Would the European Union benefit from a supranational fiscal policy?


Academic Paper, 2017
16 Pages, Grade: 1,3

Excerpt

Table of Content

1. Introduction

2. The monetarism of the EU

3. Next step to a further integration in the EU: Common fiscal policies?
3.1 Fiscal union

4. Discussion and summary

Bibliography

Online Literature

Abstract

At least since the financial crisis, the European Union (EU) discusses about the introduction of common fiscal policies. A fiscal union, seen as a deeper integration of EU politics and economy, would have many advantages. Those would for example include a fairer distribution of funds, protection against macroeconomic shocks and the introduction of a concrete legal regulation for current supportive flows of money from the wealthy to the poorer states of the EU. However, there are also arguments against the fiscal union, among other things the possibility of moral hazard, as well as the fear of losing sovereignty to the EU and the distance between the citizens and the EU institutions due to lack of communication. It would have to be communicated to the citizens that a fiscal union, leading to a larger budget, would enable the EU to work more efficient and deal with its current problems.

Zusammenfassung

Spätestens seit der Finanzkrise wird in der Europäischen Union (EU) über die Einführung einer gemeinsamen Fiskalpolitik diskutiert. Eine Fiskalunion und somit eine weitervertiefende Integration der EU Politik und Wirtschaft hätte viele Vorteile, wie z.B. eine gerechtere Verteilung der Gelder, eine Absicherung gegen makroökonomische Schocks, sowie die Einführung einer konkreten legalen Regelung der derzeitigen unterstützenden Geldströme von den wohlhabenden zu den ärmeren Staaten der EU. Andererseits sprechen dagegen unter anderem das Problem des Moral Hazard, die Angst vor Souveränitätsaufgabe, sowie die Distanz zwischen den Bürgern und den EU Institutionen. Diesen müsste vermittelt werden, dass eine Fiskalunion und ein größeres EU-Budget eine effizientere Zusammenarbeit der EU Mitgliedsstaaten vorantreiben würden und somit derzeitige Probleme besser bewältigt werden könnten.

1. Introduction

The European Union (EU) was established to promote peace, political stability, security and the well-being of its people.1

At least since the financial crises there is the discussion about the introduction of common fiscal policies in the EU. To understand the idea of a fiscal union it will be examined thoroughly in the following:

2. The monetarism of the EU

Early the politicians saw the benefits in a common budget. The idea of started in 1951 with a modest budget for the European Coal and Steel Community of six countries.2 In 1970 the project was put into concrete terms in the "Werner Plan" :3 a European Monetary Union should be realized by 1980. Later for this purpose, the European Currency Unit (ECU) was created - a clearing unit and precursor of the Euro.

Nowadays the Economic and Monetary Unions aims at converging the economies of all member states of the EU at three stages. Each stage means progressively closer economic integration. Only once a member state has met the so called “convergence criteria” and entered the third stage, it can adopt the Euro as its official currency.4 Whilst all EU member states participate in the economic union, only 19 hold the Euro as its official currency.5 Six other european countries6 are yet to fulfill the convergence criteria in order to join the Eurozone. Only Sweden has another arrangement and Denmark and the United Kingdom are granted de jure opt-outs and. They can choose to enter the Eurozone but are not obliged to by law. The converge criteria include, in particular, the stability of public budgets, the price level, the exchange rates with other EU countries and the long-term nominal interest rate. The 28 EU countries have so far implemented the EMU agreement to varying degrees. Problematically, almost no country has consistently adhered to the EU convergence criteria for sovereign debt in the past.

Within the framework of the Euro Group, the states of the Eurozone coordinate their tax and economic policies independent and without a formal decision-making authority.

The EU budget (of around 150 million € every year) represents about 1% of EU gross national income and 2% of public expenditure.7 The EU has some own income resources, which come “from taxes on the remuneration of staff, fines in the area of competition and default interest"8. But it is mainly financed by member states' contributions according to national income, plus customs duties at the external borders and a small share of value-added tax - but there is no EU tax.9

In a democratic process, the budget is adopted every year, taking into account the limitation of the long-term budget. It must always be balanced. Thus, there cannot be a deficit in the EU budget and no debts are formed. It can only be spend, which actually exists.10 The draft of the budget is made by the European Commission. The governments of the member states - represented in the Council of the EU - and the directly elected European Parliament can then adopt this proposal and set the next year's budget.11

The budget is spent mainly on the funding of research and innovation, the promotion of trans- european transport, energy and communication networks, as well as the mobility of citizens, the support of the agricultural sector, measures against climate change and environmental protection or humanitarian aid.12

3. Next step to a further integration in the EU: Common fiscal policies?

Already in 1991, Helmut Kohl claimed that a political union was the indispensable counterpart to the economic and monetary union of the EU.13

Today many politicians see the introduction of a common fiscal policy as the next step of integration in the EU.14 The requirement of a modification of the EU financial system was brought up again after the breakdown of the US finance system in 2008. After that, the members of the EU summit debt crisis talk in Brussel, decided in December 2011 to transform the EMU into a fiscal union.15 This plan was, however, never put into action due to the consequences of the worldwide financial and bank crisis.

In the following the idea of the EU fiscal union, as well as its advantages and disadvantages will be explained in detail more.

3.1 Fiscal union

The transformation of the EU into a fiscal union (as it is currently planned) would have the following consequences:16

1. With a common EU budget there would be a significant increase of the amount of money to be spend by the EU and therefore more possibilities to invest it. The financial transaction tax is envisaged to not only enrich the budget, but to benefit the financial market by bearing the cost of the tax bureaucracy.

The EU tax would be independent of national taxes. Therefore, it may relieve and/ or abolish certain national taxes. There would be a separate generalized base for the EU tax.

2. The fiscal union would need common fiscal rules and a general fiscal policy. The european fiscal union is based on a centralist idea of the state.17 It would be decided according to democratic rules on taxes, charges and public expenditure.18

A supranational directed regulatory policy would strengthen the principle of responsibility and liability. The five presidents report19 of 2015 proposed to create an independent institution, a Fiscal Committee, composed by independent experts, which would oversee the countries tax revenues and budgets, as well as their use.20 Furthermore, one would need a Minister of Finance with a wide range of intervention rights.

But above all, rules are needed, which prescribe proper budget management with legally binding limits for each country and automatisms correlating with their violation. Each country should submit its own budget for scrutiny and approval to an EU fiscal ministry. Only when the EU has approved it, it may come to a monetary transfer.

3. Another plan is to create a crisis intervention mechanism, which would increase the adaptability to asymmetric shocks. Thinking of the monetary and economic policy it also seems logic to avoid the build-up or compatible reduction of internal imbalances.

In addition to the compensation of money from richer to poorer countries, there are various ideas and plans for the use of the fiscal revenue from the EU tax: On the one hand, community projects or the shared public goods could be financed from them, like “the security of the external borders of the EU, cooperation between security authorities, the development of EU-wide transport or digital infrastructure and the operation of licensing authