Year XXXII, 1990, Number 3 - Page 193

 

 

European Currency, Reform of the Welfare State and Economic Democracy

 

GUIDO MONTANI
 
 
Introduction: the atypical. nature of European unification.
 
The problem of a European currency, which the drafters of the Treaty of Rome wholly ignored, has taken on new importance due to the crisis of the international monetary system, officially decreed by the American government with the 1971 measure of the inconvertibility of the dollar. Since then, various projects of monetary unification have been launched, but the only one which has actually materialized, albeit partially, is the European Monetary System. Recently, under the pressure of events in Eastern Europe and the problems of German unification, European governments have decided to complete the monetary unification process started by the EMS.
In the current dramatic international and political context, in which the Community has to take on new responsibilities, the decision of establishing an Economic and Monetary Union can hardly be made without a parallel decision concerning the democratic reform of the Community, in other words the establishment of a real European government which is responsible to the European Parliament itself, provided with new powers. In any case, this is the assumption lying at the basis of the observations which follow, because without a European government the establishment of monetary union would further increase the democratic deficit of the Community and cause intolerable social imbalances.
Our aim is to examine the problems relating to the new economic constitution of Europe, bearing in mind the fact that the historical circumstances in which the European federation arises will ensure some innovative institutional choices compared to the solutions adopted by the pre-existing federal states, in particular the United States of America. Compared to previous federal experiences, at least three basic differences should be noted. The first federal constitution in history, which was the American constitution, ratified in 1787, did not contain any provisions concerning currency. The American banking system has therefore developed – albeit very haltingly – within a well-defined political framework, in which the federal government has been able, when necessary, to enforce stability and efficiency on the economic system in the whole area under its jurisdiction. The European situation is quite different. Here we find central national banks with traditions going back a century, or even centuries. European monetary unification involves transferring monetary sovereignty from the national to the European framework, in a situation in which there is no actual governmental power at European level. In the United States of America market unification was accompanied and, in some cases, preceded, by monetary unification. In Europe, the Common Market was established in 1957 without provision for monetary unification and only the Japanese and American economic challenge of the 1970s and 1980s forced European governments to acknowledge that the survival of their national currencies represented a definite obstacle to European economic development. In conclusion, then, it can be affirmed that in Europe a parallel development of monetary unification and political unification has become necessary. European money and European government are two aspects of the same reality.
The second difference concerns the relative dimension of national budgets (for the US, those of the States) in relation to the European budget (in the US, the Federal budget). The Community budget at present amounts to little more than 1 per cent of European GDP, while the US Federal budgetis over 22 per cent of American GDP. The difference does not depend only on defence costs, which in the US are obviously charged to the Federal budget, but also because social and economic development in Europe has been achieved within the national framework. Thus national systems of social assistance have formed in Europe, while in the US, during the years of the Great Depression and the New Deal, the Federal government developed policies for social assistance and employment schemes by withdrawing, often after fierce contests in the Supreme Court, competences from single member-states. It is therefore unlikely that the European budget will increase considerably even after the establishment of monetary Union. Some studies[1] foresee that it will not exceed 3 per cent of European GDP (leaving out defence expenditure, which in Europe might even perpetually remain an expenditure of national budgets). It follows that the European federal budget is destined to have a “light” budget with respect to national budgets, where most of the public expenditure of the Community will be concentrated (it should be noted that, on average, European public expenditure represents 48 per cent of GDP). This cannot avoid having important consequences also for the powers of European monetary authorities. It is clear that it will be impossible to ignore easily the problem of co-ordinating national budgets. If, as at present, some countries finance significant proportions of their public expenditure by resorting to issues of public debt securities – and this has become a practice more frequently resorted to also to sustain current social services expenditure – one or more national governments can cause important inflationary damage to the whole Community.
The matter of the size of the Community budget cannot, however, be tackled without considering a third circumstance, that is, the role of the Community in international politics. It is well-known that the United States of America at its inception had very few international responsibilities, so much so that Alexander Hamilton was able to speak of America as a political island which would be able to keep out of European fights for hegemony for a very long time. Actually, the United States only lost their isolationist nature during the 20th century when, starting with the First World War, they had to take on growing responsibilities in international politics. This, together with the social interventions of the New Deal, caused an important centralization of powers on a federal level, so much so that today the United States are more similar to a centralized European state, with marked regional autonomy, than to a truly federal state. The European Community might of course share this fate if it were to assume the responsibilities of a superpower. But here an opposite hypothesis is put forward. The European budget, as far as the role of Europe in the world is concerned, will have to attend mostly to the new expense of co-operation projects with Eastern Europe and the Third World, the financing of which, however, should not only come from new budget revenues but also from international loans guaranteed by the Community. The European federation is emerging in a situation of international detente and disarmament between the two superpowers, which imposes more responsibility on Europe concerning solidarity towards the consolidation of the new Eastern European democratic regimes and Third World development, than to any strong commitment towards military expenditure. The European federation will necessarily be the heartbeat of the “common European home”, in other words that project for economic co-operation and common security which extends from San Francisco to Vladivostok, for which a “light” budget will be sufficient because Europe needs at most a defensive military apparatus, as the historical reasons for the establishment of NATO and the Warsaw Pact as opposing military blocs have been eliminated. Now a defensive military apparatus, while requiring European co-ordination, does not, moreover, involve any burdening of the European budget, but would rather very likely cause a reduction in military expenditure burdening national budgets.
The aim of this study is to examine the circumstances which could define the essential traits of a new economic constitution of Europe. The political unification of Europe, in fact, represents an aspect of this process which is by no means of secondary importance. Therefore we will deal with both the structure of public expenditure and the new administrative rules which should guarantee its efficient management, and also with the reform of enterprises and the regime of ownership of the means of production, so as to give some indications of an economic democracy which could facilitate the integration of Western Europe with Eastern Europe and the USSR. Finally, some conclusions will be reached concerning the relationship between monetary and fiscal policy in a federal state.
 
 
Public Expenditure
 
Monetary Union and public expenditure.
 
The decision to create a European currency inevitably involves a transfer of sovereignty from national states to the European federation. As for foreign trade, it is unthinkable that any national powers should survive to compete with the federal power. The central federal bank must be able to control the volume of money supply on the whole market, together with the level of interest rates. The national central banks must renounce their power to issue notes. In conclusion, European money means: a) fixing irrevocably exchange rates between national currencies; b) handing over to the European central bank sovereignty over currency, exchange rates and interest rates. The survival of national currencies or their replacement with a single European monetary symbol becomes at this stage a matter of convenience and practicality. From a symbolic point of view it is obviously very important that European citizens should be able to use a new and uniform means of payment.
At this stage it becomes necessary to reflect on the role of the central bank in a federal state. It is well-known that the central banks of unitary states, such as the Bank of England, the Bank of France, etc., have carried out and still carry out not only the functions which have just been mentioned, but are also instruments for financing public expenditure. There are two ways in which a central bank can help the “sovereign”. The first is by a simple issue of paper-money – placed at the disposal of the treasury – that in all probability will sooner or later generate inflation. The second is by absorbing a certain amount of bonds (treasury bills) which it then places on the market. This second function does not necessarily have to be achieved through the central bank, although governments often resort to it, because the extent to which the security is not wholly absorbed by the market remains in the hands of the bank, which can pay fresh money to the government anyway by issuing paper money.
The problem is therefore that of knowing what should be the responsibilities and powers of the federal central bank in its relations with the executive. There are contrasting opinions concerning this. In the federalist tradition, authors who, like Lionel Robbins,[2] have defended the necessity of attributing money competence to the federal power did not even consider the problem, because in the thirties it went without saying – although Keynes was about to launch his interventionist attack – that the central bank should follow a few prudent rules well consolidated by the gold standard tradition and which, in conclusion, forbade central banks from taking any supporting action on public expenditure. More recently, some economists, who have analyzed mainly the American experience, maintain that the federal level should be attributed with the function of “stabilizing” the economy.[3] In other terms, they maintain that the federal government should be able to manoeuvre both the volume of public expenditure, and the budget deficit or surplus, according to an anti-cyclical function. There should not be, in this respect, any significant differences between a federal state and a centralized state, and therefore no different behaviour should be expected of the central bank. In actual fact, this is what happens in the United States of America, where the Washington government manoeuvres both budget and deficit to steer the economic process in the desired direction.
In Europe, an opposite point of view seems to have asserted itself, mainly championed by the German monetary authorities. According to this point of view, the federal central bank should not finance either the deficits “of the European government or of the national governments”. The priority function of the central bank should be to keep the value of money stable, and this function can only be carried out without difficulty if complete independence of the central bank from budget requirements is guaranteed, whatever level they may appear at. This “orthodox” position becomes wholly acceptable if it is accepted that the main objective of monetary policy should be price stability, but it is open to criticism by those who would like monetary and budgetary authorities to intervene in the fight against high unemployment, or to slow down excessively rapid growth of the economy. In a centralized state this second opinion would almost certainly prevail. But in a federation, such as Europe is about to become, it must be taken into account that there are many important levels of government: European, national and local (regions, municipalities, etc.). It is obvious that if one level of government, for example the European one, had the power to trigger off an inflationary process through the so-called “seignorage” mechanism (in other words by issuing paper money), other government levels would soon see their resources depleted through an increase in prices which would impose on them an unexpected budget deficit to be recovered, if necessary, by new taxes. In conclusion, citizens would have to submit to higher taxation by those government levels which had not contributed to new expenditure. This is clearly an absurd mechanism that would soon undermine the relationship of mutual trust between citizens and administrators. The power to create inflation is also the power to destroy the federation.
However, the matter cannot be reduced to a generic truth that the central bank should not finance the European government’s deficit nor those of the national governments. Even if they respected this constraint, governments could finance their deficit by resorting to public debt. Public debt has, in actual fact, become a structural component of national finance. Until a few decades ago, it was considered in public finance treatises under the heading “extraordinary finance”, in the sense that governments resorted to it in wholly exceptional circumstances, such as wars. But now the situation has completely changed and there is no doubt that through a continuous increase in interest rates governments are able to attract a substantial amounts of savings into treasury vaults to finance current expenses, thus making recourse to public debt a chronic occurrence. Italy alone has a deficit corresponding to 40 per cent of the deficit of the entire Community (and to 2 per cent of the Community’s GDP, therefore twice the EEC budget). Consequently there is a serious danger that the inflationary behaviour of one or more national governments might cause heavy monetary and financial imbalances for the whole Community. To this must then be added the fact that the European government, facing its new international responsibilities, might also be induced to a huge use of public loans. If national governments continue to consider it feasible and right to use this form of financing there is no reason to deny it at the European level.
 
