A Super Indebted European Superstate

This paper deals with transfer mechanisms. Relying on the assumption of a European Superstate with a functioning transfer mechanism, I analyze the characteristics of this transfer mechanism and how it will eventually lead to a super indebted superstate by using non-cooperative game theory concepts. After a short introduction, I analyze which concepts constitute a superstate together, and how a transfer mechanism within a superstate functions properly (and under which assumptions). Since the critical assumption for the justification of a transfer mechanism, i.e. the fact that there is no permanent net contributor-net recipient structure, is often not fulfilled; in the analysis, I argue that this situation is similar to the "Prisoner's Dilemma" game, known from noncooperative game theory. If we distinguish between a net contributor (e.g. Northern Europe) and a net recipient (e.g. Southern Europe), both groups of countries would notice that they would be better off if they and their counterpart would both run budget deficits - with the hope that the counterpart will rescue them. This situation not only leads to a super indebted European superstate, but also reduces the credit worthiness of the superstate for international financial markets. Furthermore, this situation does not coincide with the (desired) social optimum. After discussing some alternatives with possible shortcomings, I propose a loose cooperation between the possible members of the superstate, based on an example of the post-USSR era, which can lead to the (desired) social optimum in our case.