Year LIV, 2012, Single Issue, Page 23

 

 

The Eurozone and an Independent Agency
for Sustainable Development. How to Reconcile
a Development Policy for the Eurozone
with EU Budgetary Policy*
 
DOMENICO MORO
 
 
1. Introduction.
 
When, in 2008, the subprime financial crisis exploded in the USA, it was presented as a “global crisis.” After a while, it was scaled down to a “crisis of the developed world.” Today, the financial crisis, which in the meantime has also become an economic crisis, in fact affects only the European Union and the eurozone in particular. Even though the financial situation of the countries using the euro is, overall, better than that of the USA — America’s credit rating has been downgraded by rating agencies —, the market seems to reserve its harsh treatment solely for the eurozone, and this has brought us to a point at which the survival of monetary union is under threat. The difference between the American situation and the European one, as the federalists keep pointing out, is political, not economic: the USA has a federal government and a federal treasury that ensure unity and solidarity between the states and the citizens; the EU, on the other hand, has a market and a currency, but no government and no fiscal union. This working paper, which proposes the creation of an agency for sustainable development funded by a European tax and promoted by the eurozone countries, but open to any countries that wish to participate, is intended to be a contribution to the debate on the phase of transition towards the federal completion of the process of European unification.[1]
 
2. The Structural Aspects of the Current Economic and Financial Crisis.
 
In a book-length interview published several years ago, Tommaso Padoa-Schioppa listed the structural causes of the American subprime crisis, a crisis that today, in a manner only seemingly paradoxical, is substantially affecting only the European Union. The causes he cited were: “the United States’ growing external debt, the progress of parts of Asia (a third of mankind) towards wellbeing, the consequent increase in energy and food prices [driving] millions of people into extreme poverty, the return to an economy of scarcity, the shortage of natural resources.”[2] These are structural imbalances that, despite being denounced by Padoa-Schioppa within the most important institutions for global cooperation, still await corrective measures. Padoa-Schioppa highlighted, in particular, a basic imbalance that broadly links all the structural factors just listed, namely the unsustainable American model of development, based on “consumer credit.”[3] For a period of thirty years, the US economy, driven by consumer spending, grew at a rapid rate: once the process of forming domestic savings had been exhausted, the United States resorted to external savings, accumulating a large foreign debt. In more recent years, consumer spending was underpinned by private debt, with loans secured by the (constantly increasing) value of houses, which in turn was buoyed up by an accommodative monetary policy. All this led to inflation of stock market and investment goods prices, termed asset inflation, which had the effect of further boosting consumption. Indeed, unlike inflation of consumer prices, which (all other conditions being equal) makes us poorer, asset inflation gives us the illusion that we are becoming richer and thus encourages us to continue along the consumer credit route. In the same years, consumer purchasing power was defended, if not actually boosted, by the low prices of goods and services produced in and imported from developing countries. The latter, furthermore, invested the resulting trade surplus earnings in Treasury bonds, and thus also helped to fund America’s unsustainable model of development. The start of the present economic and financial crisis came when, eventually, this crazy cycle of development was interrupted by an internal hiccup: home owners started to become unable to pay their mortgages. This crisis, which, as we have seen, broke out in the United States, has now moved to continental Europe, where it is threatening the survival of the euro. However, public opinion, and above all the governments called upon to remedy the situation, have lost sight of the fact that the structural imbalances cited by Padoa-Schioppa have remained unaddressed. This paradoxical situation is summed up by the following data: at the outbreak of the subprime crisis in 2008 (and thus in a phase of development sustained by the global economy), the average price of an OPEC barrel of oil was 94 dollars; it dropped to 60 dollars the following year, after which it progressively rose again. At the start of 2012,[4] a period in which the American economy is said to be showing only a partial recovery, and the European economy is in recession, it stood at almost 112 dollars.