Budget deficits and the crisis of the welfare state.
 
At this stage it becomes necessary to consider the causes which can drive a government to balance its budget or to abandon balancing in favour of other and more relevant economic policy objectives. If we consider the post-war experience of Western countries, it does not seem groundless to argue that one of the constraints which has most influenced the pursuit of monetary and budget stability has been monetary constraint. The countries which entered into the Bretton Woods system, for as long as American hegemony was able to assert itself, followed the fixed exchange rate system, which prevented them from having excessively easy inflationary adventures. In actual fact, the first important budget imbalances, both in Europe and the USA, appeared after abandoning the fixed exchange rate system, when international monetary discipline slackened.
Similar considerations can be made concerning the EMS experience. After the chaotic period following the declaration of inconvertibility of the dollar, the establishment of the EMS imposed a discipline of almost fixed exchange rates between the countries participating, obliging them to align their inflation rates with the most “virtuous” country, that being West Germany. However, this European monetary discipline has not been accompanied by an analogous budget discipline. Some countries have continuously increased their deficit, thus making devaluation of their currency inevitable.
Therefore, reasonable doubt remains that, even within the framework of European monetary Union, simple monetary discipline is not enough to harmonize budget policies. The member-states of the Community have different administrative traditions and, above all, social and economic problems of unequal gravity. The European Community has regional imbalances which are much more significant than those of the USA and this cannot avoid causing states to have differing abilities when reacting to the problem of adjusting economic accounts. Moreover, it must be noted that budget difficulties do not concern Europe alone, but afflict all industrialized countries, not excepting the United States of America.
Persistent budget deficit is therefore the warning signal of a much more widespread problem.[4] In effect, over recent decades there has been a growing demand for public services in all those countries which have reached a post-industrial stage of economic development. The ageing of the population has made expenditure for pensions and health care soar; raising the age limit for compulsory education has imposed greater expenditure on teaching and the building of schools; the restoration of urban areas and the improvement of transport networks has strained local governments’ budgets; pollution has made it imperative to take measures for the ecological restructuring of the economy, in part charged to public budgets, etc. The list of the welfare state’s new tasks could continue, but it is evident that we are facing responsibilities which go well beyond the welfare state which arose as an answer to the social problems posed by initial industrialization. The welfare state must change into the state provider of public services, in which the quality of service becomes one of the essential elements for judging its efficiency. The efficient administration of a hospital does not depend only on the volume of investment made. The same considerations are valid for public education, urban planning, the protection of the historical and natural environment, and so on. The centralized state, the bureaucratic structure of which was conceived in the last century, is unable to meet this kind of demand. The outcome is a public finance crisis, in other words a growing deficit in public budgets.
 
The reform of the welfare state and the rule of the balanced budget.
 
The first reactions to the welfare state crisis consisted of a return to the past, under the motto “more market, less state”. In some countries it was not merely a slogan. Great Britain with the Thatcher government and the USA with the Reagan administration actually carried out measures to reduce income taxation so as to encourage investment (so-called supply-side policies) and to cut social assistance expenditure. After a decade of conservative policies, despite a few brilliant and transient successes (like de-nationalization), the overall result is disastrous. Income inequality has increased and so has the unemployment rate, without obtaining any significant improvements in public expenditure.
For this reason, a school of economists[5] with liberal tendencies claims that the problem must be tackled at source and suggests the introduction of a precise constitutional constraint – the balancing of the budget – to the administration of public expenditure, because it is inevitable that parliaments, by their very nature, are unable to impose on themselves any serious expenditure discipline. The fiscal crisis of the state is thus imputed to the imperfection of this democratic mechanism. An organ which can make decisions on expenditure, such as the American Congress, will never willingly curtail its powers, because no single delegate or party will be willing to assume the unpopular responsibility of proposing new taxes to cover new expenses. As a matter of fact, in the USA, where budget deficit essentially means excessive expense at the federal level, with inflationary consequences which fall, both on citizens, and on the budgets of the member-states of the federation, the movement to impose the constraint of a balanced budget had, by1986, already found the consensus of as many as 32 states (in other words two states less than the quorum necessary to impose on Congress a debate on a constitutional amendment imposing the balanced budget constraint).[6]
The balanced budget proposal must be considered carefully because it represents a technical solution to the problem of the crisis in public finance, but it is naturally necessary to answer, which the conservatives are unable to do, the questions that remain unsolved by applying this simple administrative principle. Briefly, there are two problems. The first concerns reform of the public administration system to ensure a more effective – and therefore more democratic – management of collective resources. The second, which will be considered later, concerns reform of the market, because to the extent to which the market cannot alone guarantee full employment it imposes supplementary tasks on public administrations, which are forced to assume functions that private entrepreneurs could often carry out better and at lower cost.
The reform of the welfare state certainly represents an integral part of the reform of democratic systems, which are steadily losing the citizens’ confidence, and not only in Europe. Scarce participation in elections is only the most evident symptom of the crisis of democracy. In public finance this crisis is revealed by the state’s inability to collect the necessary financial resources to face growing demand for services. In Europe, the crisis stems from the concentration of sovereignty at national level and in the parallel impossibility of giving a national answer to the main problems connected with the running of the economy. The existence of the European Community and the business world’s constant demand for a European currency represent clear proof of the need to run the European economy at a supra-national level. Yet in this direction it must be observed that there are now many such requirements at a worldwide level, within the UN framework. International trade, impossible without a solid means of payment, the ecological emergency, which has already caused some worldwide intervention (for example, to protect the ozone layer), North-South co-operation for development, etc., are all issues that show how the national framework is now inadequate to control rationally productive processes and economic and social development. The crisis of democracy is thus, in the first place, a crisis of national democracy and the answer can only be the establishment of international democracy, in other words the extension of the area of the representative government beyond national frontiers. This is what is being attempted in Europe with the transformation of the European Community into a true federation.
The national concentration of power should also be broken up at the bottom, that is in the direction of regional and local autonomies, today considered solely as administrative organs, whose powers are delegated to them by the only level legitimated to hold sovereignty, the national level. The reform of the welfare state must necessarily overcome this bottleneck. It is evident that many local governments today are more inefficient and corrupt than national governments. In Europe, the voices of local autonomies were silenced first by absolute monarchies and then by republican Jacobin power. It is not surprising therefore that local government is by nature full of obstacles and slow to act. But the general tendency of the modern world, and not only in those countries where the industrial revolution has now been achieved, is incontrovertible. In the USSR the re-awakening of democracy has coincided with the re-awakening of nationalities, unfortunately with all the inherent dangers of achieving independence and autonomy by adopting the old model of the national state, and not that of the federal state. Although in a less dramatic way, the same tendency has appeared also in the USA, where the development of a service economy and the opening of the USA to international competition has stimulated the States to promote increasingly effective policies to support both their industries and the quality of local public services. This is a real and true reversal of the tendency towards levelling and centralizing policy which the Washington government managed to impose during the dark years of the Great Depression.[7]
The participation of citizens in the running of public affairs assumes a concrete aspect, because it involves to face-to-face relations, at the local level where those administered to and their administrators can discuss their community’s problems, without being separated by the falsifying coverage of the mass media. The self-government of citizens must necessarily take on a local dimension, that is the place in which an individual habitually lives and works. In a world which is now more and more interdependent, in which people are beginning to think and act as citizens of the world, the need is also felt to reinforce one’s roots in one’s local community, which has indelibly marked our character and personality, through its monuments and traditions, since the very first years of our life. But local self-government cannot be expressed, and therefore the local community can have autonomous identity, without tax and expenditure autonomy. Fiscal autonomy is an essential aspect of political life, and whoever governs must be able to make decisions and have the means to carry them out. Citizens do not feel that the administration of public affairs is really theirs unless they make even a small sacrifice to contribute to collective work. Rousseau considered the corvée (today one should speak of community service), as the only effective form of solidarity in a community governed with direct democracy. Rousseau, however, considered paying a tax as an unacceptable surrogate of community solidarity. Today we are forced to be less intolerant when considering the citizens’ duties, although it must be remembered that for young people, at least, community service would represent an excellent school of democracy. In a modern economy, with public services which often require a high degree of professionality, any general application of Rousseau’s ideal is utopian. But the direct and conscious contribution to the expenses which are necessary for the realization of public works represents an essential aspect of democratic participation. This is why the rule of the balanced budget is important, since it ensures that any decision to spend should correspond to a parallel decision to tax. Only through this constraint can perfect transparency and complete responsibility (administrative glasnost) be achieved. Whoever pays knows why he pays and what he can expect from this expense. Whoever administers is aware he has asked for a sacrifice from his fellow-citizens, and knows he must account for the good administration of the money entrusted to him.
The principle of the balanced budget does not only represent a golden rule of good administration in a democratic regime, it is absolutely indispensable to the balance of powers in a federal state. In the federal state there are various levels of government, from local to regional and national ones, etc., and each one must be independent and yet coordinated with the others. For this reason, the governments of the various communities belonging to a federation must all respect the constraint of the balanced budget. In other words, in principle they should cover their expenses (that is, public services for their respective citizens) with resources coming from the same community. There are also resources which are transferred from higher government levels, but this is an aspect which should be discussed within the framework of regional policy.
The only complication, as far as this is concerned, derives from the possibility of collecting funds through the issue of public bonds. In principle, recourse to public debt should be considered an emergency measure, both when it is underwritten by the citizens of the community and when it is underwritten by non-residents. The recourse to public debt – as Ricardo has already clarified – is an alternative to taxation. But it is an alternative which is not quite its equivalent. There can be valid reasons for resorting to public debt, but it must not be forgotten that the innate transparency of the taxation process is lacking. In conclusion, who pays the interest and who collects it?
Briefly, recourse to public debt in a federal state can cause the following side-effects: a) it causes inflation if the debt is covered by monetary issues from the central bank, or, if this first alternative is excluded, competition can be triggered off on the capital market among entrepreneurs searching for loans and public authorities, which makes interest rates go up, with obvious negative repercussions on the level of private investments; b) the strongest governments through massive issues of bonds manage to rake in the savings on the market, thus taking away from the weakest governments the chance of drawing from the capital market on the same conditions as their competitors. The solution to these problems obviously does not involve prohibiting recourse to public debt, even if the constraint of the balanced budget, in the strictest sense, would impose it. Experience, however, suggests that in modern economies it would be absurd to take away this margin of flexibility from public administrations, while it is considered indispensable for enterprises. After all a community can consciously decide to transfer income through the mechanism of interests payments to some social categories or to non-residents in exchange for social work which is particularly urgent. The only problem is that of finding a discipline of public debt usage which allows the governments of a federal state to resort freely to credit when it seems necessary, without endangering the financial autonomy principle of the other administrative units.
 
