, changes in prices and wages, and/or changes in real exchange rates -- are somewhat reduced.

Note that these viewpoints were somewhat controversial even at the time (the second and third links are criticisms of this viewpoint).

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It also fits with how much of the EU's was constructed. As Robert Schuman put it in the Schuman Declaration: "Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity."

The Euro was effectively a continuation of the European Currency Unit launched in 1979. While I can't find a conclusive reference for it, I would imagine that the creators of the Euro imagined further integration in some form at an unspecified future point. Thus far such integration has largely failed to materialize due to various reasons outside of the scope of this answer.

Answer 2

financial (starting from the taxation), judicial/law, political, and military systems.

Making any big reform is hard. And such idea would require dozens of huge reforms. Voters in many countries would be nervous, and it would be enough for one country to derail whole process. (Less ambitious projects like EU constitution were condemned by voters, so had to be implemented indirectly, as a reforming treaty.)

So why the project went on anyway?

There are some clear advantages from common currency in trade or tourism. The idea was that the only necessary precaution is a legal mechanism enforcing basic financial prudency among gov member states (like budget deficit below 3% GDP and public debt below 60% GDP). So if there is independent central bank and restrained gov spending, then the system should be more or less stable.

It even sounded logic - countries obtained benefits of common currency while maintaining sovereignty where unification gains would be lower or too hard to achieve.

The problem is that a few things were overlooked:

• stability of banking sector (EU level regulation to enforce that were passed after the crisis)

• vulnerability to asymmetric shocks (deep fiscal integration would be necessary, so no chances in foreseeable future)

• generally not enforcing penalties for violation of rules (another issue is that those rules were not so good and were extended after crisis)

• possibility of some countries to cook the books (like Greece)

Answer 3

To understand the EU it is necessary to understand that it operates as a mutually antagonistic system, based upon three bodies which have opposed objectives.

On the one hand, the bureaucracy - the European Commission - wishes to centralise all power in its own hands, through centralising all decision making and authority, and taking it away from the member states.

Opposed to this, the Council of Ministers represents the individual member governments, each of whom are more or less implacably determined to keep the real power in the hands of the 26 member governments.

Opposed to both, the European Parliament wants to be the organ which has real control of the project, being directly elected by the people, and therefore having greater political legitimacy than the other two bodies.

The eternal struggle for supremacy between these different centres of power is what prevents the project from moving forward. To some extent, the French government - but really few of the other governments - supports the bureaucracy, so long as the French government believes that it can exercise some control over that bureaucracy, for example by filling it with French appointees.

The governments of the member states fight really hard to retain the financial and economic levers of control - within their own territories - under their sole control. This is why they fight hard to prevent central control of their fiscal and tax systems from being introduced. They want to continue to set their own taxes, and do not want a central government in Brussels to have control of tax and spending policies. Thus they do not want the 26 financial systems of the 26 member states to be unified under the control of Brussels. So when the single currency was created, they made sure that it was the member states, not the EU's bureaucracy, who continued to have real control of the individual nations financial systems.