Year XLVII, 2005, Number 3, Page 136



The Role of the European Budget in European Economic Policy
1. A Federal Currency Without a Federal Fiscal System.
Nowadays Europe must face problems similar to those of the Thirties in the last century, when Keynes denounced the waste of resources provoked by an economic system that was not capable of guaranteeing full employment. For decades European economies have grown at much lower rates than their potential. Europe cannot keep up with the more dynamic American economy and faces heavy competition from the new world powers, such as China and India. The rate of unemployment in Europe is high, the labour market creates only short-term jobs and the Welfare State, the so called European social model, is subject to criticism for its unsustainable costs.
Economists are incapable of developing convincing plans of economic policy. The starting point of their analysis is the Monetary Union, which has finally been completed with the establishment of the Central European Bank and of the Euro. The Stability and Growth Pact (GSP) completes the picture by dictating limits to national budget deficits and the public debt. Almost all the literature on the issue criticises the limits of an economic system now unified on monetary grounds, but still functioning, as far as fiscal policy is concerned, with national systems. Nonetheless, the remedies are sought within the framework of the Stability and Growth Pact. The opportunities afforded by a federal fiscal system are deemed interesting, but not realistic in the short term.[1]
This essay will strive to overcome this taboo by explicitly taking into consideration the effects of a European Plan for growth and employment financed by its own resources, that is with an adequate European budget. The monetary Union is at a crossroads. Politicians, or at least some of them, faced with complex economic problems, choose to point at the monetary Union as being the cause of stagnation, instead of considering the opportunity of creating a European federal fiscal system. As a matter of fact, there are no substantial differences between the U.S. Federal Reserve System and the European system of Central Banks. The euro and the dollar are two federal currencies. However, large differences exist between the two fiscal systems. The United States can rely on a sound federal fiscal system, whereas the European Union cannot. The monetary Union therefore may become the scapegoat of a short-sighted and conservative political vision.
Our aim is to point out only the broad direction of a European fiscal reform. The Union budget has a long history and plays an important role, under certain aspects, for regional convergence. As far as the relationship between monetary and fiscal policy is concerned, the European Commission has developed the so called Broad Economic Policy Guidelines (BEPGs) in order to coordinate national budgets within the framework of the Stability and Growth Pact and it publishes a yearly report (in European EconomyPublic Finances in EMU) on the situation of European public finances without considering the Union budget vis-à-vis the national budgets. The Union budget is deemed as a mere administrative aid without any autonomous role in the Union economic policy. We propose that the financial guidelines include not n national budgets, but n + 1 budgets. Therefore, the specific function of the European budget must be sought vis-à-vis the national budgets. The Union budget, in our opinion, must be reformed in order to provide some crucial European public goods.
This problem has not been ignored by economists.[2] A study promoted by the European Central Bank explores the possible institutional reforms that might increase the size of the European budget, currently modest, and its efficacy, thanks also to possibility of financing European public goods. The authors recognise a trade-off between efficiency and legitimacy. Their point of view is that the present financial situation of the Union is already on the external frontier of the relationship efficiency-legitimacy. In order to go beyond, it would be necessary to take a step forward with regard to the “present degree of political integration”.[3]This point of view can be shared. We need to be aware that the provision of European public goods makes it imperative to re-examine the “present degree of political integration”. If Europe wants to solve its serious problems of economic inefficiency, it must take a further step towards its political unification. In the Conclusions the institutional reforms necessary to implement the proposed European Plan shall be briefly presented.
Finally, in the Appendix the value added of a European public investment vis-à-vis the value of an equal amount made by national governments shall be discussed. When one is dealing with the provision of European public goods, a euro spent by national governments produces less income than a euro spent by the European government.
2. Historical Background.
It is useful to briefly recall how the Community conceived the original relationship between monetary Union and fiscal federalism, because the current position of European governments — which would like to further reduce the already pathetic European budget (a little more than 1 per cent of the European GDP) — is miles away from the first projects of monetary integration. When the Bretton Woods system went into a crisis and then definitively collapsed, the European governments charged Pierre Werner with the task of drawing up a Plan for a monetary Union within a decade. The Werner Plan[4] envisaged that at the end of the ten year converging process, in 1980, once the exchange rates were declared irrevocably fixed, the Community budget would be increased substantially to allow the Commission to adequately face problems of social cohesion and of European economic growth. After the failure of the Werner Plan, the Jenkins Commission proposed the re-launch of monetary Union upon new bases and instructed a study group to draw up a report on the Community finances. The MacDougall Report[5] envisaged that the Community budget would reach 2-2.5 per cent of the European GDP in the pre-federal phase, that is before the creation of the European currency. The establishment of a real Federation and of a European defence policy would have further increased the budget to 5-7 per cent of GDP and with the defence, up to 7.5-10 per cent.
As is known, the re-launch of the monetary Union in the seventies did not attain a European currency, but the EMS (European Monetary System), a system of fixed exchange rates among European currencies, without the creation of a European Central Bank. Europe remained in this quandary, between monetary union and non-union, for many years. Only after the collapse of the USSR and the German reunification, was the decision taken, at Maastricht in 1991, to pass from the EMS to the monetary Union. The then President of the European Commission, Delors, who led the Union towards the implementation of a single currency, in 1993 also proposed a Plan for Growth, Competitiveness and Employment.[6]The purpose of this plan was to implement, among other things, together with the European currency, of a series of structural investments in the fundamental sector of information technology and of the trans-European communication networks with the aim of rendering Europe capable of answering the challenge of globalisation. A challenge set by the more advanced countries, such as the USA and Japan, as well as by the emerging countries with low labour costs. If the Union were not capable of increasing its productivity and international competitiveness, this being the main reason behind the Plan, it would have run the risk of heading towards a situation of dangerous stagnation and the temptation of protectionism (fortress Europe). On the contrary, the implementation of the Plan would have allowed Europe not only to face international competition, but also to create 15 million new jobs within the end of the century.
The Delors Plan was never implemented, notwithstanding the very favourable reception it received from Trade Unions and major European industries. The Council of Finance Ministers in a situation where the countries that had determined to build monetary Union had to implement restrictive financial policies, decided that there were not sufficient funds to finance it. Only some stretches of the programmed trans-European networks were implemented in the following years, but the Plan as a whole was abandoned.
Nevertheless, the problem that the Delors Plan was trying to address was not a figment of one’s imagination. During the Nineties it became more and more obvious that the US economy was flying on the wings of the information technology revolution, while the European economy was grinding to a halt. In 2000, the European governments launched the ambitious Lisbon Strategy[7] which should have allowed the Union to become, within 2010, the world’s most dynamic economy based on knowledge and innovation. It goes without saying that the Lisbon Strategy, in the middle of its course, is failing. The Union does not have an autonomous capacity to growth. Without an external thrust, the European economy cannot grow.
Some point out that the reasons for the scanty growth are due to the restraints of the Stability Pact or to the loss of national monetary sovereignty. Others maintain that the national governments have gone too far ahead in carrying out neo-liberal policies, by means of privatisation, modest public investments and excessive flexibility of the labour market. Others still hope that the national locomotives, in particular the German one, will start moving. Here we maintain that the Union, without a federal government capable of mustering the necessary financial resources for a European Plan for growth and employment, shall not succeed in competing with the most dynamic world economies. This is not a choice between more State or more market. Some objectives are either achieved at European level or are just wishful thinking.
3. The Peculiarity of the European Federal System.
Resistance to the hypothesis that the European budget may carry out an autonomous role in economic policy, vis-à-vis the national budgets, derives from a hasty comparison with the American case. The budget of the federal government was equal to 19.9 per cent of the American GDP in 2003. Take the meagre size of the European budget into consideration and the conclusion is that the European Union cannot carry out the function of promoting an economic growth similar to that of the government of Washington. This is however, a hasty conclusion. Federal systems, provided that a good constitutional framework is established, allow for the organisation of tasks and responsibilities at various government levels in a very flexible manner. The US historical experience is exactly proof of this. In 1900, the federal budget represented 2.6 per cent of GDP, it was still 3.4 per cent in 1930, but it had already reached 10.7 per cent in 1934, with the start of the New Deal. It was 43.7 per cent in 1944; 15.6 per cent in 1950; 21.3 per cent in 1975 and 22.3 per cent in 1991 [source: Statistical Abstract of the United States]. In order to compare US finances to European finances it is necessary, however, to also bear in mind the total sharing of expenditure, among the federal, state and local government levels. The situation has thus changed in time: in 1902, the federal government concentrated 36.3 per cent of the total public expenditure (the states and local governments spent 63.7 per cent in 1902; 67 per cent in 1927; 33.4 per cent in 1950; 66.5 per cent in 1960; 63 per cent in 2003) [source: Statistical Abstract of the United States]. To sum up, the historical series show that the increase of the dimensions of the federal level compared to the other levels of government is mainly due to two factors: the responsibilities of foreign policy, which increased defence expenditure during the two world wars, and social expenditure, which began with the New Deal in the Thirties and has continued on to the present.
