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Year LIII, 2011, Single Issue, Page 13



Towards a European Federal
Fiscal Union
I. From the financial to the sovereign debt crisis.
1. The greatest crisis that the world economy has had to endure since the end of WWII started in 2007 with the collapse of the housing bubble in the United States. The origin of the crisis was financial: the American banks had granted mortgage loans for the purchase of houses also to low-income families, with the declared aim of giving everybody access to home ownership. The result was an ever-increasing demand for real estate and this favoured constantly rising house prices; for the banks, the value of properties became the guarantee of repayment of the loans: should the new owner fail to make his mortgage payments, the banks could always repossess the property and put it on the market at a purchase price higher than the amount of the mortgage itself. Furthermore, the increase in home ownership favoured the granting of further loans to families, enabling them to purchase, on credit, not only furnishings, but also cars and other consumer goods. The widespread use of credit cards for everyday purchases, far above families’ economic means, represented a further step in the expansion of demand and, by consequence, of production. A land of plenty built on a house of cards: the continued expansion of credit. At a certain point, when the housing bubble burst and the banks were forced to demand repayment of the loans, the pyramid collapsed. For many banking institutions this was the start of a period of growing financial difficulties that culminated in an event that revealed the full gravity of the crisis: the bankruptcy of Lehman Brothers on 15 September 2008.
But the financial crisis has also laid bare the structural weakness of the American economy. For many years, internal demand has exceeded domestic production, with the difference being made up by net imports of goods from abroad (i.e. imports exceed exports). Furthermore, to this external deficit must be added the federal budget deficit. And these imbalances are managed through capital imports not only from China, but also from other industrially developing countries: in order to put to use the huge balance of payments surplus and consequent accumulation of foreign exchange reserves, these capitals are invested on a large scale in American Treasury bonds. At the same time, imports of consumer goods, at prices much lower than the American ones, help, on the one hand, to guarantee a huge outlet market for the industrially developing countries’ products, and, on the other, to sustain the standard of living of American families in spite of the containment of per capita income growth, especially for the middle-low classes. The American dream of unlimited growth, sustained by the housing bubble, by unlimited domestic credit, by the dollar’s role as an international currency, and by the financial centre of New York, capable of attracting capitals from the rest of the world, came to a rude end with explosion of the financial crisis.
Rapidly, the crisis, born in the United States, went global. The American banks had been packaging “toxic” securities (i.e. ones that have no chance of being covered by the payments from those that received the loan) into other securities of different kinds which were then sold on the international markets. Very soon, the European banks, too, were dragged in with the American banks, forcing the European States to intervene in support of the banking system, through large injections of public money. At the same time, the banks, facing serious financial difficulties, were forced to impose a credit squeeze on their customers and in particular on the production system. Struggling companies had to reduce their production and the resulting shrinking of family incomes had a further impact on the demand for consumer goods. At this point, the crisis spread to the real sector, involving, albeit to different degrees, all the other industrialised areas of the world.
2. Faced with the risk of a global recession, the states reacted decisively. Overcoming the growing tendency to restrict public intervention, which had prevailed since Reagan and Thatcher, they heavily financed the real economy, while also — this applies to Europe in particular — guaranteeing levels of employment through the extensive use of social safety nets. The reaction to the crisis was stronger and more immediate in the United States than in Europe, where only the ECB, which is a federal body, is in a position to take the decisions that are needed in the face of this crisis, the greatest of the postwar period. The reactions of the EU and the countries of the eurozone were slower and weaker for two reasons, which actually reinforce each other: first of all, as far as economic policy is concerned, the European Union is a confederal institution. Accordingly, its interventions in this area must necessarily be based on coordination — slow and inefficient — of decisions taken at national level; furthermore, its decisions on interventions of a fiscal nature have to be reached unanimously, which, inevitably involving lengthy and difficult compromises, gives rise to further delays.
