Having created the institutions necessary for running the monetary union, Europe now needs adequate institutions able to manage the requisite budget increase, mainly to be funded by its own resources. However, there are major institutional differences between the two processes.
Monetary Power
In a federal system, responsibility for currency is held solely at central level: a single centre must have the right to issue currency and to regulate its quantity. In federal systems such as the United States and Switzerland, a central institution holds this monopoly but it includes representatives of the lower level of government: the Federal Reserve System and the Swiss National Bank. Before the advent of the Euro there was a similar institution in the Federal Republic of Germany: the Bundesbank.
Characteristic of these monetary institutions is the composition of the governing bodies. In the case of the US, the Board (of 7 members) is appointed by the President (after consultation with the Senate) but its members have a very long mandate to ensure that they make decisions independently of the incumbent President who can appoint its majority only in special circumstances1. Reinforcing this independence is also the composition of the Open Market Committee which is responsible for approving purchases of securities on the market, thereby determining the level of interest rates. In addition to the 7 Federal Board members, on this “Committee” 6 other members are selected in rotation from the 12 Reserve Banks (although the Federal Reserve Bank (Fed) of New York, which intervenes on the foreign exchange market, is always present). An important relationship also exists between the Fed and Congress, to which the Federal Reserve Bank must regularly report. The European Central Bank has a similar structure where, alongside the 7 members of the Steering Committee appointed by the Council (after consulting the European Parliament), the governors of the central banks of Euro area countries participate in the meetings of the European System of Central Banks (ESCB).
In a federal system, currency is the responsibility of the central level, but the body responsible for its management has a federal nature.
Fiscal Power
In a federal system, fiscal power is shared – at least as regards matters of constitutional importance: in the United States, it is shared at federal and state levels. In a national system, fiscal power can be devolved to local levels (regions, municipalities), but on the decision of the central state which can always modify its criteria. In the federal systems, each level of constitutional relevance must have its own fiscal powers, not just “devolved” from the higher level.
The European Union is now facing this difficult transition: the current system is, in practice, a reverse “devolution” from state level to European level, which occurs by adopting a multiyear financial programme that requires a “unanimous” decision by the Member States, which therefore have the power to determine the quantity of resources that can flow into the common EU budget.
The shares of fiscal resources due to Europe can be defined in three ways:
- the one currently in use, in which the share for Europe is decidedly unanimously by the Member States
- the provision in the “fundamental law” (Treaty or Constitution) of the share due to Europe
- the setting of the share by the federal bodies (Commission, Parliament and Council), with decisions taken by a qualified majority.
Establishing the “share” in the “fundamental law” makes the system rigid, unable to quickly adjust (a constitutional amendment is required) to the changing economic and social situation which may, in time, require giving more resources to the federal budget – owing to common needs emerging – or to the national budgets for exceptional economic situations.
The Procedure for Federal Bodies to Set the Share
If there are no limits to the power of the federal institutions to raise their share, this could result in growing centralisation which would be to the detriment of the lower levels, even when certain expenses would be more efficiently managed by the nation states or even by regions and municipalities. This trend has taken hold in the United States, increasing the proportion of the federal budget in the last century from 2.5% to 20% of GDP, reducing the share of state budgets to 10%. In some respects, particularly as regards the evolution of the budget, it can be said that the US has now become more a centralised nation than a true federal system. In Europe it is necessary to establish a system able to avoid “forced centralisation”, but without remaining with the current system blocked by the veto power of the Member States. During the debate at the first term of the elected European Parliament which culminated in the approval of the Spinelli project in 1984, Mario Albertini set out a procedure that could reconcile the two previously mentioned requirements2.
The decision on the proportion of fiscal power that can be acquired by the EU should provide, in place of the current multiyear financial programme:
- a proposal from the newly elected Commission at the outset of each “term of office” that takes account of the debate before the European election on the priorities for action, as well as of the discussion that took place during the vote of investiture by the European Parliament
- the evaluation of the proposal by a “Fiscal Conference” consisting of representatives of the European Parliament (one-third) and the national Parliaments (two-thirds) with qualified majority voting
- final approval from the European Parliament and the Council, again by qualified majority.
The Commission’s proposal should indicate the new common policies expected to be financed, the savings possible at national level from the resultant economies of scale, the resources acquirable from own taxes and those jointly managed with the Member States. The system would, in practice, introduce a simplified constitutional procedure guaranteed by the “Fiscal Conference”. An early indication of the validity of the procedure proposed can be found in the Fiscal Compact Treaty that introduces, in Article 13, a European/national parliamentary conference.
Translated by Roger Gibson
1 A case in point is when President Reagan was able to appoint the majority.
2 Il Federalista, XXIII, 1981, No 2, p. 115