The goal of this workshop is to focus on the weak compliance of Member States with the rules and the lack of effective mechanism for their enforcement. It follows that the main interest will be absorbed by a discussion of how the economic governance could work more effectively. This idea implies that the current system, largely based on automatic rules fixed at the European level and applied uniformly in all the countries showing high deficit or a big amount of debt, is considered as adequate and effective and only needy of some reforms. I will try to support the opposite idea that the eurozone cannot limit itself to redressing financial stability through austerity measures, disregarding discretional political choices that take into account different social and economic conditions, and that it must promote an increase in the size of the budget funded with real own resources to finance the production of European public goods - in primis, control of external borders, migrants integration and security – and to guarantee the issuing of eurobonds, supplementing the provisions of the Juncker Plan in building material and immaterial infrastructures, in supporting small and medium size enterprises and in promoting research and higher education. Hence, the system should be changed radically if the Economic and Monetary Union should work efficiently and I will put main emphasis on the need to advance rapidly on the path towards a true Fiscal Union, leading, at the end of the process, to a Political Union with a federal structure.
1. I will start my comments with a quotation by a paper of Prof. Fabbrini[1] of Tilburg University: “the Fiscal Compact systematically enhances the powers of the EU institutions to direct and police the budgetary policies of the states, thus increasing centralization in the EU architecture of economic governance. This development contrasts with the federal experience of the United States (US). In fact, it appears that while most US states are also endowed with “golden rules” in their constitutions, the federal government never played a role in the adoption of these balanced budget rules and still today is barred from interfering with the budgetary processes of the states”.
According to this remark, an unexpected paradox emerges in the institutional architecture of the EU. When the crisis exploded in 2008, the eurozone governments rejected a US-like federal model as being too centralized for the EU, but they have ended up establishing a regime that is much less respectful of state sovereignty than the US federal system. The reason of this apparent paradox is simple. In the United States the federal government is endowed, in the areas where it has a competence, with an effective capacity of taking decisions, that are approved by the Congress and the Senate, where Member States are represented. Hence, a federal decision is founded upon a democratic process and could be enforced reasonably on Member States. But they keep their sovereignty where the competence is not attributed to the federal level, that cannot interfere with the exercise of Member States in the management of their policy decisions.
Within the eurozone, by relying on the strict and detailed balanced-budget rules mandated by the Fiscal Compact, the Commission will not only control the compliance with the constraints of the Stability Pact, but will be as well able to implement a more pervasive ex ante scrutiny on the sustainability and appropriateness of the draft budget bills which the governments submit for approval during the European Semester. In the end, it emerges that the Fiscal Compact, with its balanced-budget requirement, adds another stone to the path of increasing centralization in the EU, but without the guarantees through appropriate “checks and balances” of a fully-fledged federal structure. In this sense, it must be critically underlined that these developments do not fully involve the European Parliament, which does not play a central role in this new structure of the Eurozone, weakening the legitimacy of the transfer of growing slices of decision-making to the EU level.
The conclusion that I draw from these remarks is straightforward: from one side, the economic crisis has shown the lack of an effective decision power at the European level. The only timely and effective measures to promote the recovery of the eurozone economy have been implemented by the ECB, that is a federal institution; in all the other cases, the decisions have been taken by the Council only after a lengthy process, with larger costs and less effectiveness. But, at the same time, the fiscal sovereignty of Member States in defining their budget priorities has been largely limited during the European Semester procedure and by the rules of the Fiscal Compact. While EU’s governments have systematically discarded calls in favour of a federal arrangement for the EMU as being disrespectful of State sovereignty, they have established a regime for Eurozone governance that sacrifices State sovereignty much more than would have been permitted in a federal system.
If one wants to join efficiency and democracy in the field of European economic policy, the receipt follows simply: less binding and automatic rules, and more effective discretional decision power at the European level - including the power to enforce the decisions once they have been taken. But the decision process should be radically changed, recognizing the role of the Commission as the effective government of the eurozone and including not only the Ministers of the governments of Member States within a Council where majority vote is the general rule, but also the European Parliament; whereas, less interference should be guaranteed in national decision-making process in the areas where the competence is left to the Member States according to the subsidiarity principle. This evolution in the economic and monetary field will imply a decisive step forward towards a federal system, less centralised than the current one, but at the same time more efficient and democratic.