Budget discipline and the powers of the federal central bank.
 
The experience of existing federations can help us to find a solution to the problem of the most appropriate budget discipline. In the United States, during the Civil War, the Southern states became loaded with debts they were then unable to honour. Most of the debts were repudiated, and this bitter experience was repeated again towards the end of the century at the local government level, so that public opinion demanded the introduction of severe constitutional rules to limit recourse to public debt. In some states running into debt is forbidden by the constitution or requires a special procedure, like for example a referendum. As regards local governments, they are generally limited on the basis of the amount of taxes on property.[8]
In Australia, in 1927 a Loan Council was established which was composed of representatives both of the federal government and of the member-states’ governments. The Loan Council has the task of limiting recourse to public debt on the part of the states and in actual fact the power of the central government is often decisive, so much so that some claim that the instrument for co-ordinating budget policies developed in Australia “threatens the very federal system”.[9]
In general, it must be observed that in existing federal states the problem of co-ordinating budget policies has never raised serious difficulties. But it must also be borne in mind that all federations bestow substantial grants on the member-states, with the aim of lightening the local fiscal burden. If these grants, on the one hand, have a positive compensating function, on the other hand, especially in the United States of America, they have represented a powerful instrument of submission by state governments to the federal government, as was the case – in spite of the active opposition of the Supreme Court – during Roosevelt’s New Deal. In Europe, as we have already seen, the problem of co-ordinating budget policies will not be so simple, due to the size of the European budget relative to national budgets. It is therefore inevitable that the problem of co-ordination be seriously addressed.
As a preliminary, it must be specified how to tackle the problem of budget discipline. In a federation a solution which leaves the responsibilities of the various levels of government indeterminate does not seem acceptable. In the absence of a constitutional rule the outcome would be to give in to centralization or anarchy. The first case is exemplified by Australia and the USA, with their grants policy. “If grants – Wheare says – are to be a permanent feature of federal finance, it seems essential that their amount should not depend upon the good will of the granting government, for if they do so depend, the federal principle is thereby modified”.[10] The political evaluation of an authority which is external to the government concerned is not much different, in method, from what happens at international level when the IMF “recommends” adjustment policies to debtor countries. As for the second solution, that of self-limitation, it is extremely dubious whether it would be effective. In Europe it would a matter of setting limits to the public expenditure of national budgets, which are affected by historical gaps in economic development (it is enough to think of the depressed regions in the North and South of Europe). The very real danger exists that a government, driven by its structural expense requirements, might accumulate a growing number of debts, in the hope of being helped, sooner or later, by the other governments of the federation or, more simply, because a deficit is a less unpopular solution with the electorate.
On the basis of these principles, it must then be inferred that in a federal state all the levels of government should observe a precise constitutional rule as regards budget constraint and the volume of public debt. Naturally, the rule of a balanced budget, in the strictest sense, might be sufficient, but it appears to be excessively rigid, because it does not allow governments to compete with the private citizen in the savings market. It must therefore be acknowledged that every government should be able to resort to public debt to a predetermined extent (ceiling) such as, for example, a certain percentage of investments or of GDP. If this ceiling were surpassed the intervention of federal authority would become necessary to make the situation return within constitutional limits. This authority could be the European central bank itself, which in the last resort would be responsible for general conditions of market liquidity. The central bank should, therefore, make this surveillance role in agreement with the European political authorities – the government and the Parliament – which could authorize it to be the “tutor” of the government concerned, which would continue to issue public bonds only with the central bank’s consent, until its deficit returned within constitutional limits.
Moreover, in a federal state, the central bank should also take on the task of enabling all levels of government (including the smallest communities) to collect funds on the financial market at the same conditions as more important governments. Obviously, a national government or a large European enterprise can obtain more favourable interest rates on the European financial markets than a small municipality. The central bank should, however, correct these natural divergences in market evaluation through a suitable public debt policy, either by using its prestige to support the issuing value of the local government’s bonds, or by collecting directly the funds that it then redistributes according to local requirements.
 
The transition to a federal system of public finance.
 