The second reason for Europe’s weakness is the fact that in a closely interdependent economic area, it is in each country’s interests to act as a free rider, i.e. to leave it to other countries to take the initiative, given that the positive effects of interventions in other countries quickly spread to the whole area. In short, no single country is inclined to burden its citizens with the cost of financing a recovery of the European economy from which all the countries of the economically integrated area would benefit; furthermore, EU interventions are slowed down not only by the Union’s institutional weakness, but also by the limited dimensions of its budget. In conclusion, the United States, which has a federal government and a substantial budget, can strongly support the economic recovery; any intervention in Europe, on the other hand, being entrusted to the member states, is more limited (also because of the Maastricht Treaty’s budget-deficit rules) and has the sole aim — hugely important, but totally inadequate given the scale of the phenomenon — of preventing the crisis from turning into a recession of catastrophic proportions.
3. Thanks to the measures implemented by several countries, family incomes held steady and gradually the pace of production picked up once more. The newly industrialised countries, in particular, started to grow again at high rates and the expansion of world demand helped to support the exports of strong countries, especially Germany whose growth was also sustained by its livelier domestic market. But it immediately became apparent that the crisis had moved from the private to the public sector.
The case of Ireland, for years held up as the model to imitate, was the most emblematic. To save its beleaguered banking system, the Irish government was forced to make huge funds available to the domestic banking system and the result of this increase in public expenditure was a 2010 budget deficit of 32.3 per cent of GDP. In Greece, on the other hand, the conservative government had been sweeping the dust under the carpet; eager to enter the single currency, it had presented a budget deficit below 3 per cent of GDP, in line with the restrictions imposed by the Maastricht Treaty. When the new government, led by socialist Papandreou, came to power it discovered, and publicly denounced, a huge hole in Greece’s public finances (the country’s budget deficit reached 10.5 per cent in 2010 and its debt stock 142.8 per cent). The financial markets immediately reacted to this news with a loss of confidence that made placing newly issued Greek bonds more difficult. The sovereign debt crisis was born.
The weak countries of the eurozone (Portugal, Ireland, Greece and Spain, often referred to by the disparaging acronym PIGS) were greatly penalised by the market, which had begun to doubt their ability to meet their obligations. To issue the new bonds necessary to finance their deficits they had to pay increasingly high interest rates, which had a hugely negative impact on the balance of public finance. The risk of default of these countries provoked a reaction in the other eurozone countries which, after long and extensive negotiations, provided for a loan of 110 billion euros to Greece; a further loan of 109 billion was subsequently approved at an extraordinary meeting of the Heads of State and Government of the euro area held in Brussels on 21 July 2011 to avoid forcing Greece to turn to the market for help before 2014. This second loan was granted in exchange for a package of serious restrictive measures in a country whose GPD had decreased by 4.5 per cent in real terms in 2010 following a 2.0 per cent drop in 2009. Furthermore, following the granting of 85 billion euros in aid to Ireland (35 billion of which was earmarked to rescue the banks), Portugal received a 78-billion-euro bailout.
The political impact of all this has been considerable. For example, the German government lost important regional elections, a clear sign of German taxpayers’ aversion to rescue operations in favour of countries considered guilty of mismanaging their public finances, even though they perhaps forget that a huge quantity of the bonds of those countries now facing a serious financial crisis were bought by German banks, attracted by the high interest that can be earned from these bonds (data from the Bank for International Settlements show that German banks hold 62 billion dollars’ worth of securities of peripheral eurozone countries, including Greek bonds worth 22.7 billion dollars). And during the recent Finnish elections, a new anti-European party obtained 19 per cent of the vote.
4. As a means of tackling the sovereign debt crisis, Daniel Gros and Thomas Meyer, in a CEPS policy brief, suggested creating a European Monetary Fund, an idea subsequently taken up by German Finance Minister Schäuble in an interview in Die Welt. Gros and Meyer start    from the consideration that since the eurozone countries are required to adhere to the principle of reciprocal solidarity and can, accordingly, expect to receive aid from the other countries were they themselves to be facing financial difficulties, they should be obliged to create a fund containing the resources necessary to meet possible requests for support. To avoid the moral hazard risks inevitably associated with any insurance mechanism — eurozone countries knowing that they can, if necessary, count on external support might be induced to act financially irresponsibly —, the two authors suggest that the European Monetary Fund should be exclusively financed by countries that break the fiscal rules of the Maastricht Treaty. In particular, the contributions would be calculated on the following basis: 1 per cent per annum on debt stock exceeding the 60 per cent limit and 1 per cent per annum on any budget deficit over the 3 per cent limit. In this way, in 2009, Greece, with its debt/GDP ratio of 115 per cent and its deficit of 13 per cent, would have had to pay 0.65 per cent of its GDP into the Fund (0.55 per cent for the debt excess and 0.10 per cent for the deficit excess).