2. During the recent years the reform of the governance of the Economic and Monetary Union has been the object of important contributions by the Presidents of the European institutions. In the last Report signed by the five Presidents[2] the direction of travel is clear: “for the euro area to gradually evolve towards a genuine Economic and Monetary Union, it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions, most of which already exists and can progressively fulfil the task”. But this evolution regards the future, since in Stage 1 this document only envisages, as a move towards a Fiscal Union, the creation of an Advisory Fiscal Board and, in Stage 2, a vague stabilisation mechanism to cushion macroeconomic shocks.
A previous Report of the Presidents[3] included an important paragraph titled “Towards a fiscal capacity for the EMU” in which, after having noted that “while the degree of centralisation of budgetary instruments and the arrangements for fiscal solidarity against adverse shocks differ, all other currency unions are endowed with a central fiscal capacity. In this respect, the European Council in October 2012 asked to explore further mechanisms, including an appropriate fiscal capacity, for the euro area. It would support new functions which are not covered by the multi-annual financial framework from which it is clearly separated”.
This is the right way to follow. The basic idea underlying the Five Presidents’ Report is that, in the short run, the recovery of the euro area only requires a more efficient coordination of national economic policies, with a stronger focus on employment and social performance (that is naturally highly desirable). Since, according to their view, euro area governance is already well established for the coordination and surveillance of fiscal policies – this seems a bit of wishful thinking! -, the next step should be limited to the creation of a euro area system of Competitiveness Authority.
The Report follows the basic philosophy of rigid austerity that underlay the ruling of the EMU following the crisis and caused so many damages to the eurozone economies[4]. On the contrary, it must be recognized that “the fact that while monetary policy is fully centralized, the other instruments of economic policies have remained firmly in the hands of the national governments. This is a serious design failure of the eurozone. Ideally, countries should hand over sovereignty over the use of these instruments to European institutions. However, the willingness to take such a drastic step towards political union is completely absent”[5]. While I share the idea that some instruments of economic policy, particularly in the field of fiscal policy, should be attributed to the European level, I will try to show that the dramatic conditions of the Union confronted with terrorism, inflow of millions of migrants and political disorder in the Mediterranean area provide an opportunity to recognize a fiscal power, and particularly a power to manage own resources, to the eurozone.
3. In a recent article[6] Kirkegaard and Philippon estimate that, if Europe wants to guarantee the security of the Union’s external borders and to integrate the immigrants and refugees received by the Member States, the costs of doing so will considerably exceed the resources available in the European budget. Their estimate is that €20 billion euro is needed for border security and between 10 and 20,000 euro per-capita to integrate the new immigrants, for a total amount of about €40 billion. Just in border control the United States spends $32 billion, while Europe’s financing of Frontex only accounts for €143 million (out of a total budget of €140 billion).
To deal with the migrant emergency, Kirkegaard and Philippon propose issuing Security and Mobility Bonds (SMB), recalling that, in the United States, Alexander Hamilton was able to mutualise the debts emerging from the War of Independence precisely because those debts were considered the consequence of a common fight. Similarly, the management of the current immigration problem should be increasingly seen as a common-interest issue for all Europeans.
Along the same lines Lucrezia Reichlin, remarking that no country is able to cope with the problem of immigration and security without violating the rules of the Stability Pact, suggests that “not only is desirable, but also unavoidable, to take a different path and to increase the expenditure capacity of the Union by issuing federal debt”[7]. In a Comment published by the Center for Studies on Federalism I largely agreed with Reichlin’s suggestion, but I also remarked that, while it seems totally acceptable to issue Eurobonds to finance investment expenditures whose nature is multi-annual, “a residual part of the expenditures to manage the inflow of migrants and to guarantee security against terrorism has the characteristics of current expenditure and must be funded through the levy of fiscal resources”[8].