In Europe, the problem of the reform of public finance coincides with that of the construction of the European federation, in which it is necessary not only to transfer competences from the national to the European level, but also from the national level to local autonomies. Although by now the basis exists for a such reform (for example, the European Community and many regions already manage their own resources), the passage to a real and true fiscal autonomy will require laborious institutional reforms. Here, the intention is solely to consider some problems which might arise during the transition phase, bearing in mind that a federation, according to the classic definition of Wheare, is a system of independent and co-ordinated governments. Therefore, every proposal in the direction of independence, so as not to fall into the trap of nationalism, must be accompanied by parallel proposals which take into account the necessary democratic co-ordination with the other levels of government.
Let us start by examining the problems relating to the establishment of a European currency and a European budget discipline. With these decisions, of course, national governments lose the possibility both of devaluing their currency and of incurring budget deficits. For countries with an inefficient administrative structure and weaker economic systems compared to other Community countries this decision could involve serious sacrifices. Periodical monetary devaluations and growing budget deficits only represent the external manifestations of a relative and structural weakness. The European Community could therefore, within the framework of the measures which establish economic and monetary union, allow for some “exceptions” during a transition phase to attenuate European discipline, until the real problems, that is regional economic imbalances have been solved through compensatory policies, such as a reinforced regional community policy. As far as the currency is concerned, the most simple solution is that suggested by Robbins[11] as far back as 1940: in a transition phase, but one in which the European central bank is already operating, exchange rates between a national currency and the other European currencies can be modified to make adjustment easier. This manoeuvre, of course, could work only while national currencies were still circulating and had not yet been completely replaced by the European currency. If this replacement had already taken place, the only possibilities for intervention by the European authorities in a weak economy would not be very different from those of a central government in depressed areas (i.e. regenerative policies). A similar procedure could also be adopted for budget deficits. Many countries of the Community are suffering from large deficits and it is unthinkable that in the short term effective re-equilibrium policies could be successfully implemented. A period of transition might well be necessary before it becomes possible to accept without any fears European budget discipline. It could therefore be foreseen that the European Parliament will authorize those member states, which suitably justify their request, to issue public debt bonds in agreement with the federal central bank.
The possibility of overcoming these difficulties will greatly depend on the dimension and structure of the Community budget. So far as the European budget is financed with a tax levy more or less proportional to the average per capita income of each member-state, while expenditure is concentrated, whenever possible, in regions which are most disadvantaged, it is obvious that the Community budget is destined to play an important territorial re-equilibrating function. It is worthwhile remembering a proposal of the MacDougall report which deserves careful consideration here because of its evident compensatory effects. This entails the transfer of expenses for unemployment and professional re-qualification benefits, already catered for in national budgets, to the Community budget. It would not therefore be a matter of increasing the level of European public expenditure, but of making counter-cyclical and territorial equilibrium policies more effective. Moreover, a political effect of no little importance would be achieved, if citizens were able to experience directly the effectiveness of European solidarity policies.
Similar observations must be made concerning the transition to greater fiscal autonomy of the regions. It is obvious that regions with an above average per capita income will find it convenient to support a reform for fiscal autonomy, while regions with a lower than average per capita income will not, as they presumably receive substantial invisible income transfers due to the centralized fiscal system. Federalist reform should therefore be accompanied by an increased commitment, both at the national and European level, to the realization of policies which are able to guarantee a minimum standard of services for every citizen. Federalism consists of the difficult search for an equilibrium between solidarity (which at extremes means uniformity and centralism) and diversity (which at extremes means division and anarchy). Unity in diversity can only arise from a difficult and continuous search for compromise among different communities feeling themselves part of a common destiny, without any of them having to renounce to their individuality.
The last problem to be considered concerns the inevitable contrast that will arise between different centres of taxation, to the extent to which autonomy at the different levels of government in the federation will assert itself. If we admit, as is necessary in a federation, that every government possesses independent power to levy taxes, what can happen is that the single citizen, whose income is finite by definition, finds himself unable to meet all taxation demands. This question is well-known in existing federal states. In an 1819 judgement, Judge Marshall of the Supreme Court of the USA acknowledged that “the power to tax involves the power to destroy”, in the sense that excessive taxation by one government can in actual fact deprive other governments of their resources. In some federations, such as Canada and Australia, this difficulty has been overcome by granting priority in levying and collecting taxes to the federal government. This procedure, however, was adopted in exceptional conditions, to meet the requirements of the Second World War, with the introduction of federal taxes on individual income. Post-war, the central government did not want to return to a situation of equal power between the different levels of government, so that member-states have become more and more dependent on central government grants for the realization of their expenditure plans. Concerning this, Wheare’s comment, that “the federal principle does not appear to find a place in these constitutions so far as the taxing power is concerned”,[12] therefore seems appropriate.
Thus it must be concluded that the power of taxation should be classified among the concurrent powers of the various governments of a federation. No government should prevail over the others. It will therefore be individual citizens who, consenting through normal democratic procedures to pay taxes, allocate more or less substantial resources to the administrations requesting them. There can be no a priori guarantee as to the budget dimensions of the various governments within a federation. For example, a European government might be able to persuade the citizens of the Community of the need for an extraordinary tax for a Third World aid plan. The indirect consequence of such a decision could be that in a small municipality the residents will postpone the construction of a public swimming-pool. The competences of the small municipality as regards planning and expenditure remain intact. The postponing of the plan is only contingent because it is subordinated to a more pressing commitment of international solidarity. An appropriate federal system should be able to reconcile different government requirements, preventing the requests of the highest levels of government from suffocating the freedom of choice of lower level governments and, on the other hand, preventing local government autonomy from becoming particularistic selfishness, ignoring solidarity policies involving the whole federal community which only the highest level of government can implement.
 
 
The Market
 
The internal market, the welfare state and democracy.
 
Unless any dramatic regressions take place in Eastern Europe and in the Soviet Union, the establishment of the European internal market should now proceed at the same pace as the establishment of the “common European home”, in other words a vast area of co-operation, not only economic, among all the industrialized countries in the Northern hemisphere. Thus there is a much wider prospect of liberalization of the international market than after the Second World War, thanks to the formation of a large free exchange area from the Atlantic to the Pacific. The effects of this process on the structure of the market and on the organization of productive forces are easily predicted. Already the expectations of the European internal market have started off imposing processes of industrial (for example in the automobile sector, public works, etc.) and financial concentration. The realization of a wide market, from San Francisco to Vladivostok, can but accentuate this tendency.
The traditional response to huge concentrations of economic power in a few hands is the well-known anti-trust policy and the reinforcement of social policies. In Europe, as far as a system of democratic government on a continental scale will develop, it seems likely that, in the European Parliament, there will be a welcome trend towards greater protection of the social rights of citizens and workers. However, the experience of the USA should suggest that even in a continental-sized federal state traditional social policies do not wholly achieve their aims. The USA, very decisively at the end of the last century, and then during Roosevelt’s New Deal, tried to bridle great capital through anti-trust policy, but with very modest results. Large corporations are a well-known reality on the American economic and political scene, just as it is generally admitted that the degree of worker protection is lower in the USA than in Europe (especially for health services, education costs, etc.) and there are good reasons to believe that in Europe, too, there are not many opportunities for contrasting the tendency to an excessive concentration of economic power through traditional policies, particularly if one wishes to keep main social policies at a national level. The welfare state has proved to be effective in allowing most citizens to reach a minimum level of social services. But taxation systems, however progressive, have been unable to prevent the survival of high inequalities in income distribution, which at least in some conspicuous cases are handed down from generation to generation (unlike the USA where social mobility is much higher), as if there were a tacit consent to the perpetual regeneration of an industrial and financial aristocracy. Today in Europe, like in the USA in the ‘30s, the market is developing where there are no effective social policies. Besides, compliance with rules of budget austerity in the whole federation greatly reduces the chances for counter-cyclical manoeuvres against unemployment.
It is not only a matter of social justice. The very functioning of democratic regimes requires respect for equality of social opportunity. Perhaps it is worthwhile remembering that Thomas Jefferson in the project of the Virginia constitution, drawn up by himself, insisted on inserting a clause to guarantee that every adult citizen was assured a property of at least fifty acres. There was a real awareness, in the world that saw the birth of modern democratic thought, that full participation in government is possible only in a society of citizens with equal opportunities of access to economic resources. Rousseau maintained that in a democratic regime it is necessary that “no citizen should be so rich that he can buy another, and none should be so poor as to be forced to sell himself”. Nowadays something similar is taking place in contemporary industrialized societies. Election campaigns, both in the USA and in Europe, are decided more and more by the mass media, where whoever has the financial possibility to impose his own image has the better chance of winning. To some extent, money ends up prevailing over ideas. Although the deep vocation of democracy is participation by all in government for all, in actual fact there is a risk that too much room is left to a democracy of wealth.
The critical reaction to a system which tolerates and even favours economic potentates is solidifying, in the USA and Europe, around the prospect of economic democracy. In fact, if the correction of social inequalities ex-post, realized through the methods of the social state, has only partially managed to correct the greatest anomalies in income distribution, it is once more necessary to consider the hypothesis of correcting the unequal distribution of property ex-ante, in other words by regulating the very distribution of means of production so that everybody can have equal opportunities of contributing to the formation of social wealth. It is naturally not a matter of re-proposing the old barricade formula of “expropriating the expropriators” which inevitably leads to state monopoly of the means of production. The regimes of real socialism have already experienced the failure of the centralized planning system and the need to return to the market. Therefore there is no questioning the private property regime, nor competition among producers, sole guarantors of efficiency. On the contrary, it is a matter of making the market and the ownership of the means of production accessible to all, without property becoming an instrument for the “appropriation of other people’s work”, to use old socialist terminology. In conclusion democracy must also penetrate into the world of industrial production. As Robert Dahl[13] rightly points out, the enterprise is still the only organization, in some cases with a number of employees which can be compared to the population of a city, in which, even in Western states with a democratic political regime, democracy is still banned. Enterprises are ruled either by the method of autocracy or that of oligarchy. The enterprise allows much less participation than is now possible in the control of one’s local or national community affairs. This is the scandal the countries of real democracy have to cope with today.
 
Capitalism, the market and economic democracy.
 
Capitalism and the market are two institutions which are parallel, but not coinciding. In primitive economies the market exists, but capitalism does not. Capitalism began to appear with the development of post-medieval merchant economies, and then took on the typical form of the modern capitalistic enterprise with the industrial revolution. The capitalistic enterprise is an association in which the control of the means of production – hired work and material instruments – is entrusted to the owner. This juridical and economic structure has made it possible to organize industrial production in an extraordinarily efficient and flexible way in all the phases of development of modern industrial economies. Small and large businesses, from semi-artisan to large corporations, with thousands of employees, have been able to co-exist and prosper in a market which has continued to expand until it has encompassed the whole world. Marx himself could not help praising the capitalist system. The main error of Communism consisted in the attempt to suppress together with capitalism the market, in the hopes that a centrally controlled economy might be as efficient, in fact even more efficient, than a capitalist economy. History has proved this hypothesis wrong. Capitalism certainly has many defects, but it has shown it is able to direct enormous individual energies – at the bottom of which there can certainly be self-interest, greed, ambition, etc. – towards the achievement of important public ends, such as the technological exploitation of scientific discoveries and the mass production of essential goods and services.
Of course, the predominating features of capitalism have changed during its development. The progressive establishment of the welfare state can be considered as an attempt to contain the most negative aspects of capitalism as regards its effects on the material living conditions of workers and of the economically weaker levels of society. The capitalist organization of production, on the basis of the subordination of large masses of workers to the discipline of the employer or of a group of managers responsible for the profitability of the business, has guaranteed efficiency and fast economic growth. But neither a progressive salary increase nor an improvement in the material working and living conditions of the workers were contemplated among the institutional aims of the enterprise and of the capitalist system. Notwithstanding, the capitalist system has been able to adapt itself perfectly also to a social environment in which a great number of external constraints have been imposed on the action of the enterprise.
The last great reform the capitalist regime underwent was that inspired by Keynes’ policies against mass unemployment. The Great Depression of the 1930s showed that the free enterprise system was wholly unable, with its own forces, to guarantee full employment of productive resources. It was not a case of lack of investment, as is happening nowadays in Third World countries. The plants existed, but they were left unused because of a lack of demand. Keynes proposed a series of policies which both through artificial injections of buying power in the economy and through a progressive increase in monetary wages allowed not only for the crisis to be overcome, but for stable and sustained growth to be guaranteed. Thanks to Keynesian policies it was possible to direct the capitalist regime towards full employment without affecting its essential characteristics.
Half a century later, it must be acknowledged that new faults in the functioning of the capitalist system have emerged and that new reforms are necessary both to adjust its purposes to those of the collectivity, and to improve its very efficiency. In conclusion, it is a matter of examining two problems which are only apparently distinct: the increasingly eccentric functioning of the world financial markets and the crisis in the organization of traditional enterprise, in relation to the change in the social and cultural conditions of productive forces.
As regards the functioning of financial markets, it must be noted that during the post-war period the following changes took place: a) the formation of a large market in the Atlantic and Pacific involved the parallel creation of more integrated world capital markets, with consequent strong sensitivity of national stock exchanges to the changes in international expectations, which are by definition volatile in a world without a stable world currency; b) the structural separation, in large corporations, of property from control, in other words the formation of a powerful technostructure within the enterprise which mainly takes care of management utilizing capital placed at its disposal by a myriad of underwriters of shares and bonds, who inevitably end up by losing control of the business; c) the growing availability of liquidity deriving from salaries and wages, in other words from individuals who, as they have another priority, occupation, hand over the management of their savings to specialized bodies, such as credit institutions, financial associations, insurance companies, etc. It must then be added to all this that it is now a consolidated practice to grant credit more easily to large capitalists (not necessarily single individuals) than to innovative entrepreneurs without capital, because it is considered a good prudent rule to grant confidence in proportion to the security (therefore to the amount of capital) provided by the debtor.
As experience has proved over the last few decades, an often schizophrenic behaviour of the private financial market derives from the combination of these elements. Daring and unscrupulous individuals can accumulate within a few years immense fortunes, which are however very fragile because they only exist on paper. The technique is that already experimented on a smaller scale during the great 1929 stock exchange crisis. It consists of creating dummy companies and raising capital by borrowing on the credit or junk bonds market so as to takeover businesses already operating on the market, but destined to be externally controlled due to the inability of small capitalists to form a coalition and react. In most cases these attempts at gaining majority control over an enterprise are not dictated purely by economic reasons. So much so that, both whether the attempt is successful or not, “the result will be a legacy of debt and fixed interest charges that will be met at the expense of needed and useful new investments”.[14] This is a real and true failure of the market, because the normal motivations inducing entrepreneurs to risk their fortunes in a productive enterprise in this case merely lead to a waste of energies and resources. The ownership changes without any improvement in the profitability of the business. The market in this case leads to a “stupid and inefficient” result, which seems even more evident if to these private costs are added the public costs, often of considerable dimensions, necessary to allow the monetary authorities to re-establish order and confidence in the market, as happened with the 1987 Wall Street crash. There is no reason to condemn morally any particular financier. The search for wealth, social prestige and power are among the main motivations of the industrial entrepreneur, too. But the structure of the financial market is such that it often leads to results which are harmful to the collectivity, because any bankruptcy would end up by involving a long list of people who are guilty only of misplacing their trust.
The second structural change to be considered concerns the degree of productive forces’ development. The quality of work is now radically different from that existing at the time the modern industrial system arose. Not only has the average education level gone up, but technological development is making more and more obsolete those productive methods requiring large amounts of unskilled work. The completely automated factory, run by few skilled technicians, is now a reality in modern industrial economies. Manual work is progressively destined to be eliminated from the productive process.
The organizational structure of the factory can therefore no longer keep rigid nineteenth century discipline, in which the owner or the foreman commanded with authority a host of subordinates. It is certainly not by chance that the sociology of work is ever more preoccupied with the delicate problem of interpersonal relations within the enterprise. The embryonic tendency towards equality is revealed in the search for greater integration – or involvement – of the subjects of the productive process. But these attempts can only be partial and unsatisfying. While the distinction between work and capital survives, it is inevitable to fall back into the old head-on juxtaposition between managers and subordinates which, in the case of a conflict, is inevitably solved by striking, in other words through force relations. In the past, the cohesion and solidarity of the working class at least placed the juxtaposition between capitalist and worker along the lines of responsibility, because the workers’ parties and the trade unions never let the general interest out of their sight. But in a historical phase in which every class distinction is disappearing and the individual is becoming the real protagonist of the productive process, the risk is that all bargaining could degenerate into corporativism and social anarchy. So far, all attempts made at an incomes policy have only partially solved the problem. To the extent to which incomes policy is achieved for the whole market, micro-conflictuality in the enterprise is reduced, but the logic of the juxtaposition between parts with divergent interests cannot be avoided. Work productivity instead depends more and more on the degree of participation of the workers in the running of the enterprise, as has been partly achieved in Germany with Mitbestimmung. But, more generally, it must be acknowledged that the time has come to question the old “monarchic and aristocratic” management system. A full co-operation of productive forces can only develop on the basis of a democratic method, in those societies where the post-industrial mode of production is now asserting itself. It will certainly be a long and tormented process, because the regime of capitalist autocracy will not be overcome until a new and more efficient form of organizing production has shown its superiority. But the dividing line between the old capitalist authoritarian enterprise and the new democratic enterprise seems by now to have been drawn. The democratic reform of the enterprise regime must therefore start from the incipient contradiction between the widespread development of technical and entrepreneurial abilities and the growing concentration of financial capital into a few hands. The basis of the enterprise is the co-operation between capital and work. But this co-operation is constantly threatened by the juxtaposition between who, together with capital, also has the right to run the enterprise and who, although without capital, aspires to management, because of his capabilities. The aim of reform must therefore consist in spreading the capitalist system more and more (a democratic capitalism can be conceived of), so as to allow whoever has the ability to become an entrepreneur, also to have the power of doing so. The full affirmation of the right to work involves everyone’s participation, according to their relative abilities, in the management of the enterprise.
 
Democracy in the enterprise.
 