These historical developments have led the theorists of fiscal federalism to propose a model of separate federal functions that implicitly adopts as a reference point the US system or other very similar systems, which exist in Canada and in Australia. Richard Musgrave points out three main functions in a fiscal system.[8] The first function can be described as allocative. It concerns the provision of public goods, which the market is not capable of supplying or supplies only at excessive social costs. The second function can be described as distributive, because it concerns the distribution of income and wealth among individuals, if the distribution arising from the market is considered unfair. Finally, the third function can be described as stabilisation, because it guarantees that all the economic resources are fully employed without inflation pressures. In a centralised state, the three functions are carried out by the central or national government. In a federal State, the question is at what government level should they be assigned. Among the theorists of fiscal federalism[9]there is substantial agreement on the fact that the function of income stabilisation and redistribution should be assigned to the central government, while the provision and financing of public goods should be carried out at government level where the needs of the citizens can be satisfied most efficiently. Let us now concentrate our attention on the issue concerning the distribution of income. In the United States, in the Thirties, this problem was particularly serious, together with that of stabilisation and mass unemployment. The States of the American Federation tried to implement, in an autonomous manner, social welfare programmes, as was being done in Europe. Nonetheless, their attempts failed, because of the high level of integration of the American market and of the strong territorial mobility of the workforce: the more generous States rapidly attracted unemployed workers and citizens with low incomes from the other States. It was therefore necessary, for the federal government, to centralise the building of the Welfare State. This structure of the federal budget still prevails. In 2003, social expenditure absorbed 65.7 per cent of the federal budget (defence 18.7 per cent).
The history of European unification explains why the structure of public expenditure is radically different from the US one. The Welfare State was created, in all European countries, before the unification process began, and, in any case, before the monetary Union. The distributive function is therefore assigned at national level and there are no evident reasons why the Union should build a European Welfare State, intervening in the interpersonal distribution of income or solidarity among individuals. Even if, with the internal market and the European citizenship, the migratory flux within the Union increased remarkably, the legal problem of the recognition of certain rights shall attract more attention (for example, the right to health care in all Union countries), rather than the economic problem of creating a centralised welfare system at European level. It can therefore be understood why the dimension of the European budget is limited to about 2.4 per cent of the average of the national budgets (equal to 48.5 per cent of GDP in 2003 in the Europe of 25). Furthermore, a major part of the Community budget is absorbed by structural funds, to assure convergence between rich and poor regions of the Union (even agricultural policy provides some territorial convergence). The Union takes on, therefore, the responsibility of redistributing resources not directly among European citizens, but among the national governments and the local governments (in the USA, this function is assured by the federal government Grants-in-aid to the States. In 2003 the Grants-in-aid were equal to 3.6 per cent of the US GDP).
This specific structure of the European fiscal system makes the comparison with the US system very difficult. For this reason, the economists’ attempt to compare the efficiency of the two fiscal systems is often inconclusive.[10] However, for our aims, it is important to highlight the fact that, since the social security systems are organised at national level, even the labour market continues to be structured at national level. The Trade Union negotiations basically make reference to national legislation, even though there are many problems that should be dealt with at European level (such as the harmonisation of working hours, the right to non-discrimination at work, etc.).
To sum up, the European Union does not have a budget of similar proportions to that of the United States because most of the resources necessary to finance social expenditure are concentrated at national level and there are no compelling reasons for them to be centralised. Going back to Musgrave’s model, the Union budget does not carry out the allocative function, because it does not provide European public goods, nor the redistributive function among individuals, or the stabilisation function. Nonetheless, it is wrong to conclude, that owing to the limited dimensions of the European budget, the Union should not carry out any stabilising function, nor provide public goods. During the Thirties, the US federal government was able to adjust the dimensions of its budget in order to face the challenge of the Great Depression. A similar task, today, must be faced by the European Union. The challenge consists in guaranteeing an autonomous growth capacity to European economy. The issue does not so much concern the dimensions of public expenditure, but the recognition of an autonomous function (distinct from that of the national budgets) of European fiscal policy.
4. The Decline of European Economy.
Before outlining the policies that the Union should launch to overcome the crisis, it is necessary to mention the major causes of the decline of European economy. We do not intend to propose here an original diagnosis, but only to indicate two basic trends.
The first trend concerns the growing gap of labour productivity between Europe and the USA. The European per capita income, in the post war period, progressively increased approaching that of the USA, until the 1970s. Since then, it has stagnated at 70 per cent of the US one. The difference of per capita income between Europe and the USA is due for a third to lower labour productivity, for a third to lower working hours and for a third to lower employment rates.[11] According to a study promoted by the European Commission,[12] the explanation of these differences, in particular that concerning labour productivity, is to be found in the greater capacity of the US economy to produce and utilise new information and communication technologies (ICT). As a matter of fact, if changes in rates of labour productivity per hours are compared, it is possible to verify that the rate of increase of European productivity were, as from the Sixties, above the US ones, but declining. As from the second half of the Nineties, while the information technology revolution was in being, the increase in the US productivity rates surpassed the European ones and this trend continues on.
The roots of the superiority of the US information technology industry can be traced far back in time. It started in the period of the Second World War and consolidated in the Fifties, in particular, thanks to military procurements, because of deficient civilian demand. The dimension of public procurements was decisive for the development of this industry. “In the early 1970s, total R&D spending in the US’s computer industry was about 5 to 6 times larger than the combined efforts in Japan, France and the UK. In the 1960s and early 1970s about 1/3 of all R&D spending in the US was publicly financed, while the French and UK share ranged between 10 per cent to 15 per cent. The Japanese share of public funding was in between. Thus in contrast to the popular view which saw the US as the least interventionist amongst the major industrial countries, it must be acknowledged that the US was strongly supporting industrial investment in technology directly in the formative years of the ICT industry.”[13]
A comparative analysis between the USA and the EU-15 of 56 industries shows that the Europeans not only invest less than the USA in R&D (1.9 per cent of GDP for the UE and 2.8 per cent of GDP for the USA, in 2003), but they invest mainly in the low growth sectors, such as cars and chemical products. The US industry is dominant in the areas of hardware production and of other electronic products, the industries with the highest productivity rate, where the investments in R&D are higher. These industries hardly exist at all in Europe. Furthermore, thanks to this supremacy, in the US economy information technology applications are spreading to new areas, such as biotechnology and computerised services. It is therefore inconceivable, as some suggest, that Europe can fill in the technological gap with the USA by simply importing information technology. It is necessary for ICT research and production to be part of a European growth strategy.
The second trend that should be taken into consideration concerns the decline of long term public investments. Their level, both in the USA and in Europe, is equal to a fifth of private investments. In 1970, in the EU-15, public investments were more than 4 per cent of European GDP; in the USA a little more than 3 per cent of GDP. Since then, they began to decline both in Europe and in the USA, but while, starting from the end of the Nineties, this trend was inverted in the USA, the decline continues on in Europe. In 2002, they were equal to 2.9 per cent in the USA and 2.4 per cent in the EU.[14] This underlying fall of the rate of public investments, therefore cannot be ascribed to the creation of the monetary Union. Governments tend to invest less when they are forced to face a high debt and a high charge of passive interests. In fact, after the Stability Pact was approved, investments in Europe recovered slightly. The long term decline probably depends on two factors. The first concerns a deliberate choice of economic policy aimed at reducing the public economic sector. For example, in the United Kingdom with the privatisation of telecommunications, of the companies that supply energy, of airports and the railway company, about 15 per cent of public capital was transferred to the private sector. The second factor concerns the more and more frequent resorting to operations named Public-Private Partnership (PPP), with which the governments finance only a part of the investment project and provide guarantees on the debt issued by the private companies that take part in the initiative. In some cases, these projects are not even considered in national accounts as public investments.
