Year LV, 2013, Single Issue, Page 145

 

 

SOLIDARITY WITH STABILITY: AN ADDITIONAL BUDGET FOR THE EUROZONE

 

 

The American Federal Budget Before the Great Depression and the EU Budget Before the Great Recession.

The financial crisis that exploded in 2008 triggered a phenomenon that, in an allusion to the Great Depression of the 1930s, has been dubbed the Great Recession. It is useful, for a number of reasons, to examine the similarities and differences between the present situation and the American one of the last century. In 1929, the budget of the American federal government amounted to 2.5 per cent of the country’s GDP,[1] whereas in 2008 the EU budget stood at 1.05 per cent of GDP. Seemingly, then, the US federal budget, being more than twice the size of the European one, was the one better equipped to cope with the economic crisis it faced. This, however, is only partially true and, above all, it is a simplification that fails to take into account the economic policy differences between the USA of the 1930s and today’s EU. Indeed, the presence of major differences between the two budgets in question makes it difficult to compare them. First of all, whereas defence policy was covered by the American federal budget, defence is still a competence that is entirely excluded from the EU budget. Furthermore, the EU budget does not have to cover interest payments given that it is required to break even and the EU may not borrow to finance a budget deficit. Therefore, if we exclude defence spending, which in 1929 accounted for 49.8 per cent of the US federal budget (66.6 per cent if we leave out intereston government debt), the American budget amounted to 1.25 per cent of GDP (or 0.84 per cent after excluding the debt interest) and was therefore smaller than the present European one.[2] This comparison, however, fails to bring out an important difference between the two cases, namely the fact that, under the terms of Roosevelt’s New Deal, the US federal budget was subsequently increased in order to bear the costs of a policy of promotinghigh levels ofeconomic activity and employment. Indeed, the New Deal was a major turning point: by creating solidarity between the citizens of the different member states, the USA passed the second of the three important tests that marked the process of consolidation of the American federation.[3] The EU, on the other hand, despite being more integrated economically that the USA of the 1930s, is unable to make the leap towards European solidarity. Indeed, as shown by the negotiations on the 2014-20 financial cycle, the policy of Europe is not only to reduce the European budget, but also to have the already financially weakened states bear the entire burden of recovery as well as economic growth.


Combining Solidarity with Stability: the EU Budget and the Need to give the Eurozone a Separate, Additional Budget.

The Stability and Growth Pact and the economic policy suggested by the European Commission are more suited to countries that are part of a fixed exchange rate system than to countries belonging to a “true economic and monetary union”. As a result, countries that find themselves hit by a negative economic shock while already struggling with high levels of public deficit and debt are required to bear alone the costs of adjustment. The current EU budget is viewed not as an economic policy instrument, but rather as a redistributive mechanism. Indeed, what the negotiations on the 2014-20 financial cycle have shown is that the EU member states regard the EU budget more along the lines of the requisition system in force in the United States before the Philadelphia Convention than as an instrument capable of guaranteeing Europe income and employment stability. Moreover, in an intergovernmental framework, all the European institutions can do is promote measures designed to curb public spending and liberalise the product markets and production factors, particularly labour. Consequently, decisions on European economic governance, from the ideological standpoint, are rightly criticised as neo-liberal, but it must be remembered that the European institutions are not equipped with the power and resources necessary to choose between different economic policy alternatives, supporting, for example, a growth policy. Unfortunately, those who criticise the policies promoted by the EU, rather than supporting a strengthening of EU powers, tend merely to call for removal of the public debt and deficit constraints, or for withdrawal from the single currency tout court. Faced with this situation, the President of the French Republic and the Italian prime minister have resurrected the objectives of European political union and a eurozone budget, albeit without clearly outlining a timetable or the necessary steps. It is therefore necessary, taking advantage of the favourable climate that is currently being created, to try and identify what might be the stages and the timeframe of this process. It is here argued that the objective capable of bringing about an advance in the process of European unification is that of equipping the countries of the euro area, and those that will subsequently join it, with an additional, separate budget, thereby completing monetary union with economic union. Although this objective will require an amendment of the Treaties, it is possible to envisage an intermediate phase that, without modifying the Treaties, will nevertheless be decisive with regard to the objective to be reached. However, in order to specify the steps that need to be taken in the short and medium term, a number of preliminary issues should first be clarified.


A “Budget” or a “Fund”? The Steps Leading to the Establishment of the
Fund (and ofthe Budget).

The first question to ask is whether we should be talking of a “budget” or a “fund”. The answer depends on the time needed for the initiative and thus the institutional framework of reference. If the aim is to find a short-term answer to the economic crisis, then it is necessary to identify an initiative implementable in the framework of the existing Treaties, possibly preceded by an amendment, through recourse to a simplified revision procedure, of art. 136 TFEU. Initially, it might be possible to set up a specific fund exclusively for the eurozone countries, given that the Treaties make no provision for the formal creation of a budget for a limited number of EU member states.[4] Ina second phase — between 2016, when there will be a compulsory review of the EU budget and the national parliaments are due to take part in an inter-institutional conference to assess the report of the working group on own resources, and 2017, the year in which the fiscal compact and the European Stability Mechanism are due to be integrated into the Treaties— it will be necessary to modify the Treaties in order to give the European institutions increased budgetary powers.