The intervention of the Fund vis-à-vis a state in difficulty could take one of two forms: either the granting of a loan or the granting of a guarantee of newly issued public debt bonds. A state’s drawing on the Fund would be unconditional as long as it remained within the limits of the contributions it had previously made; beyond these limits the state in difficulties would be required to present an adjustment programme, which would be evaluated by the Eurogroup and by the Commission. The concrete execution of this plan would be guaranteed by the enforcement tools available to the EU. First of all, the guarantee granted by the Fund could be withdrawn or the disbursement of structural funds could be suspended. Ultimately, the ECB could decide to stop accepting, as collateral for the new liquidity, the bonds of the defaulting country. Ultimately, the Fund could support the country in difficulty, which, however, would lose its sovereignty in the management of economic policy, which would be brought under the control of the European tier of government that granted the aid.
Another proposal that envisages the issue of a European bond as a means of tackling the sovereign debt crisis is that of Depla and von Weizsäcker. In a policy brief of the think-tank Bruegel, these two authors suggest that, on the one hand, the European states should pool part of their public debt (a part not exceeding 60 per cent of the GDP: approximately 5,600 billion euros) through the issue of a European bond (Blue Bond), thereby significantly reducing the cost of this share of the debt. Instead, issues for the part of the debt exceeding 60 per cent would remain a national responsibility (Red Debt), and they would have higher costs that should prove to be a strong incentive for stricter fiscal discipline. On similar lines is Juncker and Tremonti’s proposal to issue European bonds through a European Debt Agency in a measure that should progressively reach 40 per cent of the GDP of the member states, thereby financing at least 50 per cent of the member states’ new debt issues. Furthermore, the Agency could exchange national bonds for European bonds, enjoying a discount on the face value that would increase with the growing indebtedness of the country from which the bonds were bought. This would represent a strong incentive to reduce the deficit, as indeed would the Red Debt in the Depla and von Weizsäcker proposal. A similar hypothesis involving conversion of the national debt and the financing of a European New Deal through the issue of euro bonds was put forward by Amato and Verhofstadt, supported by Baron Crespo, Rocard, Sampaio and Soares.
5. A more advanced proposal aiming to further develop the European Debt Agency was put forward in Belgium, both at political level,     by prime minister Yves Leterme — his idea was also taken up by the president of the Liberal-Democratic Group in the European Parliament Guy Verhofstadt — and at academic level by Paul De Grauwe and Wim Moesen. In an interview published in Le Monde on 5 March 2010 Leterme points out that “the recent market tensions expose the limits of a monetary union that has no economic government” and suggests “creating a common Treasury in the eurozone or a European Debt Agency. The Agency would be a European Union institution with responsibility for issuing the government debt of the eurozone, under the authority of the finance ministers of the Eurogroup and of the European Central Bank. The European Investment Bank would act as the Agency’s secretariat”. The Agency could take on the burden of existing debt, but each state would continue to pay market interest rates according to its level of solvency. This way, De Grauwe and Moesen remark, the risk of weak countries behaving as free riders, shifting the burden of their debt onto the financially stronger countries, is avoided. The new issues would instead benefit from a uniform interest rate, and as the existing debt became due, the eurozone government debt would take the form of a unified debt “which means that each member state would implicitly guarantee the debt of all the others”.
During a first phase, once the debt level for each state within the Eurogroup had been established, the Agency would gather the corresponding resources and lend them to the state in question, which, should it fail to meet the deficit target, would be forced to turn directly to the market, paying higher interest rates as a consequence of its failure to respect the rules of the pact. And this penalisation would be a strong incentive to respect these rules. Subsequently, a real, unified European public debt market would be established, offering significant advantages in terms not only of liquidity, especially for the smaller countries and for those more exposed to the risk of a financial crisis, but also of a reduction of interest rates, which would also benefit the larger countries. Finally, in the longer term, Leterme suggests, the Agency could become “a financing organ for the great trans-European infrastructure projects and a means of achieving an anti-cyclical fiscal policy”. This is clearly a proposal with political relevance since, beyond the short-term advantages favouring a positive resolution of the Greek crisis, it prefigures the creation of a fund to finance a European development policy and, ultimately, the creation of a federal fiscal union alongside the national anti-cyclical stabilisation policies.