If these two factors can explain the declining trend both in the USA and in Europe, it is however necessary to realise that in the USA the trend towards a decline has been stopped, on the contrary to what is happening in Europe. In the post war period, the highest rate of public investments in Europe meant a major effort of the Europeans to build a Welfare State, infrastructures and public services which guaranteed a more equal distribution of income among citizens. It is now necessary to observe that in some crucial sectors European public expenditure is no longer adequate. For example, expenditure for public education is greater in the USA (1.4 per cent of GDP) compared to that of Europe (1.1 per cent of GDP). The total expenditure for education, public and private, is more than double in the USA (3 per cent) compared to Europe (1.4 per cent). As a consequence, even the educational attainment rates are higher in the USA, especially as far as higher education is concerned (37.3 per cent in the USA and 23.8 per cent in Europe).[15]
5. The Failure of the Lisbon Strategy.
 In the Delors Plan the technological gap between Europe and the United States was pointed out as the major problem to be faced: the United States had a more dynamic and competitive economy because they invested at least 3 per cent (total of private and public investments) of their GDP in R&D, whereas the European Union did not reach 2 per cent. The European Council of Lisbon, in March 2000, decided to follow this indication and re-launch the strategy of economic growth on the thrust from scientific research and human capital. In Lisbon the European governments decided that within 2010, Europe was to become “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion and respect for the environment”. The objective was without doubt very ambitious. In a decade, the Union should have surpassed the United States.
Unlike the Delors Plan, the Lisbon strategy did not assign any specific task to the Commission. It no longer meant the implementation of a European Plan, but the coordination of national plans. From this point of view, the Lisbon strategy is innovative, but it is an innovation that will soon lead the Union down a blind alley. Since the Commission has only to coordinate national plans, this new method has been named “open method of coordination”. Each spring, the Commission presents the national governments with the progress report, gives “advices”, and then the national governments “autonomously” decide what should be done. At this stage a series of indicators have been found (15 in a short list), such as the GDP per capita, labour productivity per person employed, the total rate of employment and female employment, the educational attainment rates, the public expenditure for research and development, business investments, etc.
The Lisbon Strategy initially aroused little interest in Trade Unions, in the major European industries and, even less, in public opinion. It was only discussed when the European Commission began to report its failure. After five years, the major objective, that of reaching, for public and private expenditure for research, 3 per cent of GDP, was still at the starting level (1.9 per cent). In the proposal for the 2007-2013 budget, the Commission claims crudely that “the incapacity of the Union and its member States to reach such an objective reveal the inadequacy of the action adopted up to now”.[16] As far as the Commission is concerned, in the budget for 2007-13, it suggests a sound increase of funds destined to growth and employment. After this utterance, the European Council invited the Commission to create a study group. This group, chaired by Wim Kok could do nothing but confirm that, since 2000, the “gap with North America and Asia has widened” and that “the general performance of the European economy is disappointing”. The reason for this negative outcome, according to Kok’s report, is due to the fact that European economy entered a crisis first because of the explosion of the financial bubble which hit, in the USA and in Europe, the overvalued shares of information technology firms and, then, the terrorist attack on September 11, 2001, the Iraqi war, the slowdown of the world economy and the increase of the oil price. As a consequence, this is the conclusion, “many Member States have been cought in a conundrum. Because of structural weaknesses and low demand, national economic performance has been poor. As national economic performance has been poor, it has been more difficult to implement the Lisbon strategy. It has been harder in this low growth environment for some governments to keep their commitments.”[17]
The causes of the failure of the Lisbon Strategy could not be described better, even though the Kok report does not draw the necessary conclusions and proposes to continue along the old tracks of “coordination” and “advice”. Faced with the difficulties of the world economy (nonetheless, it should be noted that after the facts reported, the world economy has started to move again, also thanks to the thrust from China), the European Union does not have an independent capacity to react. Each national government is forced to face the difficulties on the basis of a “national” strategy, not a European one. And since each national government has its political priorities, since each national electorate is different and since the electoral cycles are different, it is easy to envision that the “advice” given by the European Commission are ignored. The solution, therefore, is not to improve the quality of the advice, by possibly assigning marks to the good and bad governments (as the Kok Group pathetically propose), but to allow the European Commission to implement a European Plan for growth and employment.[18]
The European Union must begin to learn some lessons from its failures. The Delors Plan failed because the national governments refused to contribute the necessary funds. The Lisbon Strategy is failing because the only task assigned at European level is that of coordinating national plans. The way out is a European Plan financed with European resources. This does not mean giving up the coordination of national plans completely. Some coordination is necessary. But it is necessary to go from the “advice” strategy to that of “powers” suitable to implement some European public good. The Lisbon Strategy proposes to implement a European public good through national means. The problem is to find adequate European means to implement European objectives.
6. Two European Public Goods.
There are two European public goods that appear on and disappear from the political scene depending on the juncture of European integration process. It is therefore necessary to concentrate on them and to discuss their structural economic aspect. The two public goods concerned are European defence and a European Plan for growth and employment. They must be discussed together, because they present the same characteristics as public goods. Furthermore, as we shall attempt to illustrate, the economies of scale which could be achieved by means of their joint implementation would be considerable. Nonetheless, politics follows its tortuous paths. Surely, European defence shall not be implemented only for economic reasons. Therefore, it is necessary to resign oneself to the fact that many possible synergies shall be lost. This is the cost of non-Europe.
European defence is a European public good. The goal of a European system of defence is that of guaranteeing security to Union citizens. It is therefore a good that has the peculiarity of non-rivalry in its utilisation. A private good is considered rival, because if individual X consumes it, nothing is left for individual Y. On the contrary, a European defence guarantees security equally to X and Y. Individual X shall be safer only if the European security system is improved. But, in this case Y shall also be safer. Furthermore European defence is a non-excludable good. If it is possible to exclude an individual from utilising the good in question, it is also possible to ask for a price for its utilisation (for example, a toll can be required for the use of motorways). However, for a pure public good, like security, it is not possible to exclude any citizen from benefiting from enjoying the good “security” once a European defence system has been implemented. This means that pure public goods must be financed by means of taxation, because nobody would willingly pay the price of European defence, knowing that, if somebody else provides defence, he shall also benefit from it (a phenomenon called free rider). It can therefore be claimed that public goods must be provided by a public authority (a government) because of the market failure: the entrepreneur will have no incentives to produce a good from which he cannot obtain a profit.
European defence, besides the peculiarities we have just discussed, and which are widely recognised by the doctrine, has a more controversial feature, namely it is a supranational public good.[19] Supranational public goods are the answer to a dual failure: the failure of the market and the failure of national intergovernmental policy (the national governments behave as freeriders: they wait for somebody else — like the United States or some other European country — to solve their problem). These goods must therefore be produced by a supranational government. Nonetheless, though it is difficult politically to make national governments admit that it is necessary to create a supranational government, as far as the doctrine of public goods is concerned, the fact that there are optimal levels at which public goods are provided should not be controversial: the municipal level provides goods to a local community of citizens, the regional level provides goods of regional interest (such as a local road network), the national level provides public goods useful to national citizens and the European federal government provides public goods useful to the European Union citizens.
Let us now consider the public good “European Plan for growth and employment”. Even in this case we are faced with a supranational public good. The explicit purpose of this Plan is to increase the rate of growth of European economy and, possibly, of employment. It is a non-rival good because, if work productivity increases as a consequence of the Plan, individual X shall obtain an advantage without necessarily limiting the individual Y’s advantages (such as for defence). The more effective the Plan, the greater the advantages for X and Y shall be. Moreover, it is a non-excludable good, because no Union citizen can be excluded from the advantages deriving from a general increase of labour productivity in European economy. The Plan, considered as a complex group of investments, cannot be produced by the market, because no individual or company has an interest in producing the set of public goods included in the Plan. The Lisbon Strategy is an example of a European public good the provision of which has been assigned to the national governments. The problem now discussed is that of finding the level of government capable of providing it most effectively. Intergovernmental cooperation does not produce satisfactory results (it is a second best solution). A European public good must be provided by a European government, with European means. Even for the European Plan it is thus necessary to resort to taxation for its financing, though it is possible, for single projects, to associate private capital, as after all also occurs for defence.
