Year LV, 2013, Single Issue, Page 69

 

 

A Budget for the Euro Area:
the Road Leading to the Decisive Federal Leap

 

GIULIA ROSSOLILLO

 

 

Introduction.

The results of recent elections held in Italy and other European countries have shown very clearly the emergence, in some sections of public opinion, of a strongly negative attitude towards the process of European integration and the single currency. Many people blame the current economic crisis on the creation of the euro and believe that scrapping the single currency would allow the states to replace the austerity policies imposed at supranational level with development policies. These views, specious as they are — they fail to take into account the fact that the influence of the eurozone countries on the global market would, following their return to their national currencies, be absolutely negligible compared with that of the continental-scale economies, making their recovery of monetary sovereignty purely illusory — nevertheless highlight an aspect that has been becoming increasingly evident in recent years, namely the inability of the European Union, and within it the monetary union, structured as they presently are, to provide effective solutions to the crisis.

This is an aspect that should be taken into account by anyone who, conscious that it is only through a quantum leap forwards in the process of European unification (rather than a return to national divisions) that Europe will find a way out of the present crisis, is trying to work out the roadmap that will lead Europe in this direction. Indeed, if it is true that a real solution to the problems currently afflicting the Europeans will be found only when the states are prepared to stop acting as “masters of the Treaties” and unite in a federal state, it is also true that the current scepticism towards Europe and the single currency, an attitude whose spread could jeopardise the entire integration process, will not be curbed unless, as of now, tools are found that can show the European citizens that a turnaround is possible, and that the European institutions, far from being concerned only with austerity, have the capacity to offer them new prospects for growth and development.


The EU Budget and the Pretence of “Own Resources”.

The shortage of resources available to the EU goes a long way towards explaining the impotence of the European institutions in the face of the crisis. This shortage of resources is due to the EU’s lack of fiscal capacity, and also to the fact that the single member states have the power toblock proposed increases in the EU budget. For this reason, the issue of resources must be the starting point for efforts to find a way out of the vicious circle in which the EU, and the eurozone in particular, now seem to be caught.

The European Coal and Steel Community (ECSC) was, of course, based on a particularly advanced funding mechanism. Indeed, whereas the traditional international organisations were, and still are, financed by contributions paid by their member states, the Treaty of Paris (1951) gave the ECSC the power to levy direct taxes on coal and steel production and thus to finance itself.[1]

However, the six founding states of the ECSC did not feel that the same mechanism should be applied to the European Economic Community, an international organisation with much more far-reaching objectives, including economic integration in the broadest sense (i.e. not just the economic integration of one specific area).[2] Indeed, Article 200 of the TEEC stated that “the revenues of the budget shall comprise, apart from any other revenues, the financial contributions of member states”, which effectively meant that the functioning of the Community depended on the capacity and willingness of the states to finance it. However, the possibility of setting up a system of own resources was not excluded by the Treaty, which entrusted the Commission (Art. 201 TEEC) with the task of examining “the conditions under which the financial contributions of member states provided for in Article 200 could be replaced by the Community’s own resources” and, to this end, of submitting a proposal to the Council, which, acting unanimously and after consulting the Assembly, would then have to lay down the necessary provisions and recommend their adoption by the member states.

All this led to the establishment, in 1970,[3] of an “own resources” system of financing, based on revenue deriving from three different sources: customs duties, agricultural levies and a share of value-added tax receipts. The innovative aspect of this this solution (compared with the original system, based exclusively on contributions from the member states) was the fact that the revenue collected derived — in the case of the customs duties and agricultural levies at least — from common policies; in other words, it was revenue generated through activities managed by the Community institutions. However, the European Community was not assigned proper powers of taxation, since the own resources were not decided at supranational level, but by the member states, and were also collected by the member states, which kept ashare as reimbursement of the costs involved (this still applies today, with the states currently retaining 25 per cent).