In this context, the stance taken by the German Finance Minister Wolfgang Schäuble is particularly significant, stating that “if the national budget or the European budget is not sufficient, then we all could agree to implement, for instance, a tax per litre of car fuel in order to get the financial means to deal with the refugees crisis”[9]. This statement is important since it links the creation of new own resources, and the strengthening of the European budget, to an issue that risks creating deep divisions within the Union, limiting the free movement of people guaranteed by the Schengen Treaty, an aspect of great importance to European public opinion, particularly after the recent wave of terrorist attacks. But this proposal could realistically be accepted by the eurozone governments?
4. On December 12, 2015 the 21st yearly session of the Conference of the Parties (COP21) of the United Nations Framework Convention on Climate Changes closed in Paris. The title of a Comment by Roberto Palea published by the Centre for Studies on Federalism seems a particularly appropriate evaluation of the results: “Ambitious goals, inadequate instruments”[10]: not only is the Green Climate Fund short of financial resources, but there are no sanctions for countries that fail to comply with the commitments taken.
There is a point at which the issue of climate changes interlinks with providing funds to manage immigration and external security in Europe. It is becoming increasingly clear that the EU’s method to control climate changes, the system of the tradable emission allowances (Emission Trading System – ETS), must be complemented by a carbon tax. The ETS efficiently guarantees the control of 45% of the emissions coming from power plants and energy-intensive industries. But the system does not include the other 55% of emissions, generated by the domestic sector, transport, agriculture and small-medium size enterprises. Furthermore, over time the emission allowance price has decreased and is now less than €6.
The carbon tax should be levied on all the sectors not included in the ETS, with the instruments of tax assessment used for the excises on fossil fuels and should be collected in proportion to the carbon content of different energy sources. In short, if it is assisted by a compensatory import duty at the border on goods coming from countries where no price is put on carbon content, it acts as a proxy for a tax on the consumption of carbon.
If a moderate tax rate is fixed, such as the €20 per tonne of carbon dioxide included in the Commission’s proposal of 13 April 2011, the tax will amount to €6 per barrel of oil and € 0.0377 per litre of car fuel. Eurostat’s estimate is that, in 2014, CO2 emissions amounted to 3,184 million tonnes. 55% of these emissions, that is 1,751 million tonnes, come from the sectors not included in the ETS, which could be subject to the carbon tax. Even with such a moderate tax rate as this (the 1992 proposal by the Commission was for a rate of $10 per barrel of oil which, at the current exchange rate, is about €9, equal to 1.5 times the rate considered here), a revenue of up to €35 billion could be collected (not including the amount of compensatory duties levied on imports).
5. The idea proposed by Schäuble of a tax on car fuel to finance immigration control and the management of security measures can then be integrated, choosing as a taxable basis the carbon content of fossil fuels in the sectors not included in the ETS and thereby providing the additional resources needed for the European budget. These new own resources could give the EU the possibility to increase the financial means of the Juncker Plan through the issuing of eurobonds, guaranteed by the increased size of the European budget. At the same time, the introduction of a carbon tax will help achieve the ambitious objectives in reducing CO2 emissions set out in the conclusions of the COP21 held in Paris.
Recently, an inter-institutional Commission chaired by Italian Senator Mario Monti has been asked to propose a reform of the structure of financing the European budget. Considering the constraints imposed by the Treaties against creating new own resources, this is a difficult task. But if in the current dramatic conditions the European governments were able to catch the opportunity offered by the Schäuble proposal and the budget were funded to a significant extent through own resources, especially by a carbon tax, this will leave the way open to completing the Fiscal Union and, in the longer term, a Political Union with federal institutions.
6. An important contribution to the debate following the Five President Report has been proposed by Andrew Duff[11]. I shall keep up only some points of his proposal, that are relevant for supporting the views I have expressed in this contribution. Duff starts from the remark that the Treaties confer on the EU the competence to coordinate national economic policy, but not to formulate and implement a common European economic policy, even for the eurozone. This void has been filled with a lot of prescriptions, much of them ineffective, that have increased the degree of centralisation within the Union. Since a complete revision of the Treaty of Lisbon is difficult to conceive given the current political atmosphere, Duff realistically suggests a new eurozone Treaty, taking the form of a Protocol to be added onto the existing Treaties, called the Protocol of Frankfurt.
