Year LXI, 2019, Single Issue, Page 132






1. Introduction

The nascent debate on the future of Europe that started with French president Macron’s proposal for a Conference for Europe, a proposal since taken up by the pro-European parties in the European Parliament and by the President of the European Commission in her Political Guidelines, will necessarily have to address the issue of European governance and how to make it effective in implementing internal and external policies designed to protect the values and interests of Europeans in the world.

This effectiveness is conditional upon the creation of new European instruments designed to overcome the preponderance of the intergovernmental method within the Community framework, and the consequent subordination of the functioning of the EU to the political will of the member states. This preponderance of the intergovernmental method can be attributed, essentially, to the lack of a fiscal capacity at European level.

Albeit subject to checks and balances put in place for the protection of all the member states, a European fiscal capacity, created as the expression of a new European sovereignty that can co-exist with the sovereignty of the national states, has now become unavoidable.

As we here seek to explain, creating this new capacity is a complex undertaking in today’s European framework, but it is certainly possible. It demands a true appreciation of the nature of the new tasks facing the European Union in the current international system, and achieving it will take a political act faithful to the original aims of the European unification process and the ideas of the founding fathers — in short, an act able to give the EU a different legal framework while continuing to respect the positions of all the member states.

2. What Does This Contribution Examine?

The systemic crisis experienced by the European Union in recent years has prompted citizens, academics, and national and European politicians to start a wide-ranging and ongoing debate on the future of the integration process. Those who still believe in the project of a united Europe have reiterated the need to rebuild the Union through a series of institutional reforms and new common policies, in order to meet the expectations and aspirations of European citizens.

Prominent among the reform proposals put forward so far is the fiscal capacity project, given its undoubted strategic importance in relaunching the integration process.

The purpose of this contribution is to explain:

— what is meant by fiscal capacity;
— why it is so important;
— the difference between the fiscal capacity project and other projects with which fiscal capacity tends to be confused;
— how the creation of a fiscal capacity would fit into a comprehensive reform of the Union.

3. What Does it Mean to Create a European Fiscal Capacity?

Economic and legal science normally understands fiscal capacity as the power to raise resources and spend them in the general interest. This power is therefore exercised on two fronts: that of revenue (which may consist of taxes or debts) and that of public expenditure (necessary to perform certain functions, such as financing public goods, redistributing wealth, and stabilising the economy in the event of economic shocks).

It is well known that under the current distribution of competences between the European Union and the member states, fiscal capacity remains a purely national competence. This puts the countries belonging to the eurozone in the very peculiar situation of having agreed to relinquish their monetary sovereignty, while at the same retaining their exclusive prerogatives in the field of fiscal policy. This explains why the Economic and Monetary Union is referred to as asymmetrical: while the monetary union part is based on a transfer of sovereignty, the economic union is essentially a coordination of independent national policies.[1]

The creation of a European fiscal capacity is therefore necessary first and foremost in order to resolve this contradiction and balance this asymmetry, endowing Europe with fiscal sovereignty to accompany its monetary sovereignty.

It is also important to appreciate that the creation of a fiscal capacity is usually linked to the founding act of a political community, and strong democratic control is required over those responsible for implementing it; accordingly, democratic societies have always demanded that fiscal power be exercised by parliament. Clearly then, creating a European fiscal capacity is a crucial element in the battle to build a federal European political union.

A European fiscal capacity, in order to be truly such, must be:

independent of the will of the individual states, i.e. it must be self-determining, with regard to both the revenue and the expenditure fronts;
— capable of generating significant resources. Depending on the tasks it is called upon to perform, the budget (when fully operational) must generate between 5 and 10% of the EU’s GDP.

4. Why is it So Necessary to Create a European Fiscal Capacity?

The attribution of fiscal power is the turning point in the battle for a federal political union in Europe. The EU’s transition from a confederal to a federal entity depends on the development of the capacity for self-determination; after all, of all the competences, fiscal capacity is the one closest to Kompetenz-Kompetenz, i.e. the capacity for self-determination of sovereign states.