But the growing competencesof the European institutions, together with a progressive decline in revenue from the Common Customs Tariff and agricultural levies (due to a general global liberalisation of trade), meant that these own resources were soon insufficient to finance the activities of the Community. Therefore, 1988[4] saw the introduction of the so-called fourth resource, which consisted of a percentage of each member state’s GDP. The introduction of this fourth resource essentially marked a return to a system of Community funding based on contributions from the states. Indeed, the bulk of the EU budget (over three quarters) now comes from this resource[5]. Basically, the survival and functioning of the supranational system still depends, as it did in the past, on the capacity (and willingness) of the states to finance it.

In conjunction with the decision on the fourth resource, the Brussels European Council of 1988 also introduced a new, multiannual financial planning instrument whose purpose was, on the one hand, to decide types of and place ceilings on own resources, and on the other to determine financial perspectives (now called the multiannual financialframework) for periods of at least five years at a time.[6] The EU’s own resources and themultiannual financial framework are today governed by Articles 311 and 312 TFEU, whichrequire the Council, in both cases, to act unanimously (in the case of the decision on ownresources, the European Parliament isconsulted and the decision enters into force onlyafter it has been approved by the member states in accordance with their respectiveconstitutional requirements, whereas the multiannual financial framework can be adoptedonly after obtaining the consent of the European Parliament). Furthermore, the fact thatArticle 310 TFEU expressly states that “the revenue and expenditure shown in the budgetshall be in balance” means that the decision on own resources also determines the EU'sexpenditure ceiling. Therefore, unlike what happens in federal states, in Europe it is the member states that decide the size of the EUbudget, which currently amounts to just over 1 per cent of their GDP.[7]

In times of severe economic crisis, of the kind we are experiencing today, it is inconceivable that the states should decide to step up their contribution to the funding of the supranational level: the lack of resources and the need to respect the parameters of the Stability and Growth Pact are, in fact, forcing them to use all their available resources to shore up the domestic economy. As a result, at a time when intervention by the EU institutions is more necessary than ever, the resources at the disposal of these institutions are tending to diminish.


The Relationship Between the Methods of Funding an Organisation and its Degree of Independence from its Member States.

This situation is clearly illustrated by recent events relating to the multiannual financial framework and EU own resources for the period 2014-2020. Indeed, during the negotiations prior to the adoption of these instruments, the member states agreed to set a a proposal for an enhanced cooperation. Leaving aside the greater flexibility route, which in any case would not solve the problem of the scarcity of resources, it should be underlined that the idea of allocating the revenue from the tax on financial transactions to the EU budget — even though this shows that the European Parliament is aware of the vicious circle created by the EU’s lack of fiscal capacity — would nevertheless run into some quite considerable difficulties. If, on the one hand, the proposal advanced was to give the EU a power of taxation, it would never be accepted by countries, like the UK, that are strongly opposed to any kind of political evolution of the Union. It is, in fact, unthinkable that the EU should be assigned a power in violation of the principle no taxation without representation: such a proposal would, in fact, be acceptable only if it were accompanied by an overcoming of the current confederal logic and the creation of a democratically legitimised European government. If, on the other hand, the proposal was to have the financial transaction tax, which will probably be adopted through the mechanism of enhanced cooperation, paid into the EU budget by the states participating in the cooperation, this, too, would be unacceptable as it would amount to using a tax applied only in some states (those taking part in the enhanced cooperation) to fund the budget of all of them (i.e. of the entire EU).

These events also serve to illustrate the importance, to the running of an institution, of the way in which it is financed. Indeed, when an international organisation is funded entirely by contributions from its member states, it remains heavily dependent on them: if they decide to stop contributing to its funding or if their contribution is insufficient, the organisation cannot operate. Conversely, if an organisation is able to fund itself, i.e. has fiscal capacity, it will be independent of the states and thus able to determine its own conduct.

