Fiscal integration in the European Union

, by Cyrille Amand

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Fiscal integration in the European Union
Fiscal integration in the EU is more likely to happen within the framework of a multi-speed Europe, Cyrille Amand writes.

Speaking of the European Union, it is to be noted that most Eurosceptics and pro-Europeans agree upon one thing: it is a half-built house. While the former would like to deconstruct, it to keep its foundations only, the latter endeavour to provide it a proper roof.

Yet, both sides would agree – for different reasons and with different visions in mind - that the present state of affairs in the EU is unsatisfactory. This statement is also true as far as the Economic and Monetary Union is concerned. What are the challenges to fiscal integration in the EU? How should it be governed and in which framework should it be implemented?

Which governance, and for which democratic legitimacy?

According to Alicia Hinarejos, the greatest obstacle towards a fiscal union, in Europe, is political (not technical or economic) in nature. It is a political obstacle in the sense that, firstly, there is presently no desire amongst the governments of the member states to achieve it and, secondly, because such a move would inevitably raise the question of democratic legitimacy.

To renew the Economic and Monetary Union, and give it a true substance, trying to put the ‘E’ into EMU – in the words of Jean-Claude Trichet in May 2010 – would best be done through a revision of the treaties. A revision agreed upon by all Member States, and ratified by all national parliaments, would probably possess the strongest mandate. Having said this, it would also be the most difficult to achieve. Aside from treaty revisions, the European Commission has allowed for developments in fiscal integration. For example, the Commission has been working on introducing a Common Consolidated Corporate Tax Base (CCCTB) since March 2011. The issue with the CCCTB is whether it can be justified on the grounds of being democratic.

Many European federalists take the United States of America as a model to follow. That is, compared to the current state of affairs in the EU, enhanced taxation power, ex-ante fiscal integration and budgetary transfers. But, crucially, this is only achieved because of the principle of ‘representation against taxation’. In the EU, though the European Parliament has been directly elected since 1979, its budgetary powers are limited. In addition to this, the informal bicameralism between the Parliament and Council (as co-legislators) is much more asymmetrical than the US Congress.

This ambiguity has been addressed by national Constitutional Courts, particularly the German one. First, in the Maastricht decision (BVG, 1993:18), it emphasised the principle of ‘no taxation without representation’. More importantly, it affirmed that such democratic representation could only be found, at present, within the national member state. Its decision on the Lisbon Treaty goes in the same direction. However, it does not close the path towards fiscal integration in the EU; rather, it contends that it must be accompanied by representative democracy at the same level. On the same note, it must be said that the BVG decision operates upon a distinction between the concepts of democratic deficit and legitimacy. Surely, fiscal integration (decided and implemented by the European Commission) would be democratically deficient. However, assuming that it were done in a wholly transparent manner and respond to pertinent economic needs (e.g. tackling abusive dumping), it would not be inherently illegitimate.

From these elements, one could set forth two elements to overcome the political barriers preventing the establishment of a fiscal union in Europe. Firstly, it would need to be democratically decided and implemented. Secondly, it would need to be efficient in order to be legitimate.

For flexible integration in a multi-speed Europe

A multi-speed Europe, whilst unthinkable ten years ago in the minds of federalists, today seems to be the reality – or at least, the pragmatic view. For example, Enrico Letta argued in 2015 in a lecture in Oxford in favour of this, in order to ‘avoid Brexit and save Europe’. [1]

When it comes to fiscal integration, it is also crucial to distinguish between the EU28 and the Eurozone. One of the goals of fiscal integration is to prevent, or at least to reduce the impact of, asymmetric shocks. In this view, one could imagine an EU28 retaining the core values expressed in the treaties, and an EU19 which would pursue much deeper integration – perhaps breaking with the spirit of Maastricht which made the adoption of the euro inevitable. Confidence from the part of investors, that the Eurozone is stable and resilient, is key. For instance, Paul de Grauwe has shown how the simple announcement of the OMT programme, by Mario Draghi, has had impressive results. Indeed, the impact of its announcement was arguably more significant than its actual implementation. [2] Importantly, fiscal integration would mean better foreseeability, as taxation rates should be harder to modify and less affected by changes in national governments following legislative elections.

A claim may be brought regarding the potential legal approximation of certain laws that would apply to Eurozone members only, and not to other Member States. But the ruling of the ECJ in Pringle vs. Government of Ireland (2012) affirmed the legality of the ESM Treaty, an international organisation under public international law, composed of the Eurozone member States. Similarly, to avoid the rule of unanimity voting, these States could explore the opportunities offered by enhanced cooperation. An example of this would be the attempt to introduce an EU financial transaction tax (FTT). While it has failed to gain unanimous support, it could still be approved in the framework of enhanced cooperation between eleven Member States.