6. De Grauwe, in a recent paper, offered a clear analysis of the origins of the sovereign debt crisis in the countries of the eurozone. This analysis takes, as its starting point, a comparison between the English and the Spanish economies. The UK, in 2011, had a public debt stock amounting to 89 per cent, which is 17 per cent higher than that of Spain (62 per cent). However, the financial markets picked on Spain, not on the UK, as shown by a gap between the respective interest rates that, at the start of 2011, reached 200 basis points (this means that in order to sell its state bonds, Spain must offer two percentage points more than the UK).
According to De Grauwe, this differential behaviour on the part of the markets is due to the fact that Spain is a member of a monetary union, while the UK still controls the currency in which it issues its debt. “National governments in a monetary union issue debt in a ‘foreign’ currency, i.e. one over which they have no control. As a result, they cannot guarantee to the bondholders that they will always have the necessary liquidity to pay out the bond at maturity. This contrasts with ‘stand alone’ countries that issue sovereign bonds in their own currencies. This feature allows these countries to guarantee that the cash will always be available to pay out the bondholders”.
In such a situation, were investors to perceive a risk of default by the United Kingdom, they would immediately sell the UK national bonds in their possession, causing the price of these bonds to fall and, in parallel, interest rates to rise. But those who sold the bonds would not want to hold onto the pounds thus obtained and would, most probably, sell them on the currency market, thereby reducing the value of the pound. As a result, pounds would remain available on the internal market and the currency stock would remain unchanged. At this point, part of this currency might be reinvested in state bonds. But were this not to happen, and the government to have difficulty selling its bonds on the market at reasonable interest rates, the Bank of England would be forced to buy these new bonds, in this way preventing the liquidity crisis from triggering a default of the British government.
Similarly, were default risks to emerge in Spain, the investors would sell their share of Spanish bonds, causing interest rates to rise. In this case, however, they would probably use the currency acquired from the sales (euros) to buy German bonds. Consequently, the potential sovereign debt crisis would become a liquidity crisis and the Spanish government would have ever-increasing difficulties in selling new issues at reasonable interest rates and, on the other hand, it would not have the power to elicit a support intervention either from the Bank of Spain or from the ECB, which is the only institution able to control the liquidity level within the monetary union. Therefore, a country within the monetary union is strongly conditioned by the behaviour of the financial markets.
Similar considerations are made by De Grauwe with regard to the problem of the differences in competitiveness between the countries of the monetary Union. If unit labour costs were to grow more in the Pigs countries than in the rest of the eurozone and the countries involved could no longer have recourse to currency devaluation, the only alternative, to render the economy more competitive, would be to start a deflationary process which would lead to wage and price reductions. But a situation of recession leads endogenously to a worsening of the deficit through a shrinking of revenue induced by reduction of the growth rate of the GDP. The worsening deficit reduces further the confidence of the financial markets, which can increase the risk of default, and also have negative consequences for the other countries of the monetary union due to the high level of financial integration existing within the area.
De Grauwe’s conclusions are important, not least for evaluating the recent decisions of the European Council on the issue of governance. “Like with all externalities, government action must consist in internalising them. This is also the case with the externalities created in the eurozone. Ideally, this internalisation can be achieved by a budgetary union. By consolidating (centralising) national government budgets into one central budget, a mechanism of automatic transfers can be organised. Such a mechanism works as an insurance mechanism transferring resources to the country hit by a negative economic shock. In addition, such a consolidation creates a common fiscal authority that can issue debt bonds in a currency under the control of that authority. In so doing, it protects the member states from being forced into default by financial markets”. He concludes: “This solution of the systematic problem of the eurozone requires a far-reaching degree of political union”. The nature of the problem to be solved is not technical, but political, and it is therefore necessary to single out the course to follow in order to achieve, at last, a real federation. As Amartya Sen rightly points out in a significantly entitled comment in The Guardian (Europe’s democracy itself is at stake), “monetary freedom could be given up when there is political and fiscal integration (as the states in the USA have)”. And even more clearly, Joschka Fischer concludes that “at the heart of resolving the crisis lies the certainty that the euro — and with it the EU as a whole — will not survive without greater political unification. If Europeans want to keep the euro, we must forge ahead with political union now; otherwise, like it or not, the euro and European integration will be undone”.