A characteristic of the European Plan remains to be discussed. One could allege that a public good is not produced una tantum, but it must have the feature of lasting in time, as occurs for defence. It is necessary to admit that in the proposal here discussed there are conjunctural aspects, dictated by the emergency situation in which the European economy is plunged, and structural aspects. The public goods included in the European Plan all have the peculiarity of endurance. When, for example, the Global Monitoring for Environment and Security (GMES) shall be obsolete, it shall have to be replaced by a similar system, since the services rendered shall have become indispensable to guarantee the functioning of European economy. Many plans presented by the US government in anti-slump policies present these peculiarities (at times the expenditure for defence and scientific research are increased, but the occasional aspect of the investments is not perceived, because these sectors are already, contrary to Europe, consolidated jurisdiction of the federal government).
We can now summarise the economic advantages obtainable from the provision of European public goods of a federal European government. As far as the defence is concerned, the economic advantages derive substantially from the economies of scale obtainable thanks to a more efficient division of labour among the industries of this sector. A system of European public procurements that should not force companies to produce on the basis of national quotas is essential for this objective.[20] As far as the European Plan is concerned, the greater advantages should derive from the value of the European multiplier of public expenditure, because each euro spent by national governments in order to provide European public goods necessarily produces much more limited effects (see Appendix). Substantial advantages may derive from economies of scale generated by the contemporary implementation of investment plans among sectors that are complementary (as we attempt to illustrate in the following paragraph). Furthermore, it is in the context of the provision of European public goods that the European industrial policy takes on a definite sense. The European Union, for many years, limited itself to considering industrial policy as a competition policy. It is time to proceed to an active vision of market intervention, even by means of the creation of proper public European industries. The introduction of Public-Private Partnership (PPP), already experimented for Galileo, is moving in the right direction. If the European Union want to keep abreast of the great world industrial powers it cannot adopt a passive attitude towards industrial policy performed outside Europe. Finally, the psychological aspects of the European Plan should not be at all underestimated. The calculation of the profitability of an investment does not depend only on factors that are certain and highly probable. The entrepreneurs’ optimistic or pessimistic expectations are crucial. Keynes was convinced that the task of economic policy was also that of weighing upon the “state of confidence”. So, a European Plan that puts forward a set of initiatives to allow the European Union to take on the leadership of world economic growth could attract to Europe capitals, scientists and workers who, on the contrary, would seek fortune elsewhere.
To sum up, it seems correct to claim that a European Plan for growth and employment would add value to European income, i.e. it would generate a greater increase of GDP, compared to the summation of national plans.
7. Some Chapters of the European Plan.
Since it is impossible to discuss a European Plan that does not yet exist, because it can only ensue from a proposal of the European Commission, let us now consider some European projects that already exist, so as to illustrate their complementarity if they were inserted in an coherent European plan. The four examples concern: European space policy; its extension to the military sector; the creation of a European research area; finally, the projects for trans-European networks of transport.
As far as space policy is concerned, the gap between Europe and the United States is serious. The USA dedicate six times more resources to space than the European Union. They explicitly follow the objective of a “space dominance” at world level. Their space expenditure is equal to 80 per cent of the world one (civil and military). The demand for the space sector, in the USA stems by 3/4 from the military sector, whereas half of the European demand stems from the commercial sector and the second half from national or European institutions.[21]Considering that only 30 per cent of the world space market is open (the other major competitors, USA, Russia, Japan and China, have very protected markets), a public financial support is needed to develop the European space industry. The Commission has therefore made a series of proposals, taking funds for space also from other programmes already in existence,[22] strongly emphasising that an increase in funds for the space programme is absolutely essential to guarantee European independence. The scope of the activities that the European space industry covers is wide. It is sufficient to remember the main programmes: Ariane, to send satellites into orbit by means of rockets; the Cassini-Huygens probe for the exploration of Saturn; the Global Earth Observation System of Systems (GEOSS), for the study of land and maritime physical phenomena; Galileo, a satellite based-navigation system, with important commercial applications over the long term; the Global Monitoring for Environment and Security (GMES), to monitor the environment, pollution and environmental security. The Commission calculates that for each euro spent in space applications it can generate a turnover of 7-8 euros for new services. At present the total expenditure for space, including the national level, is equal to 0.06 per cent of European GDP. In the White Paper it is estimated that the public investments in this strategic sector can increase considerably only if the decision to also proceed on the front of European defence is taken. For this reason, the Commission’s estimate is that from the level of 5,380 million euros in 2004, it shall be possible to reach (minimum scenario) 6,620 million in 2013 (with a 2.3 per cent yearly increase) or, maximum scenario, to 8,080 million euros (with a 4.6 per cent annual rate of increase). Even in the most fortunate guesstimate, not more than 5 per cent of the Community 2013 budget would be addressed to space policy.
From this brief overview of European space policy, its importance even for European military defence is clearly understandable. The end of the cold war, as far as defence is concerned, contributed to the development of the notion of dual-use technologies. In the new world scenarios, the traditional autarkic concept of the defence industry presents bigger and bigger flaws. In so far as military technology depends on civil technology for its development, as information technology and nano technology show, the reference framework is the world market, not the national one. Even the US army depends on Japanese industries for the supply of certain electronic components. This means that the technological and industrial defence base must more and more rest on military and civilian interdependency and public and private interdependency. Moreover, the innovative technological supremacy, even in the civilian sector, becomes a crucial aspect of defence. This is why the government of Washington sustains a policy of US technological supremacy.[23]
The Galileo project is typically a dual-use technology. As a matter of fact, the European Union was impelled to produce a European positioning system also due to the US threats to prevent the Union countries from using the Global Positioning System (GPS) in situations of severe crises. The economic problem of European defence depends on the restraints that each country in the Union sets on an economic division of labour in the industries that supply military means. The United States spend half of the world total amount on defence. Their military supremacy is overwhelming. It is therefore easy to understand how the European industry is encompassed by the US one. The British BAE cooperates with the American Lockheed Martin for the production of the new fighting aeroplane F-35: Denmark, The Netherlands, Norway and Italy are also involved in this project. The market for the French Mirage is smaller and smaller. Some of the people responsible for the European military industry are convinced that “in a few years only two or three great world industrial groups shall remain with an American dimension.[24] The inevitable consequence is that there shall no longer be an independent European industry. Indeed it is not possible to examine here the cost of a plan to conform European military means to face the Union’s challenges of foreign policy in world politics. The answer to this issue is impossible without a European government that can raises the issue explicitly. Nonetheless, we can examine a more limited problem: the adapting of a space policy to the military sector, as has been proposed in a French study.[25] The starting point of this study is the ascertainment that France, the European country which more than any other attempted to oppose the US supremacy, in the last twenty years has been forced to constantly diminish its resources dedicated to the space sector, because of pressing budget limits. Hence the only alternative is a European space policy even in the military sector, taking into account the fact that there are a great number of synergies between the military and civilian ones. The study analytically assesses the needs of the military sector in the field of telecommunication, positioning systems, electronic listening systems (Elint-Comint) of space observation and alerting systems, as well as of meteorological and oceanographic systems for military objectives. The study concludes that the adapting of the European military space system would have a total cost of 8,290 million euros that could be split in variable plans from 8 to 15 years (depending on the application) with an annual average cost of 730 million euros. To make a comparison, one should bear in mind that that annual cost is equal to 33 motorway kilometres and that in Europe 1,200 km are built every year. Obviously, since the decision to be made is of political nature, the study acknowledges that the responsibility for the implementation of the programme should be assigned to “a European Commander-in-Chief” that responds to a Union “government organism”.