The Objectives of the
Fund and ofthe Budget. Constraints and the Timetable for Implementation.

The second question needing to be answered is that of what the objectives of the fund should be. The answer we put forward here is based on the indications provided in the European Commission’s Blueprint and in the document presented by the President of the European Council, Van Rompuy.[5] Basically, the fundshould serve to ensure stability of income and employment in the event of asymmetric shocks affecting one or more member states. During the initial phase, it will co-finance, primarily, investment policies and policies of income support for the unemployed, in partnership with the states that find themselves hit by an economic crisis; it will do this for a limited period of time and according to a programme agreed with the Commission. This programme may also include "for the implementation of structural reforms.

The objective, however, must be that of accelerating the pace with respect to the schedule envisaged by the Commission for the creation of the fund. In the second phase, the fund will be transformed into a true budget, which, as such, will have the capacity to be funded by borrowing and to intervene in the event of economic crises affecting the entire eurozone, supplying European public goods. However, we feel that, in order to avoid giving rise to moral hazards, constitutional restrictions will have to be placed on this borrowing capacity. It is therefore proposed that the provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the so-called fiscal compact) relating to national budget deficit ceilings be extended to the “eurozone plus”, whose additional budget must not result in its incurring a structural deficit greater than 0.5 per cent of GDP. The establishment ofa specific budget for the “eurozone plus” is also a necessary condition for the realisation of, in addition to economic union, a true European banking union: as shown by, among other things, the American Savings and Loans crisis of the 1980s, only a federal budget would be able to confer the necessary credibility on a future Europeanbank depositinsurance fund. We also feel that, at the same time, the Treaty establishing the European Stability Mechanism, which is a prerequisite for the establishment of a European treasury, should be integrated into the existing Treaties, along with the fiscal compact. This decision could result in conferral, on the Commission, of the formal power to impose revision of national budgets, and thus pave the way for the establishment of the European Redemption Fund (ERF) proposed by the German Council of Economic Experts and supported by the European Parliament in its resolution of 20 November 2012 and by the European Commission Blueprint of November 28, 2012. The ERF would guarantee the servicing of the debt in accordance with what is laid down by the German economists. These steps will require the convening, by 2017, of a European Convention with a mandate to modify the existing Treaties.


How Should it be Financed?

The third question that must be answered is that of how to finance the fund. There are two alternatives that can be considered: the first is to introduce a specific European tax, such as a carbon tax or a tax on financial transactions, to be levied only in the participating countries; the second is to overturn the purelyinstitutional principle according to which the European Parliament is the only parliament in Europe that has a say in regard to spending, but not revenue.[6] Opting for this second alternative, the necessary step — a minimal one — would be to give the European Parliament the power to decide, together with the national parliaments,the allocation of the own resources used to finance the additional eurozone fund. This would, essentially, constitute a return to Albertini’s idea that the sharing of tax revenues between the national and the European levels should be subject to a vote by both the European Parliament and the national parliaments. Since the proposal for the first phase envisages the taking of action within the framework of the existing Treaties, should the European Parliament be unable to vote in restricted composition (i.e. only the MEPs of the states taking part in the initiative), a possible solution might be to create, within the European Parliament, an ad hoc committee made up exclusively of eurozone MEPs, along the lines of the Grand Committees in the UK. In the second phase, the Treaties would, instead, need to specify explicitly that the vote on the budget will involve the European Parliament in restricted composition, i.e. in the configuration of the participating states.


What is the Tax Whose Revenue Must be Allocated?

The proposal for co-decision between the European Parliament and the national parliaments on the allocation of tax revenue between European and national levels is based on the system of "common taxes" used in Germany. In this member state, the allocation of the proceeds of certain major taxes, such as VAT, is decided jointly by the Bundestag and by the Bundesrat. In our case, there are two possible alternatives to consider. The first is to use the revenue from a tax on financial transactions, and the second to userevenue from VAT. The first option has a series of advantages: it concerns a proposed tax that enjoys broad public consensus, it identifies a new tax base, and the process of its introduction is already well advanced. On the other hand, it is associated with the following difficulties: a) the tax would be introduced by only 11 of the eurozone countries; b) some states have already introduced a national tax on financial transactions, irrespective of the EU Directive, and have already stipulated that all the revenue generated must feed the national budgets; c) it has been proposed, in several quarters, that part of the revenue should be destined for the EU budget in place of, not in addition to, the existing national contributions. The second option, on the other hand, has the advantage of concerning a tax that already finances the EU budget and whose reform is already under discussion. In any case, were the problems relating to the proposed tax on financial transactions to be resolved, the revenue from it could be added to (or, at least, replace) the revenue from VAT.


A Fixed Share of the Revenue, or a Share to be Determined on a Case by Case Basis?