In times of crisis, when the member states are unable to meet their obligations, particularly in the terms of social spending, the existence of a higher level of government, able to procure the necessary resources, becomes fundamental. As pointed out by Wheare,[8] it was the two world wars, more than anything, that brought about an exponential increase in revenue at federal level in the existing federal states. This circumstance made it possible for the central governments of these states to transfer resources from the richest to the poorest areas at a time when the member states, being able to raise funds only at local level, were no longer able to meet the needs of their populations. If, at that time, these central governments had lacked the power to levy taxes and been dependent on funding from the individual states, the federal structure would have collapsed, because the member states would not have had the resources necessary to finance the federation.

This is precisely the scenario we are witnessing in Europe today: the EU does not have the capacity to procure resources autonomously, and neither can it expect to acquire this capacity in the future, given that some of its member states are absolutely opposed to any progress towards this end. The solution, therefore, has to be based on a different perspective and must necessarily involve only those states that, having already agreed to relinquish their monetary sovereignty, now feel ready to be part of the initial core of a federal state.


The Proposals for Giving the Eurozone an Additional Budget
.

From this perspective, it is easy to appreciate the fundamental importance of the proposal to create a separate and additional budget for the euro area, funded by own resources. This proposal is contained in the report entitled “Towards a Genuine Economic and Monetary Union”, drawn up by Europe’s “four presidents” (of the European Council, ECB, Commission and Eurogruop),[9] in the Conclusions of the European Council meeting of 28-29 June 2012, and in the Communication from the Commission of 28 November 2012 entitled “A blueprint for a deep and genuine economic and monetary union”.[10]These are documents that clearly outline the prospect of equipping the euro area with fiscal capacity, a separate budget, and an EMU Treasury, the idea being that these instruments would make it possible to break the vicious circle in which the question of EU funding is currently caught and give the eurozone the instruments it needs to correct the asymmetry due to the paradoxical coexistence of a common monetary policy and single national economic policies.

As many have already pointed out,[11] an additional budget for the monetary union could have different functions, being an instrument that could serve not only to help member states in the event ofasymmetric shocks, but also to finance a plan for growth and development capable of responding to the most urgent needs of the states in crisis, such as the need to create employment. Resources corresponding to 2 per cent of the GDP of the member states, coming from the tax on financial transactions or from the carbon tax,would be sufficient to meet these goals. On the one hand, this solution would allow Great Britain to remain outside any forms of political integration, while still allowing the states wanting to go down this route to do so; on the other, it would make it possible to implement a development plan for the eurozone and, following the austerity measures thus far pursued in Europe, open up a prospect of growth and employment, thereby helping the European citizens to see that Europe, far from being only punitive, can help to positively influence their future.

Even though the debate over the legal instruments to use in order to create this budget is still in its very early stages, it is already possible to outline several avenues that could be pursued.

The first option is to use the ordinary Treaty revision procedure provided for under Art. 48 TEU. This is an option that has many disadvantages and that continues to be regarded warily by the majority of the states. First of all, application of Art. 48 would be a long and complex undertaking, entailing the calling of a convention and an intergovernmental conference and ratification by all the member states. What is more, it would mean reopening the question of Treaty revision (a veritable Pandora’s box), and thus running the risk that any project eventually emerging from the IGC and convention would merely be the result of an unsatisfactory compromise reached with the states that are opposed to a strengthening of the supranational level.[12]

The Commission itself, in the Communication mentioned earlier, stressed that Treaty revision is a step that should be reserved for a later stage, whereas “proper fiscal capacity for the euro area could initially be developed under secondary law.” This statement, indicating that the existing Treaties might contain provisions that could be used to kindle the issues of fiscal capacity and a budget for the eurozone, may actually provide a valuable starting point. After all, amending the Treaties to actually create these instruments would be a more clearly defined and less problematical undertaking if the process had already been ignited.

The provisions that can be examined to this end are, on the one hand, those relating to the establishment of enhanced cooperation agreements, and on the other Art. 136 TFEU. These are, in fact, the only ones able to raise the prospect of integrationbetweenonlysomeof the member states, in this case the ones that use the single currency.