It should be noted that historically the revolutions of the modern age have stemmed from the question of who should exercise fiscal power (the sovereign or parliament, the motherland or the settlers, the ancien régime or the bourgeoisie). Emblematic in this regard is the story of United States’ transformation from a confederation into a federation. The Articles of Confederation did not attribute fiscal capacity to the Confederation; instead they stated that it should be financed by contributions from the member states. The impossibility of forcing recalcitrant states to pay such contributions, and therefore to pay the debts resulting from the War of Independence, subsequently led to an unsustainable crisis situation. This was resolved only when, with the approval of the Federal Constitution of 1789, Congress was attributed the power to impose taxes, which meant that the Federation no longer depended on the states for its financing.

Today’s European Union is, of course, based on the principle of allocation: it can only do what the member states (unanimously) tell it to do; this is largely due to the fact that those who decide on the resources also decide, indirectly, the policies that can be financed with those resources. It is therefore no coincidence that the national constitutional courts have always considered that fiscal competence should be exclusively the states’ domain; after all, what is at stake is the member states’ sovereignty in the last instance.

5. European Fiscal Capacity: the Wrong Routes to Follow

In the ongoing debate on the future of the European Union, the concept of reforming the EU budget, creating new European own resources, and harmonising taxation within the framework of the single market rules is often confused with that of creating a European fiscal capacity. In reality, these are two completely different plans. This is a point that has to be appreciated in order to be able to address, with the necessary clarity of understanding, the problem of creating a fiscal capacity at European level.

The Problem of Reforming the EU Budget.

The EU budget is not an expression of European fiscal capacity. It is financed for the most part (more than 70%) by direct transfers from national budgets and, to a much smaller extent, by so-called own resources, i.e. resources collected by member states in areas governed by EU law (e.g. agriculture, tariffs) and subsequently transferred to the EU budget.

Therefore, the EU budget, thus constituted, lacks two fundamental attributes of a fiscal capacity:

— first of all, it is not independent of the will of the single member states. Although it is true that the individual annual budgets of the EU are decided by the European Parliament and the Council on an equal footing, this mechanism only concerns expenditure, which, moreover, must remain within the limits set every 7 years in the Multiannual Financial Framework, which has to be approved unanimously by the national governments within the Council after first being approved by the European Parliament (Article 312 TFEU). On the revenue side, Article 311 TFEU states that the own resources system must be decided unanimously by the Council, after consulting the European Parliament, and that this decision must subsequently be approved by the individual member states in accordance with their respective constitutional requirements. Consequently, in addition to the fact that, under this procedure, the representative body of the European citizens – the European Parliament – is only consulted, each government retains the right of veto on the question of the resources transferred to, and then used as part of, the EU budget.

— second, the budget, in this framework, is structurally inadequate; in short, it is too small. Today, it amounts to only 1% of the GDP produced by the whole of the European Union, because it is designed only to finance policies linked to the development of the internal market; unlike the budgets of federal states, it is not designed to be used for financing public goods or to fulfil any redistributive function. Realistically, the size of the budget cannot be increased significantly until it becomes an instrument of European supranational governance.

Naturally, none of this should stop us from seeking to improve the current EU budget, but it has to be recognised that any such reform could not change the ultimately intergovernmental nature of the present European budget mechanism.

Development of the Own Resources System.

Some believe that an initial European fiscal capacity could be created simply by developing the current system of own resources (Article 311 TFEU). However, this does not seem possible at the present time, because own resources are not an embryonic form of European taxes, but rather national taxes linked to sectors of the economy governed by EU law, which the national authorities decide to assign to the European Union on a permanent basis. These European resources are collected by national authorities and are, in most cases, recorded in national budgets. The European Union therefore has no power to create new resources, nor to decide on their amount and use, without the agreement of all the member states.

That said, the need for unanimous agreement by the member states is not the cause of the problem, but rather an effect of the current system. This is why recent proposals — coming even from the European Commission, among others — to introduce majority voting in tax matters remain profoundly contradictory. These proposals are probably motivated by the current stalemate in the Council caused by internal divisions between governments, and also by the fact that the attempt to circumvent the principle of unanimity through the system of enhanced cooperation in tax matters has run aground as the clauses governing these cooperations make them unsuitable for this purpose.