Those liberal economists who were most open to social reform, such as J.S. Mill, always admitted it was necessary to ensure the full participation of all productive forces in the management of the enterprise. But first the obstacles which prevented this type of reform in the past must be removed. For example, Luigi Einaudi, as far back as 1944, although he was largely in favour of worker participation, clearly acknowledged two structural impediments, at that time overwhelming. The first obstacle concerned technical competence, which only few people possessed. Therefore the only possible way to choose managers was co-optation, because “it is the only form of democracy which is compatible with the persistence of an aristocratic body”. Secondly, any application of the democratic method in the choice of managers would soon cause the failure of the enterprise, because only those managers who promised ever higher wages, distributing all profits and funds for investment, would be elected. “The economic enterprise – Einaudi concluded – cannot be governed, if its persistence is desired, in other words if one wants to avoid its failure, through a universal suffrage election; but it requires a monarchic government or an aristocratic one of a body of equals”.[15]
These objections of Einaudi must be seriously considered. It is easy to answer the first. As just mentioned above, in post-industrial societies there is a tendency both to the spreading of knowledge (an increase in the average level of education) and to automation which, by eliminating manual work from the factory, also eliminates the social roots of the workers’ subordination to the manager. This does not mean that everybody will become a manager. In business, as in life in general, not everyone wishes to assume responsibility and to dedicate all or most of their energies to a single task. Cultural diversity and pluralism must find a place also in the enterprise. But if the advance of technological and social progress is not hindered, that first obstacle to the democratic management of the enterprise should fade in time.
Let us now consider Einaudi’s second objection. The greatest difficulty in a reform which should allow the enterprise to pass from the monarchic to the republican regime, once social obstacles have been removed, consists in the unequal distribution of financial capital. If only a few individuals – either by inheritance or through fortunate circumstances in their life – can have easy access to the financial resources necessary to buy the means of production, equal opportunities for the management of the enterprise cannot of course be affirmed. Competition – as economists point out – presupposes the equality of starting points. In the present capitalistic system there are almost insuperable obstacles for an individual who, on the basis of his abilities alone, without the necessary capital, wants to become an entrepreneur.
The first indispensable reform should therefore concern the financial system. It is necessary to act upon two fronts. The first concerns regulation of financial property, in other words of the possibility to acquire furtively shares from another company, which is the indispensable instrument for the realization of chain raids and take-overs. A very simple measure could be that of guaranteeing real publicity to the buying and selling of business shares. An even more radical reform would consist of ensuring that each individual could buy shares in only one business, the one in which he carries out his activity. It is not therefore a matter of questioning any traditional form of society (corporations, limited partnerships, etc.) but of limiting the possibility of extending one’s right to command (which is a form of industrial monarchy) to enterprises to which one does not contribute with one’s entrepreneurial or working ability. This would favour the association of capital with work for productive purposes, while it would make difficult, or wholly impossible, the establishment of large financial empires. The second front towards which reform of the financial system should be directed is the credit market, that is, the offer of savings to entrepreneurs on the part of the banking system. Schumpeter rightly considered as essential the function of credit for the development of entrepreneurs. The entrepreneur literally creates from nothing, if he manages to obtain the funds necessary for his enterprise. For this reason, Schumpeter considered the banker as the “ephor” of the capitalist economy. This function of the banking system must be maintained and generalized. During Schumpeter’s times, in particular in the Germany of the last decades of the 19th century, the banks played a decisive role in orienting industrial investments. Today the banking system has to face new responsibilities. Large investments are often stimulated or promoted directly by the public system. The private system instead is organized in such a way as to channel the flow of savings to already existing capital, often discouraging the initiatives of entrepreneurs without any capital. Loans are granted preferably to whoever provides real security, even allowing them a prime rate. This is exactly the opposite of what is necessary to make the entrepreneurial function really popular and general. What is really necessary, therefore, is an orientation towards a social use of savings. This means that the banking system should grant loans – without any discrimination of patrimony – to whoever wants to start a productive activity or intends to join in with an existing one. Of course, the single credit institute must no longer be considered responsible for the possible failure of the enterprise and therefore does not have to risk losing its own capital. It becomes necessary, as a consequence – but security methods of this kind already exist – to socialize the risks, in other words it is necessary that the credit system as a whole should become responsible for any possible business failure. Within this framework, what becomes decisive is the regulation of the minimum interest rate at which credit is granted to entrepreneurs.
The advantage of these reforms, which of course have only been outlined here, would be all together an increasingly accentuated channelling of the funds available for incursions into the speculative financial market towards the banking system. Whoever has surplus financial resources with respect to the productive requirements of the enterprise where he carries out his activity will be able to employ them either by buying debentures (which however do not give the right to control) or public bonds, or by keeping them in a current account in a bank. Monetary savings would thus flow towards the banking system which could make them circulate again at very low and standard interest rates. In a very rough and naive form, this essential function of credit in favouring the detailed diffusion of property had already been perceived by Proudhon in the last century, when he saw in crédit gratuit the means of drastically reducing the power of capital over work.
The second reform, which seems indispensable to ensure for everybody the possibility of becoming entrepreneurs, consists in reducing the individual risks linked with the possible failure of the enterprise in which they have invested their savings. Failure does not always depend on subjective errors. The market, in particular in our century when economic interdependence has by now reached a worldwide dimension, can cause sudden fluctuations or dislocation of productive processes which can turn whole industrial sectors upside down. The failure of the enterprise is salutary and indispensable for maintaining the general efficiency of the economic system. But the single entrepreneur, especially if he has no other wealth than that employed in the enterprise, would be unjustly involved in crises whose origins do not lie in his own mistaken behaviour. For this reason it is inevitable to move towards the institution of a “citizenship income”, which acts as a buffer to attenuate the individual risks of entrepreneurship. In conclusion, with the institution of the social state, of health services, of unemployment benefits, etc. developments are already largely going in this direction. It is only a matter of reinforcing these measures to make it possible for all citizens – and not only those who can count on the privileged reserve of a personal patrimony – to participate in the management of enterprises.
Finally, the third reform concerns the organizational structure of the enterprise itself. This reform can hardly be imposed from outside. The relevant legislation will only be able to copy and rationalize self-management practices which have already asserted themselves within the enterprise on the basis of the structural changes previously mentioned. One of the crucial knots of the reform will certainly consist of defining the maximum quota of capital which can be owned by each shareholder, because if the passage from a monarchic to a democratic enterprise is desired, then the actual weight of each shareholder in the decision-making process must not be very different compared to the others. But any indications concerning this can only come from actual experimentation. Economic democracy, unlike political democracy, cannot be founded on the acknowledgement of supposed natural rights acquired at birth. Einaudi is quite right to remind us that real abilities are needed and also that each subject should assume real responsibilities concerning the exploitation of enterprise capital. And this can take place only if the worker also becomes a capitalist. Economic democracy means widespread and popular capitalism. Reforms which are external to the enterprise have to knock down all the barriers preventing the formation of capillary entrepreneurship or which discriminate in favour of who already has a patrimony. But democracy within the enterprise can only assert itself if true willingness to participate and run risks is shown by the individuals who are part of it.
Thus there is no point in deluding ourselves over the time necessary for the reforms proposed. It will not take a single legislative reform to establish economic democracy. It will be the result of a struggle lasting many generations and of the individual effort of each subject to achieve greater competence, better entrepreneurial abilities and larger capital. Production, however automated and mechanized the enterprise may be, will still be the fruit of the work and intelligence of man, who precisely because he wants to improve his conditions without limit, also finds himself obliged to compete, and at the same time co-operate, with his fellow man. Economic democracy is not a magic recipe for abolishing work or distributing easy earnings. It merely proposes to guarantee equal opportunities for all individuals to enter the market. Then, let the best win.
 
Internal market, economic democracy and European democracy.
 
Although economic democracy can be placed in a long term perspective, with the realization of the European internal market, and in particular with the creation of monetary Union, within all probability some contradictions will appear which will oblige political and social forces to make a few radical choices.
The first difficulty concerns the growing tendency towards financial concentration, without any justification of a productive or entrepreneurial nature, in a European market that is still reluctant to accept the rules of economic democracy. The post-industrial mode of production has an internal development logic tending to reduce large human agglomerates typical of the industrial era. The automation of productive processes allows, in fact, not only to scatter all over the territory those productive systems which used to be concentrated in one place, but also to articulate better forms of property and management. In spite of this, it is almost inevitable that the integration of large economic spaces will accentuate the process of financial concentration. In these cases it is not a matter of amalgamations among large or small businesses with a view to exploiting common economies of scale. When this need appears the productivity for the whole economic system increases. Financial concentrations, on the contrary, concern the absorption into few hands of businesses operating in different productive branches, often without any productive or technological relation between them. In these cases, the suspicion never even arises that whoever is at the head of the holding or trust could simultaneously and competently take care of all the group’s activities. Large financial empires are created on the one hand by exploiting the possibility of separating ownership from control of the enterprise and, on the other hand, privileged access to the credit market. It therefore happens very easily that the larger fish eats the smaller one. But there is more than this. The big fish is often forced to be aggressive, because when economic spaces widen, whoever hesitates runs the risk of being overcome by others who are more unscrupulous and thus of becoming in turn an easy prey. The bigger one is, the more influence one has in society and politics, and these advantages, although not strictly economic, are not to be underestimated.
It must be noted that this tendency to financial concentration can hardly be controlled during the early stages of economic and monetary Union. Initially, the opening of the market corresponds to de-regulation, in which the countries with more favourable legislation to capital will also be more reluctant to modify it and accept Community norms of fiscal harmonization and regulation of the capital market, because they will be able to enjoy the relative advantage of attracting more productive resources to their territory. And until some Community regulations are enforced, it will in actual fact be the country with the least severe norms that imposes the standard for the functioning of the European financial market.
The second notable contradiction concerns the necessity of managing the European economy as a whole, in a difficult international situation, so as to ensure the traditional objectives of full employment and growth in the presence of a diminished ability to manoeuvre national budgets. The national authorities for management of the economy are now used to considering the state budget as an instrument for economic policy. But the starting of monetary Union, with a European central bank which does not finance deficits, partially or completely precludes using these manoeuvring margins.
For these reasons one might be led to think it will become inevitable to increase the amount of resources destined to the European level, to allow those anti-cyclical policies which up to now were carried out on a national level. And in actual fact, as we have seen, a school of economists supports this point of view on the basis of US experience. In the first half of the century, the formation of the large US internal market was accompanied by growing economic power of federal authorities, so much so that nowadays it can be affirmed that there is no longer a clear difference, as far as economic policy is concerned, between the American federal system and that of a centralized state. Europe, however, seems to be barred from this pathway. It would certainly make no sense to build up a “super welfare state” at European level, while laboriously attempting to transfer many responsibilities from the national level to local powers, that can undoubtedly meet citizens’ requirements much better. Besides, beyond these political considerations, it must also be observed that the Community budget at present is of extremely modest proportions in relation to the value of gross European product. Even by imagining a massive (and unlikely) transfer of resources at Community level it is difficult to suppose the size of the European budget, within a reasonable period of time, could reach the critical dimensions that would allow European authorities to carry out significant anti-cyclical manoeuvres.
The responsibilities of the European level, instead, consist of promoting great structural reforms in the European economy and in directing it towards long term development objectives (full employment, technological restructuring, sustainable development, etc.). The realization of economic democracy can allow achievement of the objectives of full employment, market efficiency and stability which have so far been pursued with other instruments of economic policy, but with diminishing success. In fact, effective reform should both improve efficiency within the enterprise by reducing conflicts between capital and work, and allow those who want to enter the entrepreneur market to do so, thus eliminating at source the causes of involuntary unemployment.
Of course, these reforms cannot take place without a strong commitment, at Community level, of all democratic forces, because it will be necessary to influence deeply the social and productive system and public budgets. To achieve this result, however, it will not be necessary to establish new expenditure in the Community budget. What is really important is that the European Parliament should pass legislation, which is binding for all Community countries, by which some “fundamental economic and social rights” are guaranteed, just as every European country has committed itself to respecting the Convention of human rights. Every single country will then be able to introduce the improvements it considers most suitable. It is however indispensable that no country should be able to go below a minimum Community standard and that the European juridical authorities are able to intervene effectively to guarantee compliance with European legislation. The cost of the reforms will thus be placed on national budgets, and possibly on those of local bodies. And in this sense it will be possible to speak of a European “right to work”. While the formation of a European capital market will simply be the fruit of de-regulation and of fiscal harmonization, already foreseen by the European governments in the Single Act, the realization of economic democracy can only arise from a common project of all the sincerely democratic forces present in a European Parliament provided with real legislative powers.
 