The third important sector is that of research and development, even though it would be more exact to talk about a group of public bodies, including university and entrepreneurial initiatives. The gap existing between Europe and the United States has already been mentioned. The urgency of an effective European policy, on this front, is proved by the fact that about 40 per cent of the R&D in the USA, according to the European Commission, is made up by personnel trained in Europe. It is necessary to create an institutional European framework, both public and private, capable of offering jobs and career opportunities to researchers. The Lisbon strategy estimates that the expenditure for R&D shall reach the level of 3 per cent of GDP, of which 2/3 spent by companies and 1/3 by the public sector (European and national). According to the Commission a 0.1 per cent increase in R&D expenditure would cause the increase of the per capita income of 0.3-0.4 per cent. The doubling of expenditure of the Seventh framework programme (FP7) would bring about an increase in the GDP rate of growth comprised between 0.69 and 1.66 per cent.[26]
Finally let us consider, as a fourth example, the investment programme in the Trans-European Networks of Transport (TEN-T). Originally these projects were part of the Delors Plans. Now some have been inserted in a greater plan, which comprises 30 projects. The Commission’s proposal is to participate with European public financing, added to national financing, to boost the construction of trans-border railway tracks or motorways. Thus speeding the construction of great communication networks between the North and South of Europe (like the railway corridor Halle-Palermo, via Kufstein and the Brenner) and between the West and East (like the Lyon-Turin-Venice-Budapest corridor). The total cost of the 30 projects is 600 billion euros but, since it is not possible, at present, to raise this huge amount of financial resources, the Commission proposed a more limited plan of six projects, for a total of 140 billion euros to be included in the 2007-2013 budget. The advantages deriving from these investments mainly consist in reducing the traffic congestion estimated in 8 billion euros savings per year, besides cutting down carbon dioxide and other harmful emissions. These initial investments should cause an increase in the GDP yearly rate of growth of 0.23 per cent and would allow for the creation of a million new jobs.[27]
These chapters on a European plan are an indication of the potential earnings achievable by each one of them, but there are other advantages obtainable by the possible synergies and their simultaneous implementation. We cannot give a precise answer to this question, but we can suggest some scenarios on the basis of an econometric study carried out for the French Senate.[28] The study was based on the Nemesis econometric model and the assumption that the intensity of the European R&D reaches 3 per cent of GDP within 2010 as established in the Lisbon Strategy, starting from a level equal to 1.8 per cent in 2002. Moreover all the governments of the Union are expected to actually implement the commitments made in the framework of the strategy outlined by the Commission. The simulation envisions two scenarios. The first is that the private sector shall make the greater effort, reaching therefore 2 per cent of GDP, while the remaining part, 1 per cent, shall be guaranteed by the public sector. The projections for the year 2030 envisages an increase in the yearly rate of growth of 0.43 per cent, with a total increase of the gross product of 12.1 per cent and an increase of 8 to 14 million jobs. A second scenario is based, on the contrary, on the hypothesis that the public sector shall completely take on the extra effort, to reach 3 per cent of GDP. In this case the result would be a much greater multiplying effect. In 2030 the GDP would increase by 15.8 per cent and 17.1 million new jobs would be created. However, it should be specified that these calculations have been carried out without taking into account a possible crowding out effect, that is an increase in the rates of interest due to the greater demand of capitals to finance the budget deficits (which nonetheless, thanks to the growth, would be in balance at the end of the process).
A study promoted by the European Commission on the economic cost of non-Lisbon, draws even more positive conclusions. “If the effects of the increased knowledge investments foreseen within the Lisbon strategy were added in, the increase in EU potential growth could reach three quarters of a percentage point. Over a ten-year period, this would imply an increase in the GDP level up to 7 or 8 per cent.”[29]
8. Own resources.
The term “own resources”, used to designate the financial resources that the European Union owns to implement its policies, is misleading. In truth, the European Union does not have its own resources due to the procedures used for the approval of the budget and to the method for raising financial resources.
In order to discuss these statements, it is fitting to preliminarily specify the dimension of the Community budget which is necessary for the implementation of the policies discussed up to now, in particular the provision of public goods. Our aim is to determine an order of magnitude, not to present the detailed items of a European budget. We can, to this end, profit by the results achieved by the Sapir Report, which envisages a substantial reduction of CAP expenditure and their re-utilisation for growth. Nonetheless, it is necessary to remove two postulates that have been accepted by the Sapir Report, that is: a) the spending ceiling, fixed by the Council at 1.24 per cent of the Community GDP; b) the exclusion from the European budget of expenditure for defence and foreign policy. The two issues are linked, because if a European defence is to be created, the current expenditure in national budgets should be transferred to the European budget. This operation involves an increase in the European budget of 1.8 per cent of the Union’s GDP and a corresponding lightening of the national budgets.[30] The unchanged amount, compared to the sum of the national budgets, of the joint expenditure for European defence is justified: a) by the economies due to a better integration of the European arms industry and by possible synergies with the civilian one, which could allow room to manoeuvre for technological improvement; b) by the hypothesis, that is not possible to examine here in depth, that the European Union should use its own military means and foreign policy to contribute to international stability and to the building of peace, without nurturing the ambition of becoming a new world superpower. The expenses for foreign policy should be added to these, in particular aid for development (which the Union has committed itself to taking it to 0.39 per cent of GDP). As far as the Lisbon strategy is concerned, the Sapir Report suggests that the European budget should contribute 0.25 per cent of GDP to R&D expenditure. Furthermore, new areas of high quality for pure and applied research should be created in Europe and a proper integrated European university system should be provided. In short, the chapter “Growth” should reach, according to the Sapir Report, 0.45 per cent of GDP. In view of the enlargement, the chapter “Convergence” (Structural Funds) should reach 0.35 per cent of GDP. The Report also suggests another chapter “Restructuring” (which we shall discuss in the next paragraph) equal to 0.20 per cent of GDP. To sum up, it can be affirmed that a European budget necessary to sustain the expenditure commitments of a federal government should be about 3.5 per cent of the community GDP, including defence and foreign policy (growth 0.45 per cent; convergence 0.35 per cent; restructuring 0.20 per cent. Total 3.5 per cent). However, the Sapir Report envisages a drastic reduction of the CAP. If this objective were not reached, the budget should be larger. Moreover, even expenditure for research, for restructuring and foreign policy would probably be increased to allow the Union to face the challenge of globalisation more effectively. But, on the whole it seems reasonable to claim that a European budget equal to 3.5-4 per cent of the community GDP should be sufficient to finance the policies of a European federal government.
This rough indication of the dimension of the federal budget of the Union, is useful to show that even the European budget can be used for an anti-cyclical function. A European Plan for growth and employment corresponding to 1.5 per cent or 2 per cent of GDP, as was done in the past by both the USA and Japan, is not inconceivable. Since a European Plan would bring substantial advantages to the national economies and their budgets, a co-financed Plan between the EU and national governments is justified. For example, a Plan equal to 2 per cent of the European GDP, financed 1 per cent by the Union and 1 per cent by the national governments can be envisaged. At the same time, the European Union and the national governments could draw by half (0.5 per cent of GDP) from their budgets and by half from a public loan. It would therefore be necessary to abolish the restraint of a European balanced budget. It would be sufficient to show that the European budget, like the national ones, also should be “close to balance or in surplus”, as required by the SGP. A European public debt that reaches the dimensions of the Community budget would not substantially change the Union’s credibility in international markets. In 2005, total indebtedness of the EU-25 was equal to 63.4 per cent of the European GDP (of 70.9 per cent for the EU-12). If the process for the reduction of excessive national debts continued, it would not be very far from this amount also taking into account the European public debt. The interests to be attributed to the European budget for the service of the debt would amount to, at the present rates, about 0.01 per cent of the European GDP.