The issue of establishing an integrated taxation policy, with specific rates for each sector, has divided federalists. While some would encourage a fixed common rate for everyone, others would prefer a more flexible approach. This debate illustrates the contradictory forces that operate within the federalist camp. A range, with a minimum and a maximum, rather than a fixed amount, could be envisaged.

Similarly, certain sectors (such as corporate taxation to avoid dumping and competition towards the lowest bidder) would benefit from more integration. Having said this, others (such as the housing market) would not benefit as the national dynamics are too diverse (e.g. most people in the UK own their house, and it is the total opposite in Germany). It would allow for progressive convergence, whilst taking into consideration national differences. This point is worth remembering: The Treaty of Rome used the terms ‘convergence’ (Art. 27) and ‘coordination’ (Art. 54). A complete fiscal integration, sometimes in an almost dogmatic way, is not exactly what the treaties aimed at; it could result in perverse effects which I shall now address.

It will never be enough: the perverse effects of too much integration

Many federalists subscribe to a neo-functionalist view of European politics: namely, spillover effects stimulate integration from one sector to another, as Lindberg wrote in 1963. In other words, a more or less limited fiscal integration will never be enough. Marzinotto, Sapir and Guntram Wolff, for example, in 2011 called for the EU to have its own fiscal resources. Such resources could be redistributed to stabilise the Eurozone and help individual states – with a somehow obscure argument on how to avoid violating Art. 125(1) of TFEU and the ‘no-bailout clause’.

This financial stabilisation, according to federalists, cannot occur unless accompanied by proper fiscal instruments through which to implement it. Indeed, federalists argue that the supranational level should have the capacity to dispense and raise its own revenues. It is at this point that fiscal integration becomes interwoven with tax raising powers. It is unclear whether it would take the form of member states being obliged to increase their transfers or, alternatively, a direct EU tax on EU citizens. In both cases, an amendment of the existing treaties seems unavoidable.

Crucially, such an extensive fiscal integration, within a remodelled EMU, cannot be considered alone as it has broader political and structural consequences.

On the one hand, it is to be expected that member states would adjust their political economic strategies in reaction to fiscal moves at the EU level. For a country like France, with high taxation rates, it would certainly imply a decrease in certain taxes, therefore a decrease in State revenues, which would necessarily lead to a redefinition of its redistribution model. On the other hand, for a country with low taxation like Ireland, any increased amount would translate into a draining of purchasing power and a loss of competitiveness and attractiveness for investors, which would alter its economic equilibrium.

The moves, since 2010, towards greater fiscal integration have, in substance, been largely based on what F. Nicoli calls the ‘IMF model’: financial help in exchange for structural reforms. The example of Greece in 2015 is quite striking. Conditionality here implies a transfer of sovereignty to the EU level, which was never stated in the treaties. Paradoxically, closer fiscal integration (according to the federalist vision) would also imply net transfers between States; and, to a certain extent, less incentives for budgetary orthodoxy as there would be the assurances of foreign financial help.

Urging the states of America to form a fiscal union, A. Hamilton argued, in 1790, that it would contribute ‘in an eminent degree to an orderly, stable and satisfactory arrangement of the Union’s finances’. In the European case, it could just be the reverse. Perhaps the issue ought to be tackled upside down: first, ensure that national economies converge; second, create a fiscal union; not vice-versa.

Conclusion

In conclusion, to achieve fiscal integration in the EU, integration must be based on both legitimate actions and democratic legitimacy. Realistically, it is more likely to happen within the framework of a multi-speed Europe, and with a high degree of flexibility in its implementation. Not only is this more realistic, but it is also desirable: too much integration risks transforming the EMU into a perverse entity. To a certain extent, the issue of forming a fiscal union is probably illustrative of the future existential issue the EU will have to face: finding the right equilibrium between necessary integration and the danger of overriding its role.

Footnotes

[1] http://www.amblondra.esteri.it/ambasciata_londra/it/ambasciata/ufficio-stampa/news/2015/11/enrico-letta-gives-talk-on-a-multi.html).

[2] De Grauwe, P., & Y. Ji (2013). “Panic-driven austerity in the Eurozone and its implications”, Vox EU, Paper on voxeu.org, 21 February 2013

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