The Crisis: a Window of Necessity for Eu Taxation

MössnerLecture2010

THE CRISIS: A WINDOW OF NECESSITY FOR EU TAXATION

I INTRODCUTION: THE MEANING OF THE TITLE:

1. Where is Europe?

Speaking about a window, the usual parlance is about “a window of opportunity” and not about “a window of necessity”. However, when a couple of months ago, I was invited to submit the exact title for this lecture I had an inkling that the period of the second Commission Barroso, would be the last chance for making or breaking the EU and hence the last chance to create a tax system that would be adequate to meet the challenges of the internal market and the economic and monetary union. It was the time when the EU was out-manoeuvred by China and the US at the Copenhagen summit on global warming, the time when, not the EU, but BRIC countries and Turkey were stealing the limelight at the Davos World Economic Forum and the time that Time magazine came with a telling cover of a world map with Europe missing and the question “Where is Europe?”. The signs were there for all to see: Europe was rapidly becoming irrelevant to the rest of the world.

2. The fatal flaw in the Euro construction:

No one, even in his wildest imagination, could have foreseen the events, which we have been witnessing in Europe and more specifically in Euro-land, during the past few months. It has become clear not only for financial wizards and speculators, but for every plain politician and citizen in Euro-land that there is a fatal flaw in the EURO construction. The EURO is a currency without the indispensable support of a centralised economic and fiscal policy, e.g. without a minimal form of economic government in charge of the fiscal and budgetary policy decisions that are necessary for conducting a common monetary policy. The package of 750 billion EURO which has been put together to deter speculators for a short time does not remedy the inherent lack of a central mechanism of fiscal and budgetary decision making in times of crisis.

3. Defending the EURO requires a transfer of national sovereignty:

Apparently the members of the Euro-zone have decided to defend the common currency at all cost. That defence can only be effective however, when, within Euro-land, a supranational authority is established capable of taking the necessary fiscal and budgetary decisions on national budgets and enforcing them on national governments, in times of crisis. It boils down that, at least in times of crisis, national governments will be obliged to hand over a substantial part of their national sovereignty, by transferring the power to make vital national fiscal and budgetary decisions to an authority competent make such decisions for any Member State of Euroland.

4.The decisive question: do we need the EURO?

The question is whether the Member States of Euro-land will be prepared to make this sacrifice of national sovereignty, once the market pressures will relent. The reply to that question can only be affirmative when the advantages of the EURO, clearly outweigh the disadvantages of transferring in times of crises a substantial degree of national sovereignty and submitting to the pain of adjusting taxing and spending habits to the necessity of a common monetary policy. So the first question is: does Europe need the EURO? This is the question with which the debate should start.

If the answer to this question is negative, we still can proceed to establish a European internal market, but it will be a market without a common currency. The internal market still requires some changes in the national tax systems of all the Member States, consisting of a limited number of necessary legislative steps to be taken at the Union level. These limited steps should install “the missing links” which are necessary for the functioning of the internal market and which cannot be installed by the European Court of Justice.

If the answer to the EURO question is affirmative but much more is needed however. An affirmative answer would require, as a minimum, the establishment of a sort of “common economic governance” in Euro-land, capable of acting in times of crises. In the longer term this form of economic governance should also be capable of acting in normal times, requiring a substantial degree of political integration. The question then is what form this economic governance should take and how democratic decision making by such government can be guaranteed? These reforms represent major reforms in the functioning of the European Union and the next question then is, should these reforms take place within the framework of the existing European treaties, or is it possible to develop a separate parallel treaty for Euro-land? As far as the impact of such far reaching reforms on national tax systems is concerned, the impact may be more important on the economic side than on the legal side. Economic and budgetary policy have more to do with the way in which tax systems (in particular rates) are used, than with the substance of tax rules dealing with purely domestic situations.

5. The question to be answered in this lecture:

Therefore this lecture will deal with the following questions:

1. Are there decisive reasons for a common currency?

2. If so, what are the minimum requirements to achieve a common fiscal and budgetary policy? What institutions do we need?

3. What are the consequences for national tax systems?

4. To whom should these institutions be politically accountable for their fiscal and budgetary policy?

5. How should these reforms be implemented in the framework of European treaties?

6. What are the necessary tax reforms when there is no common currency, but only an internal market?

II DO WE NEED THE EURO?

1. The Euro-scepticism of the British vindicated?

Some EU members, notably the British, have always been sceptical to the EURO and questioned the necessity of establishing a common currency. In their view the EURO was not essential for achieving the goals of the internal market. They have refused to join the EURO, because from their perspective adherence to the EURO implied a transfer to the European level of economic powers that were essential to maintain national sovereignty. Recent events have vindicated their judgement, but the real question still is whether the advantages of the EURO outweigh the disadvantages of a transfer of national sovereignty?

2. Some advantages of the EURO:

The EURO has obvious advantages such as facilitating cross-border payments, cutting costs of exchange transactions, but the way in which non-EURO members participate in intra-community trade and intra-community tourism indicate that the existence of national currencies is not a significant handicap to participate in the internal market. These advantages do not justify a substantial transfer of sovereignty in the area of fiscal and budgetary policy.

