FISCAL UNION

Federalists believe that the Euro-crisis and the financial and economic crisis have shown that, in the long run, a monetary union can’t survive if member states maintain fully independent economic policies (with independent power to tax and spend) whilst at the same time the European level does not have its own independent power to raise and use sufficient financial resources for economic policy making. The Eurozone needs to complement the monetary union with a fiscal union that: (1) coordinates and integrates the economic policy decisions of member states in a way to prevent excessive divergences, and (2) gives the European level the power to raise financial resources to assist member states in difficulty, fund economic projects of pan-European interest and in general promote macro-economic stabilization and growth.

1) Economic Policy Coordination, significant progress has been made in the past few years through the Growth and Stability Pack, the Fiscal Compact, the European Stability Mechanism and the packages of legislation knows as Six-Pack and Two-Pack. A framework has been established for member states to report their economic plans to the European Commission, to coordinate member states’ medium-term budgetary objectives and to address excessive economic imbalances in a pre-emptivive fashion. However, significant question-marks remain on the capacity of members to abide with such rules, and on the ability of the European Union to effectively enforce such rules, when one or more member states are faced with economic or financial shocks or at times of prolonged economic slowdown. Federalists believe that such weaknesses of the system should be addressed in the coming years through a combination of greater power of direct enforcement for the European Commission (including binding powers to request revision of member states budgets) and the creation of solidarity mechanisms among member states.

2) European Fiscal Capacity. Today, the European Union has very limited fiscal powers. On the revenues side, the European Union has a role in deciding the level of VAT (consumption taxes) and tariffs on external trade, but has no authority to raise its own taxes. Most of its income is provided through contributions by the member states. On the spending side, a heated debate periodically occurs on the European Union budget, but its size, composition and available mechanisms are such that it has little macro-economic impact in times of financial difficulties. At the same time, the Eurozone has neither its own revenues nor its own spending capacity.

The European Union, and the Eurozone, via an additional Eurozone budget for Eurozone related matters, should have the power to raise own financial resources through

– general taxation (particularly in areas of cross-border activity and/or shifting certain types of taxation from the national to the European level) and
– the issuance of debt in the capital markets (guaranteed not by the member states, but by the European budget and revenues).


The resources could then be used:

(1) to intervene in the European economy funding projects that are of pan-European interest and that foster the further development of the single market and long-term competitiveness of the European economy (such as pan-European transport networks, pan-European energy networks, pan-European telecommunication and digital networks, research and development in new technologies );

(2) provide financial assistance to member states at times of economic difficulties (particularly in case of asymmetric financial or economic shocks affecting only certain member states) and when member states are seeking to implement structural measures to reform their economies and
   
(3) work as a financial backstop for the banking union, and particularly for the bank resolution mechanism.

Decisions on both the revenues and the spending side of such a restructured European budget should be taken annually, with the relevant decisions taken by the majority of the member states and in the European Parliament in all matters.

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