II. The recovery plan and the creation of a federal fiscal union.
7. With the worsening of the sovereign debt crisis and the slowness of the European economic recovery, the EU member states are clamped in an increasingly tight vice: on the one hand they have been forced to adopt measures, very tough and with immediate effect, to avert the risk of collapse of whole sectors, financial as well as industrial; on the other hand, they have been forced to meet the unavoidable need to support workers who have lost their jobs and, in general, people in lower income brackets who have been particularly hard hit by the crisis. All this in a situation in which public finances are not only deteriorating endogenously as a result of shrinking revenues due to falling income, but also constrained by the need not to significantly exceed the threshold set by the Maastricht Treaty in order to avoid being strongly penalised by the markets.
In view of the budget problems that are weighing down the countries of the eurozone, and making it seemingly impossible for them to launch effective recovery policies, it is now widely felt that the European Union should take decisive steps to promote recovery, reducing the social tensions that are becoming unbearable in many countries and loosening — through automatic expansionary effects on tax revenues — the constraints on national budgets. But the budget resources of the Union are limited and, in any case, at the present time the governments seem to be more intent on discussing bailout provisions than concerned about the need to implement a wider ranging plan. Therefore, to find a way out of this impasse, it is up to the federalists to promote without delay an initiative to start — fully in line with similar initiatives that are taking off within the European Parliament — the implementation of a political project envisaging the creation, by stages, of a federal finance in Europe, along the lines followed in the past to arrive at the single currency. And the starting point for the elaboration of this plan is the realisation that the current crisis marks the end of the growth process of the European economy and that the current crisis will not be overcome through a policy exclusively aiming to boost demand for consumer goods.
Instead, to launch Europe’s recovery, it is necessary to promote the realisation of an economically, socially and environmentally sustainable development model; consequently, this new phase has to be driven by public investments in the production not only of material goods — necessary ones such as infrastructures (transport, energy, broadband) — but also of immaterial ones, in particular basic research and higher education and investments aimed at supporting technological innovation, with a view to increasing the productivity and competitiveness of European industry, which has now reached the technological frontier. But in Europe and in the member states, public investments cannot be relaunched in this way on account of the budget constraint: as a consequence of the financial restrictions placed on all the eurozone countries, from 1980 to 2010 the ratio of public investments/GDP fell from more than 3.5 per cent to less than 2.5 per cent. As recently pointed out in the report “Europe for Growth. For a Radical Change in Financing the EU”, presented by three MEPs, Haug, Lamassoure and Verhofstadt, the revival of the European economy demands a sharp reversal of the current trend in the form of new public investments amounting to approximately 1 per cent of the European GDP, that is 100 billion euros.
8. From this perspective, in order overcome the financial crisis that is holding back the growth of investments, and thus GDP growth, in Europe, and as a result generating serious social tensions and difficulties balancing public budgets in a stagnating economy, the first step of the plan is to create a European Fiscal Institute, responsible mainly for arranging the bailouts of the countries at risk of being swept away by the sovereign debt crisis, and for paving the way for the subsequent evolution towards a federal finance and the establishment of a European Treasury. In this context, the Fiscal Institute could serve as an intermediate stage in the establishment of the Treasury, rather in the way, in the creation of the Monetary Union, the European Monetary Institute served as as prerequisite for the start of the ECB.