The transfer to the European budget of the defence expenses, while making the national budgets lighter, it certainly creates the problem of greater and different resources for the Union. The traditional own resources (TOR), as is known, are represented by the customs revenues, and the value added tax (VAT) on the one hand and on the other hand a third resource, the national contributions, proportional to each country’s GDP. The main problems, as far as the finance of the budget is concerned, stem from the use of the third resource, which is residual in character: it is used in so far as the other revenues are not enough to finance expenses. And since the customs resources continue to diminish and the VAT revenues are regressive in character (for this reason a limit equal to 50 per cent of GDP has been fixed), there has been a growing use of national finances. From an amount equal to 29.6 per cent in 1996, 74.5 per cent was reached in 2005.[31] The distortion introduced by this method of financing the Community budget is serious. Since each country finances an important quota of the budget and maintains the right of veto, it also expects a juste retour. The expectation of a national just return depletes the European budget of meaning: it is a chapter of the national budgets the implementation of which has been attributed to European officials. On the other hand, experience shows that the efficacy of European expenditure, for example for the Structural Funds, has been seriously compromised by the governments’ expectations of a just return. The solidarity principle between rich and poor regions is ignored or underestimated. This concept of the European budget is incompatible with the notion of European public goods. A public good, like European defence, should be financed directly by European citizens, because their security depends on the efficacy with which the European government provides that good. The same observations should hold true for the European Plan for growth and employment. According to the theory of fiscal federalism, the principle of fiscal equivalence should be applied; in other words each government level should be capable of financing, with its own resources, obtained from its own political community, either national or supranational, the public goods it provides for the citizens.[32]
The European Commission is aware of these distortions, but its proposed solution cannot be shared because invalidated by ideological considerations. It suggests that at least half of the budget be financed with national contributions, since the European Union is a community of “States and citizens”. This proposal only reduces the blackmailing power of the national governments concerning European expenditure, but it does not affect the roots of the anomaly. The political meaning of the expression “a Union of States and citizens” must be translated into a democratic procedure of co-decision between the European Parliament (which represents European citizens) and the Council (which represents national governments) for the approval of the Union budget. The current rules are in favour of the Council which attributed itself the power to fix the ceiling (now 1.24 per cent of GDP) of the Community budget. The respect of the equal dignity of the Parliament and Council implies that also the possible expenditure ceiling be decided together (in order to overcome this impasse, a proposal shall be put forward in the Conclusions). EU financial resources must therefore be really its own, in other words independent, of any national influence. It is only in this way that the European Commission can steer its policies for the implementation of “European public goods” and not for the satisfying of the interests of this or that national government.
As far as new own resources are concerned, the Commission proposes three options, not necessarily alternative ones. The first is a tax on energy, which could be an important lever for an environmental policy. The second possibility is a percentage on VAT, which should not cause a rise of the existing rates, but in a greater transfer at European level (1 per cent of EU VAT would be sufficient, according to the Commission, to cover at least half of the current budgetary needs). The third resource proposed, more difficult to carry out, concerns company taxation. A fourth proposal should be added to these ones: a tax on personal income. European citizens should become aware of the Union costs and of the need to contribute to their financing. In order for the Union to be close to the citizens this choice is decisive. During the European elections, the European parties must explain their programme to the citizens and how they intend financing it. European democracy, as national democracy, means that a circuit of confidence must be triggered between governments and governed.
9. Employment.
In the General Theory, Keynes proposed a “definite ratio” between the increase in investments, the increase in income (given the marginal propensity to consume) and the increase in employment. The relationship between investments, income and employment is one of the cornerstones of macroeconomics. However, the characteristics of contemporary economic growth no longer allow for a “definite ratio” between the increase in income and the increase in employment, for at least two reasons.
The first concerns the organisation of the labour market, which can no longer be considered a rigid institution as it was in Keynes’ time. Economic growth does not mechanically generate an increase in employment on the basis of existing technologies. It is necessary to keep into account the organisation of the labour market that can be more or less sensitive to the stimuli originating from the aggregate demand. In Europe, starting from the Eighties, but especially during the Nineties, many reforms were introduced in the labour market to render it more flexible and sensitive to growth. In so far as it is possible to synthetically express this institutional index by means of the employment intensity of economic growth, that is the relationship between employment and the GDP growth, it is necessary to note that it has grown in the course of the last two decades, contributing thus to the reduction of the average unemployment rate of European economy in the long-term.[33] This institutional factor influences the relationship between production and employment not only in the expansion phase, but also in that of recession. For example, during 2004, in the European Union, “no jobs were lost in net terms in the recent downturn, while more than 2.5 million jobs disappeared in the 1992-93 recession”.[34]
The second reason concerns the peculiar organisation of European economy at different government levels. While in the USA, as has been mentioned, the federal government manages the majority of social expenditure, in Europe, these expenses are sustained at national level. The European budget is specialising, if the current tendency is maintained, on some decisive fronts such as growth and solidarity among the different regions and member States. In Europe, there are different models of Welfare States, so many that it is difficult to speak of a European social model. If we consider, for example, the level of welfare expenditure as regards GDP, not only are other European countries, such as Italy (22.3 per cent), placed between the ceiling of Sweden (30 per cent) and Germany (27.7 per cent) and the bottom part of Lithuania, Latvia and Ireland (15 per cent), but the USA too (24.5 per cent).[35] The performances generated by these different models of Welfare State are very different: the Anglo-Saxon model (UK and Ireland) have relatively low level of taxation and a relatively high dispersion of income; but it generates satisfying rates of growth and employment; the Scandinavian model (Denmark and Sweden) has a high level of taxation and a low dispersion of incomes, but it is equally capable of generating high levels of growth and employment. On the contrary, France, Germany and Italy, with relatively high levels of taxation, are not capable of achieving good performances neither in terms of growth nor of employment. This means that, in so far as the growth function is mainly assigned to European level, a uniform distribution of the advantages in terms of employment in the various national economies is not to be expected.
This does not mean that policies founded on the Keynes multiplier concept should be given up. It is only convenient to limit the analysis to the relationship between the increase of investment expenditure and the increase of income. The relationship between the increase in European income and the increase in employment shall partly depend on how each single country will manage to exploit the situation. This truncation, or reduced concept of Keynes multiplier, does not mean, however, that the European Union delegates entirely the employment problem to national governments. There are unemployment problems that are manifest at a local level, but are generated by the interdependency of the national economies and the world market. The European Union must take responsibility for these external effects.
The problem is not at all new. It has been discussed in the literature on fiscal federalism since the beginning of the monetary Union. How to manage an asymmetric shock of a national economy, which belongs to a monetary Union? The answers have often been sought for by drawing from US teachings. Nonetheless, in the USA, as it has been seen, the concentration of the fiscal system, both as far as the revenue and expenditure are considered, is much greater than in Europe. Moreover, there exist a redistribution mechanism of the shocks, such as progressive taxation (a reduction of the per capita income causes, for example, a reduction less than proportional of the revenue), which cannot be activated in Europe, though even the European Union has envisaged a system of convergence, by means of Structural Funds. At present, in fact, the European Union is not equipped to face this type of problems, which appear with the delocalisation of the companies and the inter-European transfers of underqualified workforce. Yet, in view of the monetary Union, the European Commission had already promoted a series of studies that have the merit of outlining a specific solution for Europe. If an ad hoc fund is created, its objective being the transfer of resources to the individuals hit by the shock, even a modest amount of resources can produce redistributive effects similar to those of a federation with a very centralised fiscal policy. For example, it is calculated[36] that an ad hoc fund equal to 0.2 per cent of the European GDP would be sufficient to face the effects of an unequal regional unemployment distribution.
More recently, in the Sapir Report[37] a similar proposal was made. In order to face unemployment problems caused by accelerated technological progress, international competition and the delocalisation of companies, a fund equal to 0.2 per cent of the Community GDP should be created to: a) help the workers who have lost their job with a subsidy (that is added to the national subsidy) equal to 5,000 euro per person, equivalent on average to about six months of a minimum salary, in the event that a total of one million workers can draw from this fund; these funds can be used by workers for courses to re-qualify, for transfers to other places, to start a new activity; b) a subsidy of similar dimensions should be necessary to help farmers hit by the present restructuring of the CAP, by international competition and to introduce ecologically compatible methods of production.
To sum up, the European social system is strongly anchored to the national level, despite the need for a European Plan for growth and employment. The majority of expenditures necessary to finance social policies are included in the national budgets and convincing reasons for their centralisation in a European budget do not exist. This fact also implies that the Trade Unions negotiations system has a prevalently national structure, though there exist harmonisation problems that must be faced in the Union framework (such as some kind of employee representation in European companies, certain worker rights, the harmonisation of minimum wages, etc.). Nevertheless, this does not mean that a European Plan for growth would not have important repercussions on the social security system. European countries must re-launch public investments and reform the Welfare State due to the ageing of the population and to the need to guarantee better public services. Without economic growth and greater fiscal revenue these policies risk becoming impossible. As a matter of fact, each national government continues to postpone them. Furthermore, if the European Union includes in its budget a chapter to guarantee European solidarity to the workers hit by the industrial restructuring process and by global competition, it will indirectly make the charges of the national budgets lighter.
10. Conclusions.
If the European Union shall want to give itself a federal government with sufficient powers to provide European public goods three decisive reforms are necessary.