As we know, to launch an enhanced cooperation,[13] a minimum of nine states must formally approach the Commission, submitting a request to be able to cooperate more closely in a given area (i.e. advance towards integration more quickly than the states not involved), providing it has first been established that their objective cannot be achieved by the Union as a whole. The Commission submits a proposal and the cooperation must be authorised by the Council acting by a qualified majority and having obtained the necessary approval from the European Parliament. Once established, the enhanced cooperation becomes part of the institutional structure of the EU and is governed by its institutions. In particular, on matters relating to an enhanced cooperation, the Council decides in restricted composition (i.e. only the members from the countries participating in the cooperation), whereas the other institutions act in their full composition. Furthermore, there are other conditions: the cooperation must comply with the Treaties and with EU law, may not be detrimental to the internal market or to economic, social and territorial cohesion in Europe, may not constitute an obstacle to or a source of discrimination in trade between the member states, may not cause distortions of competition between them, and may not interfere with the competences, rights and obligations of the member states which are not part of it.

One obvious advantage of this mechanism is that the cooperation can be authorised by the Council acting by a qualified majority, which means that its implementation does not demand the consensus of all the member states. However, as a mechanism to be used for the purpose of putting in place an initial fiscal capacity and separate budget for the eurozone, it presents certainweak points.[14] First of all, it is not stipulated at the outset which states can be involved in an enhanced cooperation, in the sense that these agreements are open both to states belonging to the euro area and to those from outside it; therefore, enhanced cooperation is not a mechanism specifically designed to address the needs of the euro area.[15] Second, enhanced cooperations are fully incorporated into the institutional structure and mechanisms of functioning of the EU, with the result that the states taking part in the cooperation are left little room for maneouvre.[16]

Conversely, compared with the provisions on enhanced cooperation, the other provision that could be exploited — Art. 136 TFEU — offers some interesting pointers. This article has served as the legal basis for the adoption of several measures aimed at tackling the crisis, including the Treaty establishing the European Stability Mechanism (ESM), otherwise known as the bailout fund. It is worth noting that since Art. 136 TFEU originally stipulated that the member states whose currency is the euro — the Council in its restricted composition to be precise — could only adopt measures designed to contribute to the smooth functioning of the EMU (in particular provisions serving to strengthen the coordination and surveillance of budgetary discipline and allowing the drafting and monitoring of economic policy guidelines), a further paragraph had to be added, giving the states the faculty to establish a stability mechanism. This amendment was made using the simplified revision procedure under Art. 48.6 TEU.[17] This is the basis on which the states of the euro area subsequently concluded the Treaty establishing the European Stability Mechanism. The ESM is, therefore, based on a treaty that is separate and distinct from the founding Treaties (TEU and TFEU), even though its establishment was, as it were, authorised by them.

This mechanism has allowed the eurozone countries to enjoy a certain amount of room for maneouvre, moreover without raising particular problems as regards the compatibility of their action with the EU’s institutional structure.[18] In fact, the Treaty establishing the ESM, while entrusting certain functions to the Commission, the ECB and the European Court of Justice, created new organs of its own (a board of governors and a board of directors), which are composed solely of representatives of the eurozone states and responsible for deciding how the ESM works.

Clearly, the creation of a eurozone budget funded with own resources and managed by a democratically legitimised eurozone government would be more than just a forward leap in terms of European integration; indeed, it would change the nature of the bond between the states that adopted the single currency and would demand a rethinking of the relations between the eurozone and the rest of the EU. Impossible to accomplish through the mechanisms currently provided for in the Treaties, it would be a step that would necessarily entail their revision. However, it is important to appreciate that, by exploiting the mechanisms provided by the founding Treaties, the embryo of a supplementary budget for the eurozone could already be created today, and that this embryo, raising the issue of the need to control democratically the management of the resources pooled by the eurozone countries, would constitute a reality that would have to be taken into account when revising the Treaties.


Article 136 TFEU as the Means of Creating an Embryo Eurozone Budget.