An important step in this direction was the decision of the European Council, with its resolution of 24-25 March 2011, to go ahead with the creation of a European Stability Mechanism (ESM), also through an amendment to article 136 of the Treaty which makes it possible to activate this support mechanism whenever this is necessary to guarantee the stability of the eurozone. The ESM will have a lending capacity of 500 billion euros and should be operational from June 2013, replacing the European Financial Stability Facility (EFSF), launched by the eurozone in May 2010 and in operation from the beginning of the following month. The EFSF is a company that places bonds and other debt instruments on the market to fund the states of the area in difficulty through loans guaranteed by the other member states and conditional upon implementation of a plan of debt reduction by the countries receiving the loans. In the meeting of the Heads of State and Government of the euro area, held in Brussels on 21 July 2011, the lending capacity of the EFSF was substantially increased — to 440 billion euros — and, furthermore, the right to purchase bonds of every eurozone country on the secondary markets was guaranteed, with limited constraints (as was the possibility of improving considerably the conditions under which loans are granted and of extending repayment periods).
These decisions support an in-depth change of the EFSF, previously just an instrument for granting loans to avoid the risk of default of countries facing a sovereign debt crisis, but now effectively starting to look like a lender of last resort, having the power to purchase bonds of these at-risk countries on the secondary market. But a further step forwards has been taken in the institutional field, too, with the agreement to launch the ESM, an intergovernmental institution created with a treaty ratified by the eurozone countries. It will be led by a Board of Governors comprising the finance ministers and will take decisions by a qualified majority vote. Only the granting and conditions of a loan to a country in financial difficulties and variations in the size and composition of the instruments available to the ESM will have to be decided by mutual agreement, which implies that the decision will have to be taken unanimously by the countries that are taking part in the vote, and an abstention will not be prejudicial to the taking of a decision.
The limitations of this institute are obvious, given that every decision on the allocation of funds requires the unanimous agreement of the governments taking part in the decision; furthermore, it will grant loans at punitive interest rates (the provision cost plus 200 basis points) and subject to a fiscal adjustment that will be not only costly on a social level, but also unrealistic in the absence of a European policy able to guarantee the start of a renewed phase of growth. But this first phase of the process — providing it is clearly announced to the market as a political decision representing a prelude to the creation of a true federal fiscal union — should nevertheless guarantee the financial stability of the weak countries and, by consequence, reduce the spread versus the bonds of the stronger areas, as was the case in the 1990s when the interest rates were reduced for the countries engaged in creating the conditions for their entry into the single currency.
In a second phase it will be necessary to start issuing eurobonds in order to boost European productivity and competitiveness and, at the same time, promote a transition towards a sustainable economy. The European Investment Bank, through the issue of eurobonds, could fund investments capable of guaranteeing a yield on the market, using the income generated from these investments to cover the costs of the interest and the repayment of the capital. But to finance the investments earmarked for the production of those European public goods that represent a conditio sine qua non for guaranteeing long-term sustainable growth of the European economy (i.e. secondary education, research and innovation, new technologies, renewable energies, soft mobility, and conservation of Europe’s environment, natural resources and artistic heritage), it is necessary not only to provide the funding, through the issue of euro-bonds, but also to guarantee the European budget the tax revenues necessary to service and repay the debt.
To be politically manageable, the European budget must be increased only by a very moderate amount. Indeed, as already suggested in 1993 by the commission of experts who studied the role of fiscal policy in a monetary and economic union and produced the report “Stable Money – Sound Finances. Community Public Finance in the Perspective of EMU”, it should not exceed, in the medium term, 2 per cent of the GDP. Clearly, should the need for investments financed by the European debt grow, the need to reform the structure of the European budget will become more pressing. Obviously it is necessary, first of all, to envisage a return to a system of veritable own resources. In fact, the so-called fourth resource is not a real own resource at all, only a national contribution proportional to the GDP which could be replaced by a European surtax on the national income tax — this would not be affected by the reform — paid directly by the citizen to the European budget, thereby guaranteeing greater transparency of the levy and at the same time increasing the responsibility of those who use the resources.
9. A new resource for the European budget could be found by approving the Commission’s recent proposal to introduce a carbon/energy tax as from 2013. In a situation in which the risks connected to climate change are increasingly apparent and the need to replace fossil fuels with alternative energy sources is becoming more and more pressing, a tax in line with the carbon content of energy sources would seem to be an adequate instrument for triggering virtuous processes of energy-saving and fuel-switching to renewable energy sources, thereby reducing the negative environmental impact of energy consumption and facilitating the introduction of less energy-intensive production processes. In this context of budget reform, the introduction of a tax on financial operations of a speculative nature could be taken into consideration, also with a view to guaranteeing a more orderly development of the international financial system. At the same time, part of the yield of this tax could be earmarked to finance the production of global public goods through a European contribution to a world fund for sustainable development, agreed with the United States and the other G20 countries.