One might very well wonder why it was that, in the presence of such clear structural imbalances, the outbreak of the financial crisis in the USA came as such a surprise, and why it is that, even now, corrective measures are not being adopted. Tommaso Padoa-Schioppa provides an explanation that is also the assumption underlying his whole “conversation”: in his view, one of the main reasons is the “excessive shortening of time horizons in the conducting of private and public affairs,”[5] which makes it impossible to see problems and, above all, to introduce, promptly, the necessary measures. The crisis we are currently going through, according to Padoa-Schioppa, is structural, and its clearest manifestation, the sovereign debt crisis, is not something that has arisen over the past few years; rather, it is a result of changes that have taken place in the global economy over several decades, leading to public finance management policies that favour the use of debt as a means of meeting the needs of the developed economies. These policies have been accompanied, again because of the shortening of time horizons in the conducting of private and public affairs, by questionable decisions from the perspective of sound fiscal policy.
The structural nature of the ongoing financial and economic crisis can be looked at in many ways. For example, a French Senate report on Europe’s energy policy, commenting on the predictable evolution of the geographicaldistribution of energy consumption, remarks that “basically, it can be said that we are moving from a world in which a quarter of the population consumed three quarters of the energy, to one in which energy consumption will increasingly be determined by the size of a country’s population.”[6] For its part, the UN, in a recent report, points out that the “vast consumption gap between the rich and the poor is expressed through a widely known measure: ‘roughly 80 percent of the natural resources used each year are consumed by about 20 percent of the world’s population’.”[7] Given that these global inequalities in the consumption of natural resources seem to parallel the difference, in terms of public debt, that exist between the industrialised countries and the developing world — with the latter, therefore, seeming to support the former — it is perhaps worth trying to understand their origin.
In a recent article on France’s national debt — even though the trend described is actually common to all industrialised countries —, it was remarked that France has had a structural deficit ever since 1974.[8] World Bank figures show that, in 2009, against a global GDP of 58,000 billion dollars, world public debt stood at 63,100 billion dollars, over two thirds of which (42,800 billion) was generated by members of the OECD, the umbrella organisation of countries having the highest per capita income. Therefore, if we look at the distribution of public debt on a global scale, we see that 68 per cent of this debt belongs to 18 per cent of the world’s population — the 18 per cent with the highest per capita income. In fact, in these countries, with very few exceptions, public debt has grown more rapidly than GDP and this is a process that was triggered when the oil-producing countries, increasing the price of oil, tried to alter the terms of trade to their own advantage. However, what actually made oil price increases possible was America’s decision to suspend the convertibility of the dollar into gold, a “modification of the global monetary constitution [that] had perverse effects.”[9] In the era before August 1971, China would have wanted its dollars converted into gold, and the USA would have been obliged to consolidate its public finances and devalue the dollar. But with its 1971 decision, the United States gave the market a clear message: it (and subsequently other industrialised countries) could consume more than it produced.[10] The fact that the world’s most industrialised countries consume most of our planet’s resources, and are also the most indebted, seems to prompt the conclusion that the control of resources, albeit indirectly, is financed by debt.
This tendency and the current inequalities in the distribution of the use of natural resources have political implications that Tommaso Padoa-Schioppa clearly grasped. In an interview with the Financial Times, he remarked that “we know how the global economy works and what can happen when 15 per cent of the world’s seven billion people has a high standard of living; what we do not know is what might happen if that 15 per cent becomes 50 per cent.”[11] For the sake of the world’s future, an answer to this conundrum must be found, and the European Union must be capable of playing its part, as of now.
 