Article 136 TFEU could be the right instrument for this purpose. One possible scenario is that the member states could agree, during a European Council meeting, to amend Art. 136 through the simplified revision procedure already used to give the ESM Treaty a legal basis, adding a further paragraph giving the states the faculty to create an embryo eurozone budget. A solution of this kind, requiring use of the simplified revision procedure as per Article 48.6 TEU, a unanimous decisionby the European Council, and approval by the member states in accordance with their respective constitutional requirements, would necessarily have to be supported by the states outside the eurozone, too. However, we should not overlook the fact that the current wording of Art. 136 is rather vague[19] and that, especially under the pressure of the urgency to find an effective means of breaking the current deadlock,[20] it could conceivably be interpreted in a way that would allow — on the basis of the same paragraph 3 that allowed the conclusion of the ESM Treaty — the adoption of a treaty that would see the eurozone states pooling the revenue from the tax on financial transactions and entrusting its management — provisionally — to an intergovernmental body similar to the ESM’s board of governors or to a proper finance minister for the eurozone.

The creation of a eurozone budget through a Treaty based on Art. 136 rather than through exploitation of the provisions on enhanced cooperation would have two clear advantages: first of all, the circle of states involved would already be defined, given that measures adopted on the basis of this provision refer only to states that have joined the single currency; the second is the fact that Art. 136, not applying all the restrictions that limit activities of states deciding to enter into an enhanced cooperation, would allow the eurozone member states plenty of freedom for movement.

Article 136 could therefore represent the opening that might allow the eurozone countries to take the first steps towards the creation of a federal state, offering a solution far less traumatic than the setting up of an international treaty outside the framework of the founding Treaties, which would upset the current institutional balance of the Union, and at the same time constituting an initial step that could subsequently be completed with a true revision of the Treaties.

Indeed, a Treaty based on Art. 136 could conceivably be designed to address only the issue of the pooling of resources such as those deriving from the tax on financial transactions, and the creation of a body responsible for managing them. This would constitute a step that, although preliminary, would serve to raise the issues of democratic legitimisation (of this new body) and of the structuring of an institutional framework for the eurozone. As already underlined, the creation of a democratically legitimised government of the euro area equipped with fiscal capacity — and thus the establishment of a federal core within the European Union— would in truth necessitate modification of the current structure of the EU, possible only through revision of the Treaties. However, the existence of an initial, embryo eurozone budget and a transitional authority responsible for managing it would, when that point were reached, constitute a reality that would force the member states to find institutional solutions capable of ensuring the coexistence of an evolving eurozone federation and the broader confederal Union.



[1] On this point and on the EU’s system of “own resources”, see. J. Haug, A. Lamassoure, G. Verhofstadt (with the collaboration of D. Gros, P. De Grauwe, G. Ricard-Nihoul, E. Rubio), Europe for Growth. For a Radical Change in Financing the EU, Notre Europe, Brussels, 2001, especially p. 4 ff..

[2] As remarked by U. Draetta, Elementi di diritto dell’Unione europea. Parte istituzionale. Ordinamento e struttura dell’Unione europea, 5th ed., Milan, Giuffré, 2009, p. 199, while attributing the power of taxation to an international organisation not subject to effective democratic control could be tolerated within the context of a specific sector, like the ECSC, it would not have been acceptable in the case of an organisation like the European Economic Community.

[3] Council decision of 21 April 1970 on the replacement of financial contributions from member states with the Communities' own resources, in OJ L 94 of 28 April 1970, p. 19.

[4] Council decision of 24 June 1988 on the system of own resources of the European Communities, inOJ L 185 of 15 July 1988, p. 24.

[5]On this point, see S. Saurel,Le budget de l’Union européenne, Paris, La Documentation Française, 2010, p. 171.

[6] See L.S. Rossi, La dinamica interistituzionale nella definizione del bilancio comunitario, Il Diritto dell’Unione europea, 2006, n. 1, p. 179 ff., especially p. 189 ff..