Should it be decided that the best way of funding the additional budget is through the use of part of the proceedsof a given tax, the next question would be whether the proportion to be allocated to the eurozone budget and the proportion to be allocated to the member states should be fixed from the outset. Put this way, the question seems somehow to contradict the suggestion that the European Parliament should be involved, on an equal footing with the other European institutions, in the decision on the allocation of the proceeds of a tax still to be identified. For this reason, the proposal regarding the creation and financing of the fund must be framed in such a way as to leave the parliamentary bodies free to decide jointly, case by case, how to distribute tax revenues. This approach is, in fact, consistent with the functions that should be assigned to the planned fund. It should also be noted that this choice has important political implications, considerably increasing the political value of European elections, a trend destined to become more apparent as from 2014 when, for the first time, the President of the European Commission should be chosen on the basis of the outcome of the European elections.


The Procedure for
Establishing the Fund and the Problem of the Initiative.

The last question to be broached concerns the procedure that should be followed for establishing an additional fund for the “eurozone plus”. The suggestion is to start the launch of an enhanced cooperation that, in theory, should immediately involve the countries of the eurozone, but would remain open to any other countries subsequently wishing to participate. The latter countries, not yet being part of the eurozone, would be required to renounce their status, provided for under the terms of the Lisbon Treaty, as “member states with a derogation. With regard to the voting procedures of the Council and the European Parliament, the enhanced cooperation must be established implementing the provisions of Declaration no. 40, annexed to the Treaty of Lisbon.[7] If necessary, this solution could be preceded by amendment, through a simplified revision procedure, of art. 136 TFEU, in order to take into account the fact that the eurozone countries must be enabled to introduce a fund designed to finance a policy of income and employment stability. The problem, rather, is that of the initiative, given that for all this to come about there needs to be a government, in Europe, that is willing to promote the proposal among the other eurozone member states.


The Connection Between the Policy of the
Fund (and, Subsequently, the Budget) and the National Budgetary Policies.

It remains to be clarified what procedure might be envisaged in order to establish a connection between the policy of the fund and the national budgetary policies. Indeed, given the need to share tax revenues collected at national level between the national and the European level, the governments of the countries participating in the initiative would need to know, before drafting their budgets, the extent of the resources at their disposal for the funding of national policies. In this regard, it might be envisaged that the proposal relating to the quantity of resources destined to finance the fund be formulated by the President of the European Commission during the European Semester. The amount of resources to be allocated to the fund of the "eurozone plus" would thus be defined at this stage. The Commission would then send its proposal to the European Parliament and the President of the “Eurogroup plus”. This latter body, comprising the finance ministers of the participating countries, would then make its decision. Once the European institutions had reached their decision, it would be the turn of the national parliaments. The European Commission proposal would be considered approved if a majority of the national parliaments approved it in time for the governments of the participating states to approve the budget for the following year, which they must do by 15 October each year.[8]

 

Domenico Moro



[1] The public spendingof the single statesand local governmentsinsteadamounted to7.5 per cent of GDP. Federal expenditure therefore accounted for 23 per cent of the total and that of local governments 77 per cent. Today the pattern is reversed: of total public expenditure amounting to 37 per cent of GDP, the federal government accounts for 78 per cent and state and local governments 22 per cent.

[2] If, to the latter, we add the European policies funded by the EIB (0.6 per cent of EU GDP) and the payments linked to aid policies pursued under the EFSF and the ESM, today’s European policies amount to a far greater share of GDP than did US federal government spending prior to the Great Depression.

[3] The first test was the Civil War and the third America’s assumption of global leadership in the aftermath of the Second Word War (C. Kupchan, The End of the American Era, 2003).

[4] This is not to say that the first phase is irrelevant. On the contrary, it is the decisive one, because it is the one that makes provision for the intervention of the European Parliament in the decision on the financing of the fund. Indeed, contrary to what is provided for by the European Commission’s Blueprint (2012), the fund is not to be financed with national contributions, but only with its own resources. This suggests that what is needed is a solution similar to that adopted for the European Development Fund — currently funded and managed directly by the nation-states — which, following a resolution by the European Parliament in 1993, it was decided to include in an ad hoc section of the EU budget.

[5] Presidency of the European Council, Final Report. Towards a Genuine Economic and Monetary Union, Brussels, 5 December 2012; Commission Européenne, Projet détaillé pour une Union économique et monétaire véritable et approfondie - Lancer un débat européen, COM(2012) 777 final/2, Brussels, 30 November 2012.

[6] European Parliament Budgets Committee, Working paper no. 1 on the system of own resources of the European Union, 1 December 2011.

[7]Declaration 40 on article 329 of the TFEU: “The Conference declares that Member States may indicate, when they make a request to establish enhanced cooperation, if they intend already at that stage to make use of Article 333 providing for the extension of qualified majority voting or to have recourse to the ordinary legislative procedure.”

[8]An alternative to the procedure of approval by the European Parliament and national parliaments could be that of submitting the European Commission’s proposal to the conference of parliamentary representatives pursuant to art. 13 of the fiscal compact. This solution could be considered following the incorporation of the fiscal compact into the Treaties.

 

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