Moreover, leaving aside the fact that unanimity is still required in order to approve a reform of this kind, even if it were established that the Council could decide on new own resources through qualified majority voting, it is inconceivable that those states unwilling to limit their sovereignty in this area would apply taxes that they had opposed. Furthermore, even in the event of a switch to qualified majority voting, the own resources system would continue to be based on decisions taken by the member states, whose will would therefore still determine the collection of these taxes and their payment into the EU budget. And this is precisely why the outcome could only be an impasse (as the current issue of migrant quotas surely shows), or maintenance of the existing method of Council operation based on the reaching of (unanimous) consensus on fiscal matters.

Moreover, as is also stated in the Monti Report on own resources, to create true European taxes (and therefore to give life to an EU fiscal capacity), these taxes need: i) to be decided by the Union on the basis of its own economic policy choices; and ii) to flow directly into the EU budget (whose size would no longer be decided unanimously by the member states); furthermore, iii) the supranational level would have to be endowed with an administration capable of collecting taxes from private individuals.

The reality, therefore, is that in order to become European taxes, “own resources” must become the expression of a European fiscal capacity, acquiring the two key attributes mentioned earlier: they must be independent and structurally adequate; and this can only be achieved through a new legal framework establishing new rules on fiscal sovereignty.

Harmonisation of National Tax Policies.

Tax harmonisation, which is expressly provided for in Article 113 TFEU for indirect taxation and requires a unanimous decision by the Council (and thus the agreement of all the member states), is a very different matter from the creation of a European fiscal capacity. Tax harmonisation is the elimination of major disparities between the member states’ tax systems through the imposition of measures designed to render the tax base, and the rates applied to the same taxes, uniform across the different systems.

Tax harmonisation is currently a focus of debate, particularly in relation to corporate tax, because of the particularly low rates applied by some member states in order to attract investment; these low rates have the effect of distorting competition within the single market and lend themselves to abuse by multinationals.

The classic example of tax harmonisation is value added tax; in this case, provision has now been made for a uniform tax base and an approximation of the rates applied in the various member states. However, even when, as in the case of VAT, member states pay a proportion of a harmonised tax into the EU budget, this does not make it an EU fiscal capacity. Harmonised taxes continue to be national taxes that are collected by the national authorities that then use them, allocating a proportion to the EU budget.

6. How Can a European Fiscal Capacity Be Created?

Before creating a European fiscal capacity, it is necessary to overcome not only a series of chronic problems relating to the transfer of new competences to European level, but also certain specific contingencies of the current phase of the European integration process.

The European governments have different visions of the future of European integration. In contrast to some countries in favour of greater integration (such as France, Spain, Portugal, Slovenia, Slovakia, Malta, and now Italy once again), there are others that would prefer to maintain the status quo, albeit with some adjustments (such as Germany, Finland, the Netherlands); and then there is the bloc of countries characterised by a more sovereignist outlook (in particular Poland, Hungary and the Czech Republic).

Moreover, the various governments, endeavouring to preserve the well-being and stability of their economies, face different situations and have different priorities: the euro countries, not having the instruments of autonomous monetary sovereignty as a means of stabilising their economies, need common mechanisms in order to absorb economic shocks and implement structural reforms of their economic systems; moreover, their economies are more interdependent. The countries outside the eurozone, on the other hand, are more independent of their EU partners, even though some of them receive significant transfers from the EU budget. However, for the non-euro countries, too, stability of the euro area is necessary in order to guarantee proper functioning of the internal market.

Finally, while the existing Treaties allow a measure of harmonisation of national tax systems, and possibly the creation of new own resources to feed the EU budget or a budget line for the euro area, they make no provision for the creation of a European fiscal capacity with the key attributes mentioned above. Moreover, all decisions in this area must be taken unanimously (Articles 311, 312, 113 and 352 TFEU).