3. The Fiscal Policy Crisis and Sustainable Development as a New Budgetary Policy Objective.
 
Literature on the fiscal policy crisis starts from the premise that, from the 1970s on, the countries of the industrialised world recorded growing budget deficits and growing levels of public debt due to the inclination of governments, of all political orientations, to engage in deficit spending during economic downturns and favour procyclical policies during booms.[12] According to this current of thought, the fiscal policymakers, driven by specific incentives (including the desire for re-election) that lead them to cater to the short-term interests of pressure groups and of voters, are deemed to act quite rationally. Today, however, a growing awareness, as well as growing evidence, of the inconsistencies created by fiscal indiscipline and procyclical policies has made it possible to open a debate on the distortions created by these behaviours and on effective ways of correcting them in order to move, instead, towards an objective compatible with the interests of all citizens, that of sustainable development.
In an ideal world, fiscal policy should be consistent with the objective of government solvency (i.e. it should guarantee the sustainability of the debt); second, it should be able to respond effectively to unforeseen shocks (limited taxation risks against an unexpected increase in public expenditures); third, it should contribute to macroeconomic stabilisation, or at least not undermine it (countercyclical measures). If all these aspects of fiscal policy enjoyed the full support of the electorate, a rational and democratic government would have no incentive to deviate from them. In practice, however, fiscal policy has not been coherent with the objective of macroeconomic stability in the broad sense; on the contrary, it has tended to feed the structural public deficit and, therefore, increase the level of public indebtedness, causing it to grow at a faster rate than GDP. A possible explanation for this is that voters, apparently unable to accept the macroeconomic constraints that are associated with virtuous fiscal policies, want to see the provision of additional public goods and, therefore, the spending of any financial resources accumulated during economic boom years. Second, they do not fully appreciate the nature of intertemporal budget constraints, whereby deficits today will inevitably mean higher taxes tomorrow. These voter attitudes may have a dual effect: the rational policymaker may seek to gain leverage from tax incentives in order to secure his own re-election, while the shortsightedness of voters and the desire, on the part of those elected, to stay in office may lead to delays in the adoption of the measures that should be taken to tackle a critical situation for public finances.
One key distortion underlying inadequate fiscal discipline stems from the fact that governments tend to have even shorter time horizons than the electorate do, a myopia linked to the electoral uncertainty that is inherent in the democratic decision-making process. Since those in office are concerned mainly with the consequences of their own discretionary actions, the risk of losing the next elections means that they have little interest in forward-looking policies. Another explanation for the tendency to pursue lax fiscal policies lies in what economists call “time inconsistency”: whereas governments should save windfall revenues accrued during favourable economic periods against the prospect of future budget difficulties, they are, in fact, more likely to bow to pressure from voters and spend them immediately.
In theory, in the presence of permissive public policies, it would be logical to expect the market to respond in a way that might induce economic policymakers to pursue fiscal discipline; in other words, to raise interest rates in response to growing public deficits, to increase country credit risks (and, therefore, spreads on interest rates), and, finally, to impose limits on access to credit when public debt exceeds a certain threshold. In truth, however, both the literature and experience suggest that market discipline does not effectively curb lax fiscal policies, usually intervening, if at all, only in the final stages of these policies, when it is too late to introduce measures able to prevent, or limit, the damage. Therefore, market discipline, alone, is not seen as a sufficient incentive for pursuing virtuous financial policies.[13]
The answer being offered as a means of overcoming the limits of current fiscal policies is inspired by the monetary policy already implemented by central banks that are independent of political power, like the European Central Bank, and it takes two forms: a) the establishment of independent fiscal councils, required to pronounce, publicly, on the robustness and reliability of the economic policies to be pursued; b) the establishment of true independent fiscal agencies with the power to modify, within certain limits, the rates of certain taxes, so as to ensure the meeting of a given government’s budgetary balance objectives or projected fiscal balances. The Congressional Budget Office in the USA and other similar offices in the UK and Scandinavia provide examples of the first of these two types of fiscal institution, even though they proved to be inadequate; instead, there are no examples of the second type, which in theory ought to be more effective. Indeed, it has been impossible to introduce institutions of this kind into public life as the democratic legitimacy issues raised by this solution, as well as the likelihood that governments sanctioned under such a system would subsequently pay the price at election time, have made it impossible to generate the necessary consent.
However, leaving aside their nature and evident weaknesses, the aim of the various proposals advanced in relation to the institution of these fiscal agencies is ultimately to remove the constraints of sectional interests and short-term electoral deadlines, so as to create the conditions for the pursuit of virtuous budgetary policies in the long term. It cannot, therefore, be denied that they attempt to solve an objective problem. This is true not only at national, but also at European level. Indeed, the reluctance to give Europe autonomous fiscal and spending powers probably masks concerns about introducing a further institutional layer entailing a fiscal policy in the same permissive mould as that experienced at national level. However, such concerns are actually more relevant to stability policy than distribution and allocation policies, given that the latter, in principle, should achieve budget balance. The fiscal compact treaty, which was approved by the European Council on 1-2 March 2012 and overcomes the limitations of the Stability and Growth Pact, regulates stabilitypolicy, paving the way for it to become, in time, European.[14] Furthermore, insofar as it demands broadly balanced budgets, it introduces the institutional adjustments necessary to turn Keynesian-style policies back into measures able to deal with temporary insufficiencies of aggregate demand. Therefore, under the terms of the fiscal compact, public deficits that are incurred to boost demand must be followed by surpluses during economic upturns.
The fiscal compact, in the way it was conceived, presents limitations; first, it does not solve the problem of the democratic legitimacy that must necessarily underpin a European budgetary policy; second, it fails to identify an adequate instrument for pursuing the only policy with the capacity to assert a new model of growth suitable for the new global framework: that of sustainable development. It is thus necessary to provide Europe with institutions that not only have autonomous fiscal and spending powers, but also address the concerns that have been highlighted by the relevant literature and confirmed by violations of the Stability and Growth Pact. This paper supports the proposal to create a European agency for sustainable development, which could be autonomously funded through the levying of a European tax and would respect the balanced budget requirement.
 
