14.1 Benefits of the federation

Against obvious difficulties in maintaining federation described in previous chapter, we have to say  its benefits are enormous.

The process which leads to need to implement fully federal transfers is straightforward:

At the beginning, national states were producing everything within their boundaries, there existed trade barriers and taxes forbidding free flow of goods.
As soon as free trade zone is introduced as a first step towards federation,  production starts to cumulate to bigger factories due to economies of scale.
Simply put, if some factory is producing 1 mil of something just for national state it is far more expensive as if bigger factory is built which is producing 5 mil of the same product for the whole group of states.

As a result of economies of scale and geographic concentration, price goes significantly down and all consumers benefit.

It is important to say that really ALL, regardless whether they are located in country where is this newly concentrated production located or residing in country which local production facilities were abandoned and are just buying the goods from new, much cheaper source.

However, there is one difference: before the concentration, flows of goods and money were happening within boundaries of single states, there was no permanent outflow of funds.

After the concentration,  flow of goods and money is separated from state boundaries and leaves us with a situation, where certain states are permanent net buyer of goods ( negative trade balance) and some are net receiver of money ( positive trade balance).

It is important to mention that benefits gained through economies of scale still exist, and all types of states ( net receivers, net buyers) are benefiting enormously.

But the established pattern of money outflow  is causing the need to implement federal transfers, as otherwise net buyers would simply after some time bleed out of money and they would have no other option than to secede from federation and resurrect their abandoned industries.

As a result it could mean countries in which this highly concentrated production is now happening would suffer probably the most.

Production of 5 mil pieces is cheaper than 1 mil pieces,  but production of 2 mil pieces in factory designed to produce 5 mil is more expensive than production of 1 mil in factory designed to produce just 1 mil !

Of course, all would lose:  economies of scale would be lost, enormous wastage of natural resources would occur in relation of building of duplicity factories just to supply states locally ( which already existed at full capacity )

So obvious step to maintain these advantages of economies of scale is introduction of federal transfers, which regularly replenish net outflows from deficit countries.

And successful federations got this :

In USA, there are states that are getting every year more federal spending that they pay in federal taxes. For example Delaware, Minnesota, New Jersey, Illinois are permanent net donors, while New Mexico, Mississippi, West Virginia, Montana  are net receivers.  Nobody is telling them that they should tighten their belts through austerity or that they are lazy – money simply flows and maintains them in the union.

In Canada, situation is the same – some provinces are regularly supported by richer ones.  

China is the perfect example of successful federation and we all envy their 6-7% GDP growth.
Some are attributing this growth to authoritarian Communistic rule.  But it is not so.  The reason of Chinese growth is that they perfectly understood the benefits of transfers of funds between federal areas and are moving mountains of support worth billions, without asking what they will get in return.  Whole cities are being built in areas previously representing economic desert and millions of people are uplifted from poverty every year.


We , Europeans could do the same.

And if we don´t get it, then why on Earth did we introduce free trade zone ?

It was inevitable that after certain period of time economies of scale will begin to work and concentration of production stemming from it will cause permanent net outflows for certain countries.

They did not do anything wrong:  they are not lazy, they are not irresponsible, they just played by the rules of free trade capitalism which generates such outcome naturally.

Now it is time to complete the circle and implement full fiscal federation with transfers. Otherwise the EU will dissolve and we move back to previous level  and all benefits gained through free trade zone will cease to exist.