During the last phase, geared at creating a federal fiscal union, the budget, financed with EU own resources, should be run by a federal European Treasury, responsible for implementing a sustainable development plan and for coordinating the economic policy of the member states. This would increase the attractiveness of the debt instruments issued by the Union, which would be guaranteed by levies flowing directly into the federal coffers. After making this institutional change, it would seem realistic to think of introducing a European finance minister, as proposed by ECB President, Trichet and, later, by Dutch central bank governor Wellink, by Belgian finance minister Reynders, and by Jacques Attali.
The plan to create a federal fiscal union and institute a European Treasury should be subject to a decision by the European Council, which would decide the timing of the different phases and, most of all, the final date that will mark the effective start of the tax union. But a decision of this kind, important as it may be, is not sufficient. There is a basic difference between the future fiscal union and the monetary union. The ECB is a constitutional organ whose independence is ratified by the Treaty of Maastricht and whose task — important but limited — is to guarantee price stability through interventions decided in full autonomy. The Treasury, on the other hand, would be a different kind of constitutional organ, given that the fundamental principle of democracy is “No Taxation without Representation”. The Treasury, to operate efficiently, would have to have consensus and therefore must be under the democratic control of the Parliament and act within the framework of a government that represents the will of the people. In conclusion, the decision to go ahead with the construction of a fiscal union, with a Treasury and a federal public finance, must be backed by a simultaneous decision fixing the date for the start of the complete federation, and therefore also envisaging, ultimately, a European foreign and security policy.
10. A plan including, from the outset, the objective of arriving at a federal fiscal union would presumably have the same impact on the market as the single currency did on interest rates. Several proposals for the creation of a European debt have been put forward, but, as was the case with the single currency, they have, so far, been rejected, most notably by the German and British governments. The latter objected on principle, being perfectly aware that advancing in the direction of European public finance will mean the Union evolving towards a federalstructure. For its part, the German government rejected the idea of a common European bond because its issue would imply an additional cost for Germany.
The validity of this latter notion is linked to the idea — questionable insofar as the creation of a European debt is connected with the step-by-step creation of a federal fiscal union — that the market must necessarily incorporate into the price of the European bond the risk of the emissions issued by the weakest countries. Furthermore, the German government fails to take into account the negative effects that a deterioration of public finance (fuelled by rising issue costs triggered by a widening of the spread) and the risk of default of these countries would, in any case, have on the German economy and, more generally on the prospects for the development, and even the very survival, of the eurozone. Also, the debt financing of a European economic recovery plan can no longer be avoided since, given the interdependence of the economies of the monetary union, each country is tempted to act as a free rider, failing to take steps to boost the economy at national level on the grounds that it can benefit from the positive effects of recovery policies implemented in the other countries.
11. Two final remarks can be drawn from these considerations. First of all, Europe, following the crisis, is increasingly seen not only as something unrelated to the citizens’ everyday life, but even as something hostile, imposing restrictions and sacrifices without guaranteeing a better and more secure future. It is therefore time to bring about a change, rapidly setting up, in the eurozone, a development plan to relaunch the European economy and employment. The plan can be financed by issuing bonds denominated in euros, guaranteed by the European budget and bound to attract the huge money stock circulating in the world market. With new prospects for development and the solution of the problems connected with the sovereign debt crisis, the citizens’ confidence will be restored, favouring the evolution towards a federal outcome of the European unification process through the creation of a federal Treasury responsible for management of the budget and coordination of European economic policy to promote sustainable development. In this way, after the single currency, the second arm of a federal state will have been created, with a view to completing the process by assigning the Union decision-making power in the field of foreign and security policy too.