4. An Independent European Agency for Sustainable Development and the ECSC as a Precedent.
 
The establishment of an agency for sustainable development is proposed on the grounds that pursuit of sustainable development, which is a long-term objective, demands an ad hoc instrument; it is not simply a question of proposing a cyclical economic policy, but rather of setting the direction of travel of the European (and global) economic system for at least a generation, if not more. In other words, it is a question of finding a way of leading public institutions to design sound, long-term policies. Padoa-Schioppa, at a certain point in his “conversation”, cited earlier, recalls that “to politics and public institutions falls the task of providing guidance and education [and] there is much they can do to correct the myopic trend. In many ways time is a public good that must have institutional safeguards [our italics].”[15] The creation of an agency for sustainable development would be a step in this direction.
What is needed is an institution that outlasts the term of a normal electoral mandate, given that, considering the tasks that would fall to the Agency proposed herein, it would have to have continuity: in short, it could not be established by one political party only to run the risk of later being dismantled by a majority with opposing political views. As Barbara Wootton, in her time, pointed out, there are policies that cannot be called into question from one parliamentary term to the next and that therefore have to be approved by all the political parties, or at least by the vast majority of them.[16] In the case in hand, in the absence of a specific, specially created institution, it is hard to imagine sustainable development becoming a structural policy of governments, with agreement routinely being reached on individual initiatives: indeed, agreement, both between the European political forces and between the European Union’s members, would have to be actively sought each time. It can therefore be assumed that the parliamentary votes that would be required to approve the establishment of the Agency, its management structure, and the development plan that it would subsequently present, would have to be taken in joint sessions of the national parliaments and the European Parliament, the latter in a composition representing the countries in favour of the establishment of the Agency. To ensure that the viewpoint of the rest of the world is taken into account, a representative of the United Nations, entitled to speak but not to vote, would also be present. The Agency, for its part, would present a plan broadly outlining the development policy it intends to follow. For the reasons just mentioned, the parliamentary debate on this plan would concern the establishment of priorities, time frames and ways of implementing the lines of development, but not the individual proposals. The Agency’s management structure, on the other hand, could be based on the Ecofin Council and be composed of those countries in favour of the initiative;[17] were the initiative to be taken up by the eurozone countries, the management structure could, ideally, be provided by the Board of Governors envisaged by the Treaty establishing the European Stability Mechanism.[18]
However, before looking in more depth at issues relating to the Agency’s structure and modus operandi, it is still necessary to dwell briefly on the concept of “sustainable development.” The term is generally used in accordance with the definition given in the 1987 Brundtland report, which states that Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”[19] The debate triggered by the publication of that report, which brought out its limits and contradictions, allows us to make two points. First of all, since it refers to the meeting of needs, it is necessary to recall the distinction drawn by Luigi Einaudi between demand and needs, and thus the difference between the role of the market and that of the state in providing an optimal mix of private and public goods and services. According to Einaudi “in recognising that the market is the right tool fordirecting producers, in the sense of encouraging them to produce goods and services that, in quantity and quality terms, correspond exactly to man’s needs, aren’t we also saying that the market directs producers to produce goods and services in the quantities and of the quality desired by men […]? The market meets demands not needs.”[20] Einaudi wanted to make the point that whereas the market satisfies monetary demand, there exist needs, such as domestic and foreign security, justice, education, health, and so on, that do not translate into monetary demand and must therefore be met by the state. Economic growth and environmental protection, which have proved to be somewhat conflicting objectives, have created the need for “sustainable development,” a need that is not met by the market and can only be met through the action of the public sector. The second observation concerns the conclusions reached following the debate started by the Brundtland Report, whose definition of “sustainable development” was intended to facilitate translation of this concept into economic policy measures. The debate showed that priority should be given to policies supporting investments, not consumption, and this is the approach endorsed herein.
The following reflections differ from the many European development plan proposals not so much in the assessment of the volume of financial resources and investments needed, as in the type of approach suggested. Accordingly, the first two aspects are here discussed with reference to documents already drawn up on these matters: with regard to the resources that the Agency should have at its disposal and the investments it should be required to finance, reference is made, respectively, to a document drawn up by several MEPs[21] and to Europe 2020, a communication from the European Commission.[22]
 
a) The Agency’s Own Resources.
 
In order to pursue sustainable development as well as affirm the principle of solidarity between European states and citizens, the Agency should be able to count on financial resources deriving from European taxes, resources which would also attest to the European citizens’ willingness to support the Union directly. These taxes could, pending the final definition of a European federal institutional system, be levied by the Agency itself; alternatively, given the powers conferred upon it by its establishing treaty, they could, once it came into effect, be levied by the European Stability Mechanism (ESM), whose Board of Governors includes the finance ministers of the eurozone countries and which may be seen as a sort of European treasury under construction.[23] In the latter case, a substantially definitive institutional system could subsequently be reached should the ESM, probably on the basis of revision of the existing Treaties or of a new treaty, be set within a federal-type constitutional framework and brought under the joint control of the national parliaments and the composition of the European Parliament representing the countries that have agreed to the transfer of sovereignty (preferably these would be the eurozone countries, including those countries that, despite still preparing to adopt the single currency, already wish to take part in the initiative, possibly on the basis of provisional clauses).
The idea of a European tax levied by the Agency or by the ESM is not novel; indeed, the ECSC operated using its own resources. These derived from “levies” (a term used in the founding treaty in preference to “tax”) on coal and steel production at a maximum rate of 1 per cent of their average value, with the proviso that increases beyond that limit could be approved by the High Authority (the present European Commission) by a two-thirds majority. Thus, this would not be the first time that the European states had agreed to surrender fiscal powers to an independent community for the purpose of fulfilling a specific task. Since, in this instance, we are talking about creating an agency for sustainable development, the carbon tax would seem to be the ideal tax for funding it. As regards the resources that could be mobilised in this way, the Haug, Lamassoure and Verhofstadt Report estimates that revenue from a carbon tax would amount to around 38-48 billion euros. This could be summed with revenue deriving from the introduction of a European tax on financial transactions which, according to the European Commission, would amount to about 57 billion euros.[24] Together, these resources would double the size of the present EU budget. Moreover, the total financial resources activated could, potentially, be much greater than this, as the Agency could help to boost them by issuing project bonds (i.e. debt instruments used to fund projects whose economic returns allow them, totally or in part, to service the debt) and thus without incurring debt directly. Indeed, the Haug, Lamassoure and Verhofstadt Report points out that the financial requirement forproject bonds aimed at supporting investments in infrastructures would amount to around 1,800 billion euros (in the case of projects able to service the debt only partially, the tax on financial transactions would cover the difference). The expansion of the production and employment base resulting from the investment policy would be further strengthened by a carbon tax, which would also be levied on imported goods and would be likely to prompt a partial relocation of production activities to continental Europe.
 
b) The “Joint Undertaking” as an Instrument Allowing the Agency to Finance and Implement Investments in Material Goods.
 