Another advantage of the EURO has been to act as a financial shield in the international banking crisis which erupted in 2008. Member States like Austria, Belgium, Ireland and the Netherlands have weathered that crisis relatively well, compared to countries like Hungary , the Baltic states and Iceland. However that better result can also be explained by the bigger and more robust economy of these countries. On the other hand one would not like to envisage the problems of the cross-border rescue of banks as it has taken place in Belgium, the Netherlands and France, when, at the time, each of these countries would still have operated different national currencies. This may be a more weighty argument, but rescuing banks is not a very good argument to convince the population of Euro-land to practice the austerity needed to maintain membership of the club.

3. The need for a mobilising motive to justify a transfer of sovereignty:

In order to justify the sacrifices needed to run an effective currency union, a more lasting and mobilising motivation is needed. During the last century the mobilising motivation for progress in the European Union has always been the slogan: “Never again war in Europe”. As the vivid memories of the second World War reach the age of retirement and as the communist threat and the threat of war in the Balkans fade away the slogan “Never war again in Europe” cannot act as a catalyst for the economic and monetary union. Another new idea is needed to mobilise the imagination of the citizens of Europe.

4. Defending the European way of life in a globalised world:

There is such an idea although it appeals less to the imagination than “Never war again”. It is the threat to the European way of life caused by globalisation and the ascendance of new economic powers. The financial and economic crisis has demonstrated that worldwide economic events are no longer dictated on both sides of the Atlantic ocean. In this crisis the EU has not been speaking with one voice, but each of the major powers has been busy rescuing its national industries and its own financial institutions. As a result the Member States of the EU have been incapable of adequately defending their views on the world scene. It is this spectacle of squabbling EU states or of the total absence of Europe on the world map, like in the Time cover that should galvanize Europeans.

It is an illusion for countries like France, Italy, the U.K. and even Germany to think that on their own they can solve their economic and social problems. In less than five years their economic impact will be surpassed by that of the city of Shanghai and its hinterland in the nearby province of An-Hui. In spite of all the social and economic differences between Euro-land countries, their social systems show many more points of comparison than social systems in China, India or even the US. If the Member States of the Euro-zone want to preserve in the long term their social systems which constitute the basis for their common European way of life they have to act as one single economic power on the world scene. This implies a minimal form of common economic governance. It will also require some painful changes in the European systems of social protection, but the outcome of these changes will be infinitely better, than a gradual decline and total surrender to social models that have been designed in Beijing, New Dehli or even in Washington. Preserving the European way of life in a globalised economy, is an ideal worthwhile to make sacrifices for. This question should be put on the agenda of the European Council and the European Parliament. The outcome of this debate should determine further action in Euro-land.

III INSTITUTIONS NEEDED FOR COMMON ECONOMIC GOVERNANCE:

1. The traditional recipe: a federal state:

Looking at existing currency zones, the answer to the question what is needed to run an economic and monetary union is of course a preferably independent Central Bank in charge of the money supply and of managing the currency on the market and a central point of decision making for fiscal and budgetary policy, i.e. a political organ directly in charge of levying taxes and other public charges and of spending public money. The only form in which such central point of decision making exists in this world is a department of economics and/or finance of a central or federal government controlling a significant volume of public spending. It would mean that this department would gain direct control over at least a quarter or a third of all taxes and public spending in Euro-land.

Such an arrangement would transform the present internal market of the Euro-land construction in a real federal state with a minimal economic government. Right now the EU controls less than 3% of all taxes and public spending and does not have the power to levy any of the major taxes, with the exception of custom duties. The transfer of such a volume of taxing and spending power would also require a transfer of the areas of competence corresponding to this increase in volume of spending power. Needless to say that no country in Euro-land is willing to envisage such a monster reform. Even Greece would probably still prefer to go its own national catastrophic way, rather than to surrender to a Euro-land federation.

2. What Euro-land is willing to accept:

What the Member States of Euro-land were willing to accept were two things: (1) an embryonic form of a European Monetary Fund to back up the EURO and any Member State of Euro-land in need of funds in case of crisis and (2) a closer coordination of economic policies, which would still be controlled by the national governments of the individual Member States. The hope is that this closer coordination will gradually improve the budget situation of all countries so as to become worthy and thrifty members of the Euro club. That latter hope is like whistling in the dark however.

The Commission has made a proposal to impose the obligation on the governments of Euro-land Member States to submit their national budgets for screening by the Commission, prior to approval of that budget by national parliaments. The purpose of this proposal is to allow the Commission to practice budgetary prevention and formulate its remarks before a national budget is approved and implemented, rather than making recommendations to the Member States how to repair the damage after it has occurred. In the proposal of the Commission there is no transfer of decision making power and as such it is too little compared to what the market is demanding in times of crisis: strong decisions and quick action. Yet even this modest proposal meets a lot of opposition and has been qualified by convinced Europhiles as an “inadmissible attack on national sovereignty”. It remains to be seen whether Euro-land will accept this proposal.

On the other hand this proposal may be asking too much from the Member States in normal times when there is no crisis. Close and informal prior consultation between the Commission’s services and the national ministers of finance may be less spectacular and more efficient in normal times to bring national budgets within the policy lines set by the Commission. It also leaves more room for face saving than the formal presentation of a national budget before the Commission.