The second consideration concerns the setting within which this process can be started. The point of departure is certainly the eurozone, where an ever-increasing interdependence is manifest and where it is possible to foresee further development in a federal direction. Within this setting — whose boundaries cannot be defined a priori, but which certainly does not correspond to the framework of the 27-member EU — it is necessary to establish which countries are capable of taking the initiative. Historically, advances have always stemmed from Franco-German initiatives, with Italy pushing for a federal outcome of the process. The federalists’ task, as at the time of the struggle for the European currency, is to devote themselves to mobilising the political and social forces, with the aim of getting the eurozone governments to take the political decision, also encouraged by the support of the European Parliament, to create a European Treasury and a federal fiscal union, a decision that would represent an important step towards full European federation.
Although it is, at the moment, difficult to predict how the sovereign debt crisis will develop, it has already had the effect of exposing the inadequacy of the present EMU setup. After a decade of growth of the euro area, all doubts about the efficiency of the Maastricht rules and the restrictions of the Stability Pact seemed to have been swept away. But then, the financial tsunami that hit the world economy, followed by the Greek crisis and its knock-on effects in other countries, revealed the true weakness of the institutional structure of the EMU. The eurozone governments managed to prevent the economy from collapsing by bailing out the banking system and guaranteeing a minimum of support to the production system, also in order to avoid a loss of social stability. But it has proved impossible, both within Ecofin, and within the Eurogroup, to introduce a serious strategy to guarantee, in a short time, significant economic recovery and to boost the competitiveness of the European industrial system.
What is more, the Greek crisis highlighted a further weakness of the structure of government of the European economy. While the ECB, being a federal body equipped with decision-making power, acted immediately to promote financial sustainability, guaranteeing the system a liquidity supply, even using the Greek public debt bonds as collateral, the Euro-group’s decisions on financial support mechanisms have been slow and most probably inadequate. The reason for this weakness clearly derives from the confederal nature of Europe in economic policy management, which favours free rider behaviours and, with the right of veto, guarantees unjustifiable privileges particularly to the stronger states.
As seen in the past, there are two sides to every European crisis and this one is no exception: on the one hand it makes disintegration of all that has already been achieved a real possibility. Today the most concrete risk is that of speculative attacks against the other countries of the eurozone, capable of jeopardising the very survival of the single currency. But, at the same time, each crisis opens the way for new advances towards greater integration within the Union, particularly for those countries which already show a higher level of integration. Indeed, after the Greek crisis, a debate started up between those countries that intend to carry on with the integration process, creating new institutions and introducing new policies, and those that instead wish to strengthen the decision-making power held at national level, thereby preventing Europe from finding a solution to the crisis.
Lately, the pendulum between the nations and Europe has swung strongly in favour of a returning of decision-making power to the national governments and the body through which they are, at the highest level, co-represented in the Union, i.e. the European Council, which many consider the natural depositary of decision-making power on economic policy management. But some proposals recently put forward instead envisage significant steps towards more efficient governmentof the European economy, less bound by the national powers. But it has to be understood that the decisive point is essentially political: it is a question of transferring to European level the power — until now jealously guarded by the member states — to make, independently, key decisions on economic policy, thereby completing the construction of the Economic and Monetary Union through not only the creation of a federal Treasury, but also the possibility of guaranteeing effective coordination of national policies through a power, limited but real, at the European level of government.
In the sovereign debt crisis that started in Greece, the first thing that surfaced was the serious behaviour of the Greek government, which was found to have manipulated data on its public finances. But the crisis also stems from a steadily growing divergence between the real trend of the economies of the weaker countries and those of the other EU states. In this sense, even a tightening of the restrictions of the Stability Pact, as recently proposed in various quarters, appears totally inadequate. What needs to be strengthened, rather, is the possibility of starting a development policy at European level through the availability of greater funds to boost productivity and, by consequence, the competitiveness of the eurozone economic system. But there is also a need for greater powers to coordinate national economic policies in order to prevent the diverging trends of the different economic systems within the eurozone, which cannot be offset by exchange rate variations, from causing the eurozone to implode. Hic Rhodus, hic salta. The Greek crisis has shown that the modest institutional progress obtained with Treaty of Lisbon is totally inadequate to achieve the establishment of a European federal state, with competences initially limited to the sector of the economy and currency management, among the EU countries where the degree of integration is most advanced, in particular those of the eurozone.

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