The first consists in including the Community budget in the Stability and Growth Pact (SGP), in order to outline in a coherent and unified framework the Union fiscal problems. This step is so much more necessary if the same margins of flexibility as the national budgets will be granted the European budget, fixing a ceiling to European indebtedness and a sustainable deficit, as has been done for the national budgets. At this point the Stability and Growth Pact should explicitly be part of the European Constitution and should be subject to reform with the same procedure established for the European Constitution.
The second decisive reform concerns the creation of a European budgetary authority which takes its decisions on the basis of a democratic co-decision procedure between the European Parliament and the Council. Until the national right of veto survives and the possibility for the Council to fix a limit to the Community resources it shall not be possible to speak of the Union’s own resources. The procedure for the approval of the budget must substantially reflect the will of the Union citizens; a will that is expressed through the European vote, when the European Parliament is elected, and through the national governments. Once the Stability and Growth Pact imposes constitutional limits to the Union maximum indebtedness and to its budget deficit there is no reason why the Council of Ministers should impose further restraints to the Community budget.
Finally, a Minister of Economy and Finance should be created within the European Commission. In the project of the European Constitution the creation of a Foreign Minister has already been envisaged, but as far as economy is concerned, the issue has not been decided. The present division of tasks in the Commission reflects a power void. Indeed, if the Commission could count on its own resources it could not do without a Minister politically responsible for the choices concerning the revenues and the expenditures of the Union. Only by activating this institutional figure within it, shall the Commission take on full responsibility before the European Parliament and the European electorate. European economy can really become the world’s most dynamic economy, founded on knowledge and innovation, on condition that there is a clear political will and adequate means to implement this project.
The value added of a European public investment
A significant index of the efficacy of the economic policy of a government is represented by the value of Keynes’ public expenditure multiplier. The government expenditure produces a series of positive effects on the income, which increases not only of the value of the whole amount invested, but also of the infinite increases of expenditure which shall be carried out by the economic subjects that perceive the first payments and the successive ones. The series of positive effects will diminish more rapidly the greater the income not spent (saved) by the economic subjects and by the percentage of income spent in importations (which ends up outside the area administered by the government). Several empirical inquiries confirm that the value of the multiplier is inferior to the unit or near the unit in the case of European countries, whose economy is very open to international trade.[38] For this reason, the expansive policies promoted in isolation by European governments, and not coordinated at European level, are not at all effective.
Let us now consider the European Union, ignoring its relationships with the rest of the world (as if it were a closed economy), and let us suppose that there is a European federal government that, alike the US one, can count on a federal budget financed with its own fiscal resources and that it can, if necessary, issue a European public debt. The responsibilities assigned to the federal government concern, firstly, the provision of supranational public goods. These are goods that present the peculiarities of non-rivalry and of non-excludability. In our case, we are interested in studying the effects of the production of two European supranational public goods: European defence and a European plan for growth and employment.
The analysis of the European situation, contrary to the US one, is complicated by the fact that a true European federal government, provided with its own resources, does not yet exist. The function of European government is carried out partly by the European Commission and partly by the European Council. The European Union manages to provide some supranational public goods, such as the satellite navigation system Galileo, but in the majority of cases it only provides surrogates of supranational public goods by means of intergovernmental cooperation. In this case we must speak of international public goods (or cooperative goods). European defence and the Lisbon Strategy are significant examples. In place of European defence, the member States have created military corps that act as allied forces in a coalition of national governments. The Lisbon Strategy proposes to increase the productivity of European economy by means of a series of national plans coordinated by the European Commission. In both cases, the surrogate of the supranational public good consists in a sum of national public goods.
Let us begin to consider the effects of an aggregation of national plans or, maybe it is preferable, the provision of an international public good. Let us suppose that the national plans are financed by means of the national public debt. In the hypothesis that a European fiscal policy does not exist and that the Union does not have foreign trade relationships, the new value of the gross European product (YEU) shall be equal to the sum of n national expenditure plans (Gn) multiplied by the Keynes national multiplier (kn), in the hypothesis that the marginal propensity to spend is the same in all the Union countries and that each country has an elevated propensity to import. The increase in value of the gross European product, which arises from this policy, shall be equal to the difference between Y2, the value of the production after national investments, and the initial value Y1.
Let us now consider a European plan, decided by a federal government, and financed by means of the issue of a European loan or with its own resources from the European budget. The goal of this plan is to provide European supranational public goods, the specific function of which is to increase labour productivity throughout the Union. The total of the European Plan is equal to the sum of the national plans. The entire volume of the gross European product which shall be achieved, after this intervention of European economic policy, shall be greater than that obtained by means of intergovernmental cooperation (Y3shall thus be bigger than Y2), for at least three reasons.
The first reason concerns the decisional method adopted to produce an international public good. The intergovernmental plan shall be financed by national resources, whether it resorts to taxation or public debt. Even if the national projects are implemented contemporarily, the resources that should be dedicated by the national governments to the financing of an international public good are structurally deviated towards national investments, with scarce effects on European productivity. In short, there is a preference for investments of the “motorway” type (with national productivity) rather than investments of the “Galileo” type (with European productivity).
Secondly, a European plan, financed with European resources, can completely concentrate expenditure in the provision of supranational public goods. If the main objective of the Plan is that of increasing productivity and competitiveness in the European economy, the European financial resources shall be concentrated in the production of European projects in its entirety, both private and public. The complementarity between these projects shall allow the attainment of considerable economies of scale.
Thirdly, a European plan for the production of supranational public goods, since it can take into consideration the advantages obtainable from the increase of domestic trade within the Union, shall generate an increase in income equal to the value of the European multiplier (kEU,), which depends only on the European citizens’ marginal propensity to spend, as regards the national multiplier (kn), whose lower value also depends onthe dispersion caused by the propensity to import goods from the other Union countries. This statement contrasts with what is affirmed by some economists.[39] It is true that, if the central government (European) provides the public investment directly, the value of the multiplier shall be the same, whatever the State (or region) in which the investment is carried out. But this observation totally ignores the political problem in an economic area made up of a group of independent governments. National governments must necessarily take into account the efficacy of an investment financed with national public funds, since they have to answer for their action before their national electorates. A national plan of investments is generally not very effective in stimulating economic growth, if the expenditure dispersion for the purchasing of goods produced by other countries is elevated. One could object that this modest result would be obtainable only with an isolated national plan, without similar policies in the other Union countries. If all the Union countries committed themselves to contemporaneously implementing investment plans, the importations of a country would correspond to the exportations of another country and the final outcome would be equal to that of a European plan of investments realised by a European government. This observation (on which the Lisbon Strategy is based) is, however, not realistic, because it assumes that the national governments are determined to give priority the European interest. The problem concerning contemporaneousness is decisive. If some national plans were not implemented, there would be only better advantages than those relative to an isolated plan, but the effects achievable by a single European plan could not be fulfilled. The contemporaneousness of national plans, on the other hand, could only be obtained if the European government (the Commission) could impose the execution of a certain public expenditure to each national government. But this power would correspond to that of a centralised State, with national governments that only represent a decentralised administration of the centralised power. The national budgets would be a local fraction of the European budget at the disposal of the Commission. On the contrary, in a federal system, the European government would have at its disposal budget resources sufficient to implement a European plan, without interfering with the expenditure decisions of the national governments. In this case, the economies external to the national plans could be considered as internal to the European plan, which would thus achieve results superior to the sum of the national plans. To sum up, European interests can be taken into consideration only by a European federal government which is responsible for its actions before theEuropean Parliament, not by national governments that must, by definition, defend national interests.
We can now sum up the effects of a European plan on the economy by comparing them to those that derive from an international plan (or intergovernmental). The intergovernmental plan would generate at the most an income increase from Y1 to Y2. Now, the same amount of financial resources, if used for a European plan of supranational investments can generate an income increase from Y1 to Y3. We can therefore claim that the difference between Y3 and Y2 is the value added of the European plan as regards the sum of the national plans. If the same phenomenon is observed from another point of view, we could claim that the difference between Y3 and Y2 is the waste of European resources generated by the persistency of the national governments in pursuing ineffective policies of intergovernmental cooperation. If we imagine, to use Keynes’ terminology, that Y3is the level of full employment, the difference between Y3 and Y2 is the deflation gap generated by the intergovernmental cooperative policies.