The European Commission’s communication of March 3 2010 underlined three priorities, which include “smart growth — developing an economy based on knowledge and innovation” and “sustainable growth — promoting a more resource efficient, greener and more competitive economy.”[25] The first priority includes an initiative called the “digital agenda for Europe” which aims to increase the spread of high-speed Internet across Europe and to ensure that 50 per cent of European families have access to it by 2020. The second seeks to promote the transition to a more efficient economy, based on the use of low carbon natural resources, to decouple economic growth from the use of natural resources and energy, to reduce CO2 emissions, and to help increase energy security. It includes a series of initiatives covering a number of areas: a European “green” car initiative; an initiative to upgrade Europe’s networks, including trans-European energy networks, towards a European supergrid, “smart grids” and interconnections in particular of renewable energy sources to the grid; infrastructural projects in the Baltic, Balkan, Mediterranean and Eurasian regions; space policy, in particular aiming to deliver Galileo and GMES. In the energy sector, the harnessing of solar energy in North Africa could constitute a concrete initiative, as envisaged by the Desertec project.[26]
If the Agency were required to fund investment projects that offer economic returns, it could opt, for example, to use the “joint undertaking” instrument envisaged by the existing Treaties, the most famous example of which is the “Galileo Joint Undertaking,” set up to create a European satellite navigation system.[27] In such cases, the Agency could invest its own capital and become a shareholder, or it could use long-term debt capital, along the lines of the Tennessee Valley Authority solution: established in 1933, in the framework of America’s New Deal, this authority, in 1936, took out a loan to finance its investments. The loan was repaid seventy years later, in 2006. The stakes acquired in the “joint undertakings” that may, from time to time, be set up would, over time, become part of the assets passed by present to future generations.
 
c) The Financing of Investments in Intangible Assets: R&D, Education and Training.
 
The Commission aims to increase EU spending on R&D, which currently stands at less than 2 per cent of GDP, as against 2.6 per cent in the US and 3.4 per cent in Japan, a discrepancy due mainly to lower levels of private investment in Europe; it also aims to increase levels of education, given that in Europe less than one person in three aged 25-34 years has a degree, as against 40 per cent in the US and over 50 per cent in Japan. Although these were objectives included in the Lisbon Agenda, they have not been achieved. This is because the Union, if no action is taken by the states, does not have the means to act directly. This is a limitation that would be overcome by the Agency proposed herein, which should probably also operate in other sectors, healthcare for example, that have long been neglected but are destined to become increasingly important with the ageing of the European population. Some may be surprised to learn that in the USA, the sector that absorbs most public funds for research and development, after defence, is that of healthcare, which thus comes ahead of the energy sector and of NASA. In 2010, America’s federal government, universities and states together invested over 60 billion dollars in health-related R&D (in the same year, 81.1 billion dollars were spent on defence, 10.7 billion on energy, and 9.3 billion on NASA).[28] It is not known how much, in total, the EU spends on health-related R&D: all we know is the amount invested by the European Commission through the EU budget (0.6 billion euros in 2010) and the amount invested by the UK through the National Health Service and the UK Medical Research Council (a total of 1.8 billion euros in 2010).[29]
 
d) The Connection with Traditional Budgetary Policy Objectives.
 
Traditionally, budgetary policy includes an income and employment stability policy, and distribution and allocation policies. Under the fiscal compact treaty, stability policy will be a shared European competence, while competence for allocation and distribution (except as regards distribution between states) will remain at national level. The Agency would address a further objective: sustainable development. However, it must immediately be made clear that this objective could not be an exclusive competence (even a rigidly centralised regime would be unable to pursue it), but must, instead, be a shared competence; after all, sustainable development policies make provision for interventions that involve different territories and thus different levels of government. From this perspective, too, the Agency underlines the need to work towards a federal reorganisation of the European institutional framework, introducing the federal system at all levels of government, from the regions to Europe. In this setting, Europe would have a new role, steering the development of the European economic system and financing and implementing projects at continental and intercontinental level.
 
e) The Limits to Be Placed on the Agency’s Field of Action.
 
The field of action of an agency for sustainable development runs the risk of being interpreted too broadly. It is believed that this risk could be avoided through the following measures: first of all, the Agency’s final budget must be balanced, in other words, the Agency cannot spend more than it receives; second, the projects financed by the Agency must refer to investments in capital goods and not in consumer goods; third, it should finance very long-term projects that are unaffected by the logic of short-term electoral reasoning; fourth, to avoid the risk of policies tending to squander public resources or to protect consolidated interests, the Agency should be flanked by an ad hoc committee responsible for assessing whether the projects to be funded are, indeed, in the interests of future generations.[30] This committee would fulfil the monitoring role that is played by the market in the case of debt funded projects. One might therefore imagine, along the lines of a suggestion made a few years ago by a young German philosopher, a body required to give binding opinions on the value of projects. This body, symbolically representing the interests of futuregenerations, should be composed of “specialists with proven expertise in the disciplines most relevant to the survival of mankind […].”[31] Similarly to what is proposed by Hösle, half of these specialists could be elected by the European Court of Justice, and half by the European Parliament.
 