 
The State and the Economy
 
Stability and efficiency.
 
During the post-war period, in all Western countries, Keynes’ philosophy of the management of economy progressively conquered public opinion and all political forces, both of liberal and socialist tendencies. Nobody, up to a few years ago, doubted any more that through appropriate manoeuvres of the public budget and of monetary policy it was possible to achieve high rates of economic development, full employment and equilibrium in the balance of payments. The only problem economists discussed concerned the appropriate mix of policies, in other words whether, in some specific cases, for example a disequilibrium in the trade balance, it were not more appropriate to resort to fiscal policy, monetary policy or to a combination of both.
This solid confidence in Keynes’ recipes, however, has been seriously dented by the international crisis of the seventies, when governments of the main industrialized countries had to face a totally new situation of high inflation in the presence of heavy unemployment. Since then a process of revision of traditional economic doctrines has been under way and in particular with regard to the role of the state in the management of the economy. The beginning of the European constituent process can contribute in a substantial way to solving this debate. Supposing the previously made observations are correct, in the European federation an economic policy which is founded on wholly new principles will develop. In actual fact, if the central bank is not forced to finance any deficits and if government budgets have to comply with the rule of balancing, within all probability the principle of the dichotomy between budget policy and monetary policy should assert itself. In conclusion, it is a matter of going back to certain golden rules formulated during the period of classical political economy and of the gold standard, but which have more recently fallen into disuse. The central bank, to the extent to which it has to see to monetary stability and at the same time to the needs of Treasury funds, inevitably ends up serving two masters, and on occasion it has to sacrifice either one or other objective. The federal constitution, thanks to the explicit recognition of the role of local governments (including national ones), which can have interests in opposition both to the central government and to those of the remaining governments, implements a mechanism of checks and balances which should allow the central bank to manage monetary aggregates and interest rates with sufficient autonomy, which is the necessary presupposition of responsibility. In the federation the central bank, therefore, is the institution whose priority task is to guarantee monetary stability and must be held responsible for this in front of the democratic bodies (European Parliament and European government). The market, which is the place where, par excellence, economic efficiency is realized, can thus be freed from the greatest and most insidious (because hidden) interferences of public power. Inflation upsets the whole system of relative prices and incomes, whose structure is founded on delicate equilibriums deriving from confrontation between productive forces. Moreover, the interference of public power in the credit market provokes the so-called crowding-out effect because, so as to be able to finance public expenditure, governments often accept extremely high rates, not having to respect criteria of economic efficiency, thus raking in credit which would otherwise be available for private investment. Efficiency in public services cannot, on the other hand, be founded solely on economic criteria. The comparison of efficiency standards between different centres for the distribution of public services certainly plays (and hopefully will do so even more) a role in improving the quality of the service. But the fundamental issue, when the good management of expenditure is concerned, is the responsibility of the administrators towards the administered. For this reason, the criterion of the balanced budget, and of the consequent “administrative glasnost”, is of the maximum importance. The dichotomy between monetary and fiscal policy, by obliging administrators to account wholly for the use of fiscal resources, also forces them to greater responsibility towards taxpayers.
However, it could be objected to that the dichotomy between monetary and fiscal policy, even admitting its advantages, introduces an unbearably rigid management of the economy. The objective of Keynes’ policies was precisely to fight depressive crises and unemployment through injections of public expenditure and monetary manoeuvres. At first sight, in a federal system this margin for manoeuvre would be sacrificed, thus endangering the possibility of reaction on the part of economic authorities to possible crises. In theory, a healthy and efficient economic constitution could perhaps be realized, but it would be unable to react to short term shocks. And, as Keynes rightly said, “in the long term we are all dead”.
These objections are clearly important, but they do not take into account the structural changes which have appeared in post-industrial economies compared with the period in which Keynesian thought was formulated. At that time national budgets were much smaller than they are today and purchasing power came almost entirely from private incomes. A fall in real demand and in employment could therefore have triggered off dangerous depressive crises from which the economy could hardly have recovered spontaneously. Today the situation has changed completely. National budgets represent about half the income produced and public employment is, more or less, the same size as private employment. Moreover, some mechanisms of automatic stabilization have been introduced into the fiscal and expenditure system which reduce erratic expansive and depressive impulses. Aggregate demand is therefore much more stable than it was half a century ago. This does not mean that it is necessary to renounce short term stabilizing manoeuvres. Interest rates and public expenditure (advances and delays in payments) can easily be managed in an anti-cyclical sense. Moreover, recent experience has proved that, due to the growing interdependence of the economic system, the more these manoeuvres are co-ordinated at an international level, the more effective they are. It is a matter which concerns not only Europe, but the industrialized world as a whole.
The stabilization of aggregate demand is an important condition for the good functioning of the economy, but it is no longer sufficient for achieving full employment. Contemporary employment problems do not depend any more on the fact that “the plants remain unused due to lack of demand”, but rather on the structural changes of the productive process linked to the transition from industrial to post-industrial society. Some sectors expand and other decline, some introduce automation and pose problems of labour re-qualification, in others it is the educational level of young people that does not correspond to required qualifications, etc. The answer to these problems seems to lead us once more in the direction of economic democracy. In a situation in which knowledge and technology are constantly changing, infinite opportunities for work are opening up for enterprising individuals. The more employment becomes a problem of self-employment, in other words of entrepreneurship, the greater the possibility of solving it. For this reason the assumption that inspired Keynes with his interventionist policies is no longer true: today it is possible to reform the market so that full employment – without external intervention – can be achieved.
It must also be added to these considerations that public employment can be made much more flexible and adaptable to demand than it is today. The demand for social services, on which a better quality of life depends, is practically unlimited. It is however a potential demand which has difficulty in becoming a real demand due to citizens’ reluctance to grant greater resources to public powers. A reform of the financial system which guarantees greater fiscal autonomy and a fair management of public resources can but favour wider employment in the public sector, especially in local authorities.
 
The government of the economy.
 
Since it has been acknowledged that it was not enough to leave it to the market to solve certain important social problems, there is a debate about the relations between public and private, in other words over the necessity for the state to intervene to steer the market towards objectives of public interest or completely to replace it. In more general terms, one can also talk about the relations between plan and market, as Liberals and Socialists do when they confront each other on the role of the welfare state and the quota of public or private property of productive resources.
In a federal state the matter becomes more complicated. In a situation in which different levels of government exist, economic policy must be articulated on the basis of the various governments’ competences. In a national state, the instruments of economic policy are mostly concentrated in the hands of the national government One talks of a national employment policy, of energy, of transport, etc. In a federation, on the contrary, economic policy will be able to count on the specific responsibilities of the various governments: there will be therefore an economic policy which is articulated territorially, because every government, from the small municipality to the European government, will first of all be responsible for the territorial ambit of its jurisdiction. But this means that the instruments for intervention will be, and in general will have to be, different according to the level of government and of the economic policy in question.
To clarify this point, let us consider two examples: employment policy and ecological restructuring of the economy. As regards the role of the market in favouring full employment, the importance of the European level for the achievement of economic democracy has just been considered. However, today most employment depends on the public sector. From this point of view it is obvious that, to the extent to which most public expenditure is controlled at a national level, it is still national governments that mainly influence the level of employment. But to the extent to which progress is made towards real fiscal autonomy of local bodies, their responsibilities towards employment will increase. And it is in this reform that the greatest hopes must be placed for the future of the welfare state. It is at the local level, in fact, that a greater request for public services appears and it is at the local level that it is possible to consider extending the area of public services without causing further inflationary pressures, thanks to the tight budget constraint and citizens’ greater participation.
Analogous considerations are valid for ecological policies. It is well-known that each single Community country cannot hope to realize effective ecological protection policies, if the other countries do not want to be equally “virtuous”, in the presence of an increasingly integrated market. And it is at the European level, therefore, thanks to Community legislation, that it will be possible to impose adequate environmental standards and any ecological taxes, to discourage the use of polluting technologies and to favour the introduction of clean production methods. But the work of applying European policies and of detailed surveillance will have to be carried out mainly at the local level, within the framework of the municipality or the region. Consequently the administrative apparatus for ecologically safeguarding the territory will have to be established or reinforced at the local level.
These examples could perhaps be enough to derive a few indications of a general rule. As one goes up to the highest levels of government, the responsibilities increase concerning the co-ordination of policies. This is why the institution of supra-national democratic bodies, such as the European Parliament is indispensable. Only by a democratic method of deciding is it possible to realize the collective interest of the federation, without the compromises which are indispensable for reconciling the requirements of populations with different history, traditions and needs, preventing the search for and realization of common policies (as happens when sovereign governments, with the right of veto, make decisions). On the other hand, at the highest levels of government, there is less need to manage financial resources directly, because policy management is carried out at lower levels. This is why, in general, a slender budget and the recourse to agencies for co-ordination, orientation and surveillance are often sufficient instruments for the supra-national level of government. At lower levels, very often the responsibility for the execution of various policies is the task of local authorities. Their administrative and fiscal autonomy must mainly be directed towards the realization of better standards of welfare and quality of life with respect to the Community average. In reality, local authorities should feel responsible to every citizen – and for this reason they have a right to European solidarity, for example, by resorting to aid under the regional Community policy – for guaranteeing a minimum quantity of essential services.
 