[1] Cf. for example, the Beetsma R., Debrun X. review, “The Interaction between Monetary and Fiscal Policies in a Monetary Union: a Review of Recent Literature”, in Beetsma R., Favero C., Missale A., Muscatelli A., Natale P. and Tirelli P., Monetary Policy, Fiscal Policies and Labour Markets. Macroeconomic Policymaking in the EMU, Cambridge, Cambridge University Press, 2004.
[2] Cf. Buti M. and Nava M., Towards a European Budgetary System, RSC Working Paper, 2003.
[3] Enderlein H., Lindner J., Calvo-Gonzalez O., Ritter R., The EU Budget. How Much Scope for Institutional Reform?, European Central Bank, Occasional Paper Series, n. 27, 2005.
[4] Werner Report, Report to the Council and the Commission on the Realisation by Stages of Economic and Monetary Union in the Community, Supplement to the Bulletin II-1970 of the European Communities, Brussels, 1970.
[5] MacDougall Report, Report of the Study Group on the Role of Public Finance in European Integration, Commission of the European Communities, Economic and financial series, Brussels, 1977.
[6] European Commission, Growth, Competitiveness, Employment. The Challenges and Way Forward into the 21st century, White Paper of the European Commission, Luxembourg, 1994.
[7] European Commission, Report from the Commission to the Spring European Council. Delivering Lisbon. Reforms for the Enlarged Union, Brussels, 2004.
[8] Musgrave R.A., The Theory of Public Finance. A Study in Public Economy, McGraw-Hill Kogakusha, Tokyo, 1959.
[9] On the theory of fiscal federalism see Oates W.E., Fiscal Federalism, New York, Harcourt Brace Jovanovich, 1972; Musgrave R.A. and Musgrave P.B., Public Finance in Theory and Practice, McGraw-Hill Kogakusha, Tokyo, 1976; and for a recent review, Oates W.E., “Toward a Second-Generation Theory of Fiscal Federalism”, in International Tax and Public Finance, 12, 2005, pp. 349-373.
[10] For example, Fatàs A., “Does EMU Need a Fiscal Federation?” in Economic Policy, 1998, n. 26, pp. 165-192; and, for a recent survey, Pacheco L.M., “Fiscal Federalism, EMU and Shock Absorption Mechanisms: A Guide to the Literature”, in European Integration Online Papers (EioP), 2000, vol. 4, n. 4;
[11] Sapir Report, Report of an Independent High-level study Group Established on the Initiative of the President of the European Commission, European Commission, Brussels, 2003.
[12] Denis C., McMorrow K., Röger W., Veugelers R., The Lisbon Strategy and the EU’s Structural Productivity Problem, European Economy, Economic papers n. 221, 2005.
[13] Cf. Denis C., McMorrow K., Röger W., Veugelers R., op. cit., p. 56.
[14] Turrini A., Public Investment and the EU Fiscal Framework,European Economy, Economic Papers n. 202, 2004.
[15] Cf. Sapir Report, op. cit., pp. 31-2.
[16] European Commission, Building our Common Future. Policy Challenges and Budgetary Means of the Enlarged Union 2007-2013, Commission Communication to the European Parliament and Council, Brussels, 2004.
[17] Cf. Kok Report, Facing the Challenge. The Lisbon Strategy for Growth and Employment, European Commission, Brussels, 2004, p. 10.
[18] For an evaluation “in contrasting hues” of the Lisbon Strategy cf. European Central Bank, “The Lisbon Strategy: Five Years on”, in Monthly Bulletin, n. 7, July 2005.
[19] On supranational public goods see Montani G., “The European Union, Global Public Goods and Post-Hegemonic World Order”, in The European Union Review, vol. 8, n. 3, 2003, pp. 35-63.
[20] The inefficiency of the current European defence system, organised on intergovernmental basis, is widely recognised by the organisms of the EU and NATO. A recent report (Flournoy M.A. and Smith J., European Defence Integration: Bridging the Gap between Strategy and Capabilities, CSIS, Center for strategic and international studies, Washington, 2005), despite the fact that it was drawn up based on the hypothesis that national sovereignty in defence matters should not be discussed, recognises that the creation of the European Defence Agency (EDA) shall help the Union member states to “eliminate waste and duplication in their defence budgets, thereby freeing up resources for collaborative research, development, procurement, and improving interoperability” (p. 57). Furthermore it claims that, as far as the industrial basis of European defence is concerned, “there are three key challenges to achieve greater European defence cooperation: fragmented defence demand, existing rules of intra-European defence trade and the fact that industrial capabilities continue to be focused on weapons systems developed during Cold War. …The resulting collection of primarily ‘national’ defence markets keep Europeans as a whole from reaping any significant economic savings from a ‘common’ defence and security market. …Insistence on using a juste retour approach means that programs are divided up not by engineering of economic logic but by political expediency” (pp.73-4).
[21] European Commission, Green Paper on Space, Brussels, 2003.
[22] European Commission, White Paper on Space: a New European Frontier for an Expanding Union. An Action Plan for Implementing the European Space Policy,Brussels, 2003.
[23] On the relationship between European industry and Europeandefence see Versailles D., Mérindol V., Cardot P., La recherche et la technologie, enjeux de puissance, Paris, Economica, 2003.
[24] See Le Monde, 19 March 2003.
[25] Gavoty D., “L’espace militaire, un projet fédérateur pour l’Union européenne”, Défense nationale, mars 2005, pp. 79-96.
[26] European Commission, Why Europe Needs Research Spending, Memo, 9 June, Brussels, 2005.
[27] European Commission, Memorandum to the Commission from President Barroso in Agreement with Mr Barrot. Implementing the Trans-European Networks, Brussels, 2005.
[28] Bourdin J., Rapport d’information au nom de la délégation du Sénat pour la planification sur les incidences économiques d’une augmentation des dépenses de recherche en Europe, Procès-verbal du 30 Juin, Paris, 2004.
[29] European Commission, The Economic Costs of non-Lisbon. A Survey of the Literature on the Economic Impact of Lisbon-type Reforms, European Economy, Occasional Papers, n. 16, 2005.
[30] In point of fact, the Sapir Report proposes a structure for the Community budget that excludes European defence (cf. Sapir Report, op. cit., pp. 167-8). It could be asserted that not all national expenditure for defence should necessarily be transferred to the European budget if the countries of the European Union accept a clause that obliges them to assign the supreme command of their troops to a European General Staff and to a European government, in some circumstances expressly envisaged by the European Constitution. Nonetheless, here we consider, for simplicity, the traditional solutions adopted by the existing federal States.
[31] European Commission, Financing the European Union. Commission Report on the Operation of the Own Resources System, Brussels, 2004.
[32] Olson M., “The Principle of ‘Fiscal Equivalence’: the Division of Responsibilities among Different Levels of Government”, in The American Economic Review, Papers and Proceedings, 1969, pp. 479-87.
[33] European Commission, The Economic Costs of Non-Lisbon. A Survey of the Literature on the Economic Impact of Lisbon-type Reforms, op. cit., fig. 1.
[34] European Commission, European Economy, n. 2, Economic Forecasts, Spring 2005, p. 5.
[35] European Commission, The Economic Costs of Non-Lisbon. A Survey of the Literature on the Economic Impact of Lisbon-type Reforms, op. cit., fig. 2.
[36] Italiener A. and Vanheukelen M., “Proposals for Community Stabilization Mechanisms: Some Historical Applications”, in European Economy, Reports and studies, n. 5, 1993, pp. 493-510; Majocchi A. and Rey. M., “A Special Financial Support Scheme in Economic and Monetary Union: Need and Nature”, in European Economy, Reports and Studies, n. 5, 1993, pp. 457-80.
[37] Sapir Report, op. cit., pp. 148-9.
[38] Hemming R, Kell M, Mahfouz S., “The Effectiveness of Fiscal Policy in Stimulating Economic Activity. A Review of the Literature”, in International Monetary Fund, Working Paper 208, 2002.
[39] For example, H. Richardson asserts that “with equal marginal propensity to consume [in each region], changes in the regional allocation of government spending (or other autonomous expenditures) will not change the level of national income but will only affect regional income levels” (cf. H. W. Richardson, Elements of Regional Economics, Harmondsworth, Penguin Books, 1969, p. 23).



Share with