It should also be added that, for the reasons already mentioned, the constitutional courts remain hostile to the creation of a European fiscal capacity and could be tempted to activate “counterlimits”, or block European acts that they consider to be ultra vires or in conflict with a member state’s constitutional identity.

The creation of a European fiscal capacity will therefore require a political act that breaks with the existing European legal framework (essentially, a revolutionary act). In order to steer the process of European integration up to this point, certain requirements and circumstances must be taken into account.

— The legal act creating a European fiscal capacity can only be a new Treaty reforming the EU, adopted by a majority, for the reasons set out below:

1) given that the objective is to amend the EU legal framework and create a new competence, the new Treaty would be different from the so-called fiscal compact or the ESM Treaty, which established intergovernmental instruments for use by groups of member states. The amending treaty must, as its name indicates, amend the EU legal framework;

2) given that adoption by majority vote is envisaged, the obstacle of unanimity (Article 48 TEU) would be overcome. Obviously, this would lead to the creation of at least two groups of states: those adopting the new European Union 2.0 Treaty and those remaining bound only by the current European Union 1.0 Treaties.

3) The next issue is that of the ability of Union 1.0 is to coexist with Union 2.0, possibly for a long period of time. Several steps can be taken to ensure that this is possible:

  1. the rules of public international law will need to be applied, in particular the principles of the succession of Treaties over time, according to which the later treaty abrogates the earlier one(s), and the ineffectiveness of the treaties vis-à-vis third parties. In this way, the two unions (structured as two circles) could coexist, largely without friction;
  2. the EU institutional framework will need to be reformed (in part) so that it can work simultaneously for the two unions. While the Council can easily function in variable compositions, the Commission would need to be streamlined in order to overcome the one state, one representative idea. The structure of the Parliament and the Court of Justice, on the other hand, need not change: after all, individual MEPs, like the members of the Court of Justice, are representatives of the entire EU. A committee of eurozone MEPs could possibly be set up within the European Parliament (along the lines of the West Lothian question in the British Parliament).

— For the reasons set out above, the adoption of an amending Treaty to be adopted by a majority would not follow the procedure laid down in the existing Treaties (Article 48 TEU); instead, it would have to be the fruit of a Convention involving national and European institutions and representatives of the citizens.

Luca Lionello and Giulia Rossolillo**

* This is an information sheet drawn up, as a contribution to the debate, ahead of the XXIX Meeting of the Movimento Federalista Europeo (MFE) held in Bologna on 18-20 October 2019.

[1] The contradiction between, on the one hand, the de facto interdependence between the euro area member states (stemming from their sharing of the single currency and the very strong links between the national economies) and, on the other, the lack of a single economic and fiscal policy emerged clearly during the economic and financial crisis. At the outbreak of the crisis, there were no European instruments available either for dealing with the risk of default to which the markets immediately exposed those countries that — for various reasons — were hardest hit by crisis, or instruments for attempting to tackle the imbalances between the member states and intervene with European own resources to heal these imbalances and encourage growth and investment. In that emergency, recourse was had to intergovernmental instruments that led to the creation of solidarity funds and increased the mechanisms of control over the budgetary policies of the eurozone member states, which previously had (in fact) only been subject to market discipline, which had proved to be totally inadequate. These new instruments allowed the ECB to introduce its expansive monetary policy, which saved the euro. The overall result, however, was a system in which, in order to preserve their fiscal sovereignty, the member states, despite recognising the need (due not only to their membership of the euro, but even more so to the unsustainability of excessively high levels of debt) to limit their autonomy in terms of budgetary policy, chose not to accompany this limitation with economic and political balances deriving from the creation of a true supranational government capable of taking the economic and fiscal policy decisions necessary for the harmonious development of a single monetary area. The new system also includes conditionality mechanisms to guide national economic policy — which remains the absolute prerogative of the member states —, but completely ignores the need to implement, at supranational level, the public policies for development, stabilisation and solidarity, that the individual member states cannot implement themselves due to a lack of resources and political vision at national level.

** Although the present essay is the result of joint reflection by the two authors, paragraphs 1-4 are to be attributed to Giulia Rossolillo and paragraphs 5 and 6 to Luca Lionello.


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