Europe and the new international economic order.
 
The discussion on the economic constitution of Europe cannot be considered finished without examining the structure of international relations. In this respect, the European economy can be defined as extrovert, in the sense that Western European countries not only have a high degree of integration between themselves, but they are very open to commercial and financial exchanges also with the rest of the world. The historical situation in which the economic unification process of Europe is being completed – with the internal market and a European currency – can only accentuate these characteristics. The equilibriums of Yalta and of the Cold War are over. The two superpowers have started off a process of détente which can hardly be wholly achieved without an active contribution from the Europeans.
Even without entering into a detailed examination of the major problems of international politics, it is easy to see that it is definitely in the interest of Europe to favour and, so far as it is able to do so, promote détente, which does not concern only the level of armaments, but also economic integration between the East and West and North and South of the world.
The most urgent problem, over the medium term, concerns the aid the Community can give to the countries of Eastern Europe in converting their controlled economy into a market economy. It is not only a matter of financial aid. It is obvious that the target is that of full participation on the part of these countries in the European Community. For this reason, the decisive step will be the creation of a European currency and the possibility that it be adopted first in international transactions and then, progressively, within the countries themselves. A market economy is inconceivable without full monetary convertibility, that is, the possibility to buy and sell on the market not only products, but also the means of production. Only with great difficulty, and under the risk of serious social crises, will the small countries of Central and Eastern Europe be able to tackle economic reforms without the explicit support of the monetary and financial institutions of the Community.
The use of a European currency in international transactions will immediately pose the problem of its relations with the US dollar and the main international currencies, such as the yen. The old international monetary system is now in a coma, since the US dollar has no longer been able to guarantee its convertibility to gold and, therefore, a system of fixed exchange rates. Therefore a new “Bretton Woods” is to be hoped for in which not only are the foundations for a new international monetary system laid down – without a leading currency, reinforcing the role of SDRs as a world currency – but which also lets Third World countries take part in its management, because their exclusion from the main world monetary institutions can no longer be justified. The amount of their indebtedness sufficiently proves that the international banking system, including the South of the world, is by now deeply integrated and that the control of the international monetary aggregates can no longer succeed without their participation.
The most dramatic international problem Europe will have to face is precisely that of the Third World, which includes ecology (deforestation, desertification, toxic waste, etc.) as no secondary aspect. Europe is the continent with the closest contact with developing populations, both because of its colonial past and because of its geographical position, which lays it open to the migratory waves coming from the Mediterranean, Central Africa, the Middle East and Asia. Up to now Europe has faced the problem of the Third World with an intelligent policy of structural aid (Lomé Convention) which, however, has proved insufficient from the quantitative aspect. Growing immigration from the Third World is the most evident proof that those peoples that look to Europe as a model of civilization have no other way to improve their fate except by abandoning their native country. Without a radical reversal, over the next few years Europe will be increasingly torn by isolationist tendencies (which are impractical due to the open structure of European society and economy) and racist backlashes.
Third World aid is the only policy requiring a considerable long term commitment of resources and which must be managed at Community level. To obtain them, austerity and disarmament seem to be the only practicable options. Both require wisdom, but perhaps it is more simple to save on military expenditure, rather than to sacrifice the civil resources which can be used for improving the average living standard of the population. For this reason, on this ground too, Europe will be driven to find solutions to the problem of its security more through political alliances and integration processes, than from competition with the superpowers in a rush to armaments from which it would not derive any benefit. The more Europe is able to co-operate with other peoples, the more it will reduce any threats to its borders and will obtain greater guarantees of security.
With the objective of economic democracy, Europe will finally make feasible the construction of that society which is both efficient in producing wealth, and just in distributing it, the roots of which go deep into the utopian thought of the last century. But in a world that is now united by capitalism and international emigration, these conquests will appear to be exclusive and discriminating unless they can be inscribed into a political project making it possible for every citizen of the world to become a member of this same just and efficient society. The foundation of European economic and social development lies in overcoming every political, ethnic and social frontier. This is why the institution of the European Union, together with the destruction of the last surviving frontiers in the old continent, will represent a formidable impulse to the establishment of a new international economic order based on the principles of federalism.


[1]For example the MacDougall Report (Bruxelles, 1977) drawn up for the EEC Commission by a group of experts and the more recent study by A. Lamfalussy, “Macro-coordination of fiscal policies in an economic and monetary union in Europe”, in Report on Economic and Monetary Union in the European Community, Part II, Collection of Papers Submitted to the Committee for the Study of Economic and Monetary Union, Luxembourg, 1989 (Delors Report).
[2]L. Robbins, Economic Planning and International Order, London, Macmillan, 1937.
[3]R.A. Musgrave expresses himself in this sense in The Theory of Public Finance, Tokyo, McGraw-Hill, 1959, p.181; and also W.E. Dates, in Fiscal Federalism, New York, Harcourt Brace, 1972. Dates affirms very explicitly: “The logic therefore suggests that, as regards the stabilization problem, a unitary form of government is distinctly superior to a government organization exhibiting an extreme degree of decentralization. A central government is in a position to make good use both of monetary and of fiscal policy in maintaining the economy at high levels of output without excessive inflation” (p. 6, italics are mine).
[4]According to a study concerning the countries of the OECD area (Public Sector Deficits in OECD Countries, ed. by H. Cavanna, Hong Kong, Macmillan Press, 1988, p. 8) the budget deficit which appeared after the 1973 oil shock is mainly due to four causes: a) slackened economic growth with a consequent increase in expenditure for automatic stabilizers; b) increase of interest charges on public debt; c) the effects of inflation on public expenditure; d) the measures adopted by the authorities to stimulate economic recovery. The most worrying situation, documented in this study, is that deriving from excessive recourse to public debt which, in some countries, has become an increasing structural item of the deficit. In conclusion, the old fiscal mechanisms of the social state no longer seem adequate to meet new requirements, so that the only way out, to which governments with little popular consensus can easily resort, is growing indebtedness.
[5]The main exponent of this school of thought is J.M. Buchanan. The proposals of these economists initially developed as a severe critique of Keynesian “deficit spending” policies. In this sense see J.M. Buchanan and R.E. Wagner, Democracy in Deficit. The Political Legacy of Lord Keynes, New York, Academic Press, 1977; and J.M. Buchanan, J. Burton and R.E. Wagner, The Consequences of Mr. Keynes, London, Hobart Paper, 1978.
[6]See J.M. Buchanan, Ch.K. Rowley, R.D. Tollison, Deficits, Oxford, Basil Blackwell, 1987.
[7]See R. Scott Fosler (ed.), The New Economic Role of American States. Strategies in a Competitive World Economy, New York, Oxford University Press,. 1988.
[8]See J.A. Maxwell, Financing State and Local Governments, Washington, The Brookings Institution, 1969, Ch. VIII.
[9]R.R. Bowie and C.J. Friedrich, Studies in Federalism, Boston-Toronto, Little, Brown and Company, 1954, Ch. VII.
[10]K.C. Wheare, Federal Government, London, Oxford University Press, 1967, pp.118-9.
[11]L. Robbins, “Economic Aspects of Federation” in Federal Union. A Symposium, ed. by M. Chaning-Pearce, London, Jonathan Cape, 1940.
[12]K.C. Wheare, Federal Government, op. cit., p. 107.
[13]R. Dahl, A Preface to Economic Democracy, Oxford, Polity Press, 1985.
[14]J.K. Galbraith, “From Stupidity to Cupidity,” The New York Review of Books, November 1988.
[15]L. Einaudi, Lezioni di politica sociale, Turin, Einaudi, 1965, pp. 206-7.
 

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