5. Federalist Proposals for Creating a Federation within the European Union.
 
In order to re-start the debate on how to get closer to the objective of creating a federation within the current European framework, it may be useful to go back to the very beginning of this debate, in other words to 1986 and the proposals advanced by Francesco Rossolillo and Antonio Padoa-Schioppa, also in order to see how the European situation has changed in the intervening years.[32] The mid-1980s was the period that saw the Spinelli draft treaty on European Union and the opposition, in this regard, from Great Britain leading the federalists to ask whether a European Union like the one proposed by Spinelli could legally be instituted within the framework of the then European Community. It is worth recalling, in particular, the political and economic terms of the technical-legal proposal put forward at that time. From a political point of view, the proposal to form a Union within the Community was designed as a means of overcoming the resistance opposed not only by Great Britain, but also by Denmark, Greece and Portugal.
The suggested procedure did not require an immediate split from those countries; rather, it envisaged the presentation of a draft Treaty/Constitution by the states in favour of the proposal and recourse to art. 236 of the EEC Treaty (which requires a unanimous vote) in the hope of being able to proceed with the consensus of all parties. Only after verifying the impossibility of reaching unanimous agreement on the Union-within-the-Community proposal would a formal break with Great Britain, and with the other countries opposed to it, have become inevitable.
Instead, as regards the strictly economic terms of this technical-legal proposal, the following conclusions were reached:
1. Own resources and budget: current resources would remain attributed to the Community, while the Union would have to find its own resources by effecting further transfers of funds;
2. Common agricultural policy: this would remain in the Community’s jurisdiction;
3. Cohesion: dual jurisdiction was deemed to be conceivable and it was recommended that the Community and Union seek to harmonise, as far as possible, their regional and social policies;
4. Currency: it was held that this need not give rise to conflict, as the Union could incorporate the then EMS into its own institutional system and subsequently push ahead towards its transformation into a true monetary Union;
5. Internal market: the Union could pursue the process of unification while respecting agreements made, from time to time, between the Union and the countries outside it.  
If we think of the above proposal, which was formulated in such a way as to take into account the need to overcome the opposition both of those wanting to avoid a split, and of the “legal sticklers” determined to adhere rigidly to what was laid down in the Treaties, the circumstances in which we find ourselves today can be considered more favourable, for at least two reasons: first of all, with the single currency, we already have a federal-type power at European level, and therefore already have the embryo of a federation (the eurozone) within a confederation (the EU); second, as a result of the decision of the European Council on 9 December last year, the split with Great Britain has effectively already taken place. As for the economic terms of the proposal advanced in the mid-1980s, no particular adjustments would be required.
 
6. The Procedure for Establishing a Eurozone Sustainable Development Policy within the Framework of EU Budgetary Policy.
 
The present proposal to create an agency for sustainable development with the capacity to decide and act autonomously is completely the reverse of the approach to date adopted by the European Commission, which is merely to request the European Council to encourage and coordinate national initiatives. The states in favour of the proposal, by helping to bring about the creation of a body that would have a statute similar to that of the ECB and governing bodies that would remain in office longer than the duration of a political legislature, would be putting in place an instrument that could be used to intervene directly in the territory of the participating countries in order to implement a sustainable development policy.
The first step in its creation could be accomplished, if the political conditions were right, by exploiting the provisions contained in the Lisbon Treaty. Therefore, it could initially be proposed as an enhanced cooperation, in which case it would be useful if it could be supported by a European Citizens’ Initiative, organised in accordance withart. 11.4 of the Lisbon Treaty. The enhanced cooperation proposal should be submitted to the European Commission by one or more of the states wanting to proceed with it. Should this route prove unproductive,[33] the countries in favour of the proposal could press ahead outside the framework of the Treaties, following the precedent set in the case of the ESM and fiscal compact treaties. Moreover, if in the meantime, efforts had been made to collect the million signatures necessary to present a European Citizens’ Initiative, these countries would also have the popular support needed in order to do so. The initiative, set outside the Treaties, should be supported by the votes not only of the national parliaments involved, but also of the European Parliament, which could approve it using the same formula used to approve the fiscal compact treaty, i.e. requesting that, within the space of the subsequent five years, the treaty establishing the Agency be incorporated into the existing Treaties.
As regards the functioning of the EU organs in relation to the Agency, the idea that these would not be duplicated but would carry out their functions as organs of both the eurozone and the Union[34] would actually apply only to the European Parliament. The Agency, as mentioned, in fulfilling its institutional role, would answer to the Ecofin Council/ESM Board of Governors. Instead, as regards the Court of Justice, the members of the countries not taking part in the initiative “would be empowered, like the others, to rule on matters relating to the [Union] and the relationships between the [Union and the eurozone].”[35] Finally, as regards its relationship with the current European budget, the fact that it is called an Agency would leave the way open for an eventual fusion of the two institutions. In short, the Agency, retaining its original structure, could become the budgetary section of a future European sustainable development ministry. In any event, from the outset provision could be made, as in the case of the European Development Fund in 1993, to insert the Agency budget in an adhoc section of the EU budget, until the time is ripe for the two to merge.