[7] As remarked by J.-F. Jamet, L’Europe peut-elle se passer d’un gouvernement économique?, Paris, La Documentation Française, 2011, p. 55, the EU member states have a very strong influence over the EU budget, given that this budget is funded almost entirely by their contributions and that it is the states, together with the European Parliament, that fix the size of the budget and decide how it should be used; by contrast, the states of the American and Canadian federations are not directly involved in the federal budget procedure.

[8] K. Wheare, Federal Government, Oxford, 1964, p. 103 ff..

[9] Towards a genuine economic and monetary union, Report by the President of the European Council Herman van Rompuy (in close cooperation with the Presidents of the Commission, the Eurogroup and the European Central Bank), 25.6.2012; Towards a genuine economic and monetary union, Interim Report by the President of the European Council Herman van Rompuy (in close cooperation with the Presidents of the Commission, the Eurogroup and the European Central Bank), 12.10.2012.

[10] COM(2012) 777 final.

[11] E. Rubio, Eurozone budget: 3 functions, 3 instruments, Notre Europe, Tribune, November 2012; P. Toporowski, A Budget for the Eurozone: An Idea Fast Maturing, Polish Institute of International Affairs, Bulletin No. 117, December 2012; G. Wolff, A budget for Europe’s monetary union, Bruegel, Policy Contribution 2012/22, December 2012; F. Zuleeg, J.A. Emmanouilidis, A budget for the eurozone?, European Policy Centre, Commentary, October 2012.

[12] For more, in general, on forms of flexibility resulting from compromises reached within intergovernmental conferences, see A. Stubb, Negotiating Flexibility in the European Union. Amsterdam, Nice and beyond, New York, Palgrave, 2002.

[13] After remaining inert for many years, the enhanced cooperation mechanism was first applied with Regulation 1259/2010 of 20 December 2010 which related to the implementation of enhanced cooperation in the area of the law applicable to divorce and legal separations (published in OJ L 343 of 29.12.2010, p. 10), and recently led to the adoption of Regulation 1257/2012 of 17 December 2012, implementing enhanced cooperation in the area of the creation of unitary patent protection(published in OJ L 361 of 31.12.2012, p. 1). The enhanced cooperation agreement is governed by Articles 20 TEU and 326-334 TFEU.

[14] The instrument of enhanced cooperation is seen by the European Parliament [resolution of 20 November 2012 (2012/2151(INI)] as the means of introducing taxes and duties specific to the euro area. In this sense, see D. Moro, A Budget for the Euro Area: Objectives, Procedures and Institutions, The Federalist, 55 (2013).

[15] On the limits of the use of enhanced cooperation as an instrument for completing the economic and monetary union, see O. Clerc, La gouvernance économique européenne, Brussels, Bruylant, 2012, p. 481 ff., which points out that enhanced cooperation, being required to respect the single institutional framework of the European Union, does not really lend itself to the creation of bodies specifically for the Eurozone; an additional risk is that an enhanced cooperation would also be open to states wanting to hinder the process of creating an economic government.

[16] A further consideration that would seem to discourage the use of enhanced cooperation as a means of creating an embryo eurozone budget emerges from an obiter dictum of the Pringle judgement (27 November 2012, C-370/12, Pringle, not yet published), according to which “an enhanced cooperation can be established only if the Union has jurisdiction to act in the area of that cooperation”, a circumstance not deemed by the Court to exist in the case of the EMS and which would probably not exist in that of the creation of an embryo eurozone budget, either.

[17] European Council Decision of 25 March 2011 amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for member states whose currency is the euro (2011/199/EU), published in OJ L 91 of 6.4.2011, p. 1.

[18] The Court of Justice, in the Pringle judgement (cit.), has also underlined the compatibility of the ESM Treaty with EU law.

[19] J.-C. Piris, The Future of Europe. Towards a Two-Speed EU?, Cambridge, Cambridge University Press, 2012, p. 107.

[20] As underlined by F. Zuleeg and J.A. Emmanouilidis, A budget for the eurozone..., op. cit., “the debate over a eurozone budget may also follow a much broader trend, observed again and again in the crisis: what seemed impossible becomes likely, what was inconceivable is implemented.”

 

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