“The main purpose of the Protocol of Frankfurt is to establish a credible and discernible economic government for the eurozone. It will pool executive authority in the Commission, giving it a Treasury[12], and endowing it with the latitude to shape the fiscal stance of the EU and to steer the direction of its economic policy (…). The new arrangements will enable the eurozone to create its own fiscal capacity. Revenue will be raised from new ‘genuine’ own resources (…). A eurozone budget of roughly the same size as the current EU budget (about 1% of GDP) would give the Commission over time the capacity to intervene meaningfully to support counter-cyclical adjustments, for instance through the instrument of a common unemployment insurance scheme. The budget would also be used for investment in large-scale European public goods with real European added value, for example in the field of R&D, energy infrastructure or security measures”.
In the Protocol there are a lot of other important suggestions regarding the governance of the euro area, that are at the same time ambitious and realistic. Jean Monnet thought that only when the European governments are obliged to cope with a dramatic problem they are unable to solve at the national level, it is likely that they could be ready to accept giving up some more slices of their sovereignty. According to this view, it follows that today it seems possible to change the institutional set-up in Europe since the Union faces a bundle of political problems that appear more and more difficult to deal with and risk to put in danger some very important pillars of the Union like the Treaty of Schengen. Then, combining the idea put forward by Schäuble for financing the measures needed to control migrations and to provide security measures with the institutional proposals advanced by Duff it will be possible to start a new phase of the process, aiming at completing the Fiscal Union, promoting economic recovery and the absorption of unemployment and, having restored the confidence of the European citizens, opening the path driving towards an effective Political Union with federal structure in the eurozone within the larger European Union. “Only a genuine and democratic refounding of the eurozone, designed to encourage growth and employment, arrayed around a small core of countries willing to lead by example and develop their own new political institutions, will be sufficient to counter the hateful nationalistic impulses that now threaten all Europe”[13].
* This lecture was given in the Workshop “Economic governance: how to make it work? What next beyond the Five Presidents’ Report?” – organized by the European Policy Center, Brussels, 17 February 2016
Translated by Lionello Casalegno
[1] F. Fabbrini, The fiscal compact, the “Golden Rule”, and the Paradox of European Federalism, Tilburg Law School Legal Studies Research Paper Series No, 013/2013
[2] The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union, Brussels, 22 June 2015
[3] Towards a Genuine Economic and Monetary Union, Brussels, 5 December 2012
[4] P. De Grauwe, The Legacy of Austerity in the Eurozone, CEPS Commentary, 4 October 2013
[5] P. De Grauwe, The Governance of a Fragile Eurozone, “Australian Economic Review”, 2012
[6] J. Kirkegaard- T. Philippon, How to Pay for Europe’s Border Control, Bloomberg View, Nov. 18, 2015
[7] L. Reichlin, Un’Europa più stabile è possibile, “Corriere della sera”, 28 novembre 2015
[8] A. Majocchi, La via maestra per un bilancio dell’Eurozona, Centro Studi sul Federalismo, 9 dicembre 2015
[9] W. Schäuble, Die Rückkehr sollte die Normalfall sein, “Süddeutsche Zeitung”, 15 Januar 2016
[10] R. Palea, L’accordo sul clima di Parigi: obiettivi ambiziosi, strumenti inadeguati”, Commento, Centro Studi sul Federalismo, 7 gennaio 2016
[11] A. Duff, The Protocol of Frankfurt: a new treaty for the eurozone, EPC, Brussels, 12 January 2016
[12] In the Duff’s proposal the Treasury should be responsible for shaping a common economic policy, managing a budget funded with adequate own resources. These characteristics cannot be found in many current proposals that are limited to the creation of a new institution without specifying what are the goals to be pursued and the instruments that are available for the Treasury
[13] T. Piketty, A New Deal for Europe, “The New York Review of Books”, February 25, 2016