* This paper is the written version of a lecture given at the Milan section of the European Federalist Movement (MFE) on 17 January, 2012. The proposal set out herein aims to involve primarily the eurozone countries and ultimately the EU member states that signed the fiscal compact treaty (i.e. all the EU member states except the UK and the Czech Republic).
[1] The agency proposal can, indeed, be set only within the framework of the structural powers of a true federal government.
[2] Tommaso Padoa-Schioppa, La veduta corta (conversazione con Beda Romano sul Grande Crollo della finanza), Bologna, Il Mulino, 2009.
[3] Padoa-Schioppa is referring explicitly to the American model of development, but the book as a whole is actually a broad criticism of a development model based on credit.
[4] OPEC, Monthly Oil Market Report, February 2012.        
[5] Tommaso Padoa-Schioppa, La veduta corta ..., op. cit., p. 61.
[6] Aymeri de Montesquiou, Rapport d’information fait au nom de la délégation pour l’Union européenne sur la politique européenne de l’énergie, French Senate Report no. 259, 15 March 2006; Jean-Marie Colombani, “Une nouvelle donne”, Le Monde, 30 December 2006.
[7] John Drexhage and Deborah Murphy, Sustainable Development: From Brundtland to Rio 2012, UN High Level Panel on Global Sustainability, September 2010. http://www.un.org/wcm/webdav/site/climatechange/shared/gsp/docs/GSP1-6_Background%20on%20Sustainable%20Devt.pdf
[8] Michel Ternisien, Michel Tudel, “De 1974 à 2011, l'indiscipline budgétaire a conduit la France à s'endetter”, Le Monde, 2 December 2011.
[9] Tommaso Padoa-Schioppa, La veduta corta ... , op. cit., p. 38.
[10] Gianni Ruta, militant federalist from the Rome section of the MFE, when he was financial director of Stet (Stet SpA, an Italian state-owned company that operated in the telecommunications sector), intervening in a debate of the MFE central committee in the second half of the 1970s, pointed out that any increases in the price of oil could be financed by suspending the convertibility of the dollar into gold.
[11] Tommaso Padoa-Schioppa, Due anni di governo dell’economia (maggio 2006-maggio 2008), Bologna, Il Mulino, 2011, p. 502.
[12] See, for example: X. Debrun, D. Hauner, M.S. Kumar, “Independent fiscal agencies”, Journal of Economic Surveys, n. 1/23 (2009); Manmohan S. Kumar, Teresa Ter-Minassian (editors), Promoting Fiscal Discipline, Washington, IMF, 2007. The problem of the compatibility between Keynesian policies, democratic institutions and sound financial policies was addressed mainly by the public choice school of economics. In particular, according to public choice theorist James Buchanan, Keynes provided the ideological justification for abandoning the balanced budget objective, and Keynesian policies, in the absence of adequate constitutional constraints, lead structurally to the pursuit of deficit policies and the gradual increase of public debt (See James M. Buchanan, Richard E. Wagner, Democracy in Deficit: the Political Legacy of Lord Keynes, Indianapolis, Liberty Fund, 1977).
[13] This argument was conceived, in particular, with the governments of sovereign and independent states in mind. Indeed, the absolute sovereignty requirement acts as an incentive to investors, who believe that a sovereign state, in the event of a severe fiscal crisis, will guarantee public debt securities. Experience shows, however, that the market, in the absence of rules, instead causes financial disasters (See Carmen M. Reinhart, Kenneth S. Rogoff, This time is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton, 2009). Conversely, in the case of governments of states that belong to a federation, like the USA, if the federal government makes it clear to the market that it will not intervene to support states in financial difficulties, and if this attitude on the part of the federal government is accompanied, at state level, by constitutional constraints on excessive indebtedness, the market will give out timely signals (usually raising interest rates) of the worsening state of public finances, forcing a readjustment of public finances. In federal states where there exist constitutional constraints that impose solidarity between the different levels of government, as in the Federal Republic of Germany, for example, the need to ensure compatibility between the bond of solidarity and the objective of sound government finances has made it necessary to introduce constitutional constraints on public deficit and debt that apply to all the levels of government.
[14] The budget balance requirement would also address the problem highlighted by Tommaso Padoa-Schioppa in relation to the subverting of the global monetary constitution through suspension of the convertibility of the dollar into gold. This was a decision that definitively cut the dollar’s ties with gold (which had implied almost “automatic” adjustments of a state’s public finances and balance of payments) and the transition to a system based solely on paper money (V.R. Triffin, Our International Monetary System: Yersteday, Today and Tomorrow, Random House, New York,1968). It goes without saying that the latter, if inflationary effects are to be avoided, requires the adoption of constitutional constraints to ensure correct management of monetary policy and public finances.
[15] Tommaso Padoa-Schioppa, La veduta corta ... , op. cit., p. 77.
[16] Barbara Wootton, Freedom Under Planning, New York, The University of North Carolina Press, 1945. Wootton cites, as examples, the establishment of the London Passenger Transport Board, the Central Electricity Board, and the BBC.
[17] The Ecofin Council is referred to because every year it, together with the European Parliament, prepares and adopts the EU budget.
[18] See European Council, Treaty establishing the European Stability Mechanism, T/ESM 2012/en, http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf
[19] Report of the World Commission on Environment and Development, Our Common Future, Milan, Bompiani, 1988.
[20] Luigi Einaudi, Lezioni di politica sociale, Turin, Einaudi, 1964, p. 23.
[21]Jutta Haug, Alain Lamassoure, Guy Verhofstadt, Daniel Gros, Paul De Grauwe, Gaëtane Ricard-Nihoul, Eulalia Rubio, Europe for Growth. For a Radical Change in Financing the EU. 2011. http://www.ceps.eu/book/europe-growth-radical-change-financing-eu.
[22] Communication from the Commission, Europe 2020 – a Strategy for Intelligent, Sustainable and Inclusive Growth, Brussels, 3.3.2010 COM(2010) 2020.
[23]The need to ensure that the European Stability Mechanism, established to pursue a policy of budgetary discipline, is accompanied by mechanisms designed to promote the sustainable development of the European economy is underlined in the European Parliament resolution of 23 March 2011, which approves the amendment of art. 136 and the establishment of the EMS (see P7_TA(2011)0103 and, in particular, par. 10, which “calls on the Commission to look for other mechanisms to ensure the financial stability and sustainable and adequate economic growth of the euro area, and to make the necessary legislative proposals; underlines the need for the European stability mechanism to include measures used to reduce risks to financial, economic and social stability, including effective regulation of financial markets, revision of the SGP and better economic coordination, the introduction of instruments for the reduction of macroeconomic imbalances inside the euro area and measures directed at ecological reconstruction”). Instead, as regards the attribution to the ESM of the power to collect the proceeds of the two taxes which, it is here suggested, might be used to finance the activity of the Agency (i.e. a carbon tax and a tax on financial transactions), a problem could arise. Whereas, given its role, the Agency could justifiably be funded by the proceeds of the carbon tax, it would be more logical to assign the proceeds of the tax on financial transactions to the ESM directly, enabling it to fulfil its functions (intervening to support the sovereign debt of a member state subjected to a speculative attack by the markets). This is, therefore, a point that needs to be analysed in greater depth.
[24] European Commission, Proposal for a Council Directive on a Common System of Financial Transaction Tax and Amending Directive 2008/7/EC, COM(2011) 594 final, 28 September 2011. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011PC0594:EN:NOT
[25] Communication from the Commission, Europe 20… , op. cit.
[26] Information on the promoters of this initiative and the content of the proposal can be found at: http://www.desertec.org/.
[27] Were the Agency to have recourse to the establishment of “joint undertakings” the problem would arise of how to control them. One possible scenario, in this case, is that of equal participation of the Agency and the states contributing to the creation of the Agency, but with the casting vote held by the representative of the Agency, so as to overcome the governance limitations that emerged in the case of the Galileo joint undertaking, which, hostage to national interests, was unable to represent the European interest.
[28] The federal government of the USA invested 34.5 billion dollars, the universities 11.1 billion, the states 3.6 billion, and other federal public agencies 11.1 billion: Research America, 2010 U.S. Investment in Health Research, http://www.researchamerica.org/; Congressional Research Service, Federal Research and Development Funding: FY2011, 10 June 2011. http://www.ieeeusa.org/policy/eyeonwashington/2011/documents/rdfunding.pdf
[29] Mark McCarthy, “Who supports health research in Europe?”, European Journal of Public Health, 20, n. 1 (2010).
[30] One objection that could be raised is that, under this proposal, the extra European resources generated would not benefit the EU budget, but another institution. This can be countered with the argument that what should interest federalists is that they are, nevertheless, extra resources in European hands that can be used to support the creation of institutions (like the ECB) that have shown that they can work: this is the only way of convincing European public opinion that they are the answer to national problems.
[31] Vittorio Hösle, Filosofia della crisi ecologica, Turin, Einaudi, 1992, p. 152.
[32] Francesco Rossolillo, “European Union and the Community”, The Federalist, 28, n.2-3 (1986), pp. 145-152. This is the essay reprinted in this issue of the journal. Antonio Padoa-Schioppa, “European Union and European Community: two incompatible institutional systems?” , The Federalist, 30, n.3 (1988), pp. 201-204.
[33] On this point, see Giulia Rossolillo, “The Fiscal Compact, the European Stability Mechanism and a Two-Speed Europe: Institutional Proposals for a Government of the Eurozone”, The Federalist, 54, (2012) p. 10.
[34]Francesco Rossolillo, “European Union and the Community”, op. cit. Given the objective of creating a European Union within the then European Community, it made sense to suggest that the Commission should not be duplicated. In the case of the Agency, on the other hand, it is a case of creating a new body with a clearly defined task.
[35] Francesco Rossolillo, “European Union and the Community”, op. cit. The sharing of the running costs of the existing institutions would naturally be a problem. In the case of enhanced cooperations the Treaties stipulate that the European budget should bear the administrative costs only. Were it necessary to resort to an initiative outside the framework of the Treaties, the attribution of costs, including administrative costs, would have to be the subject of an agreement reached with the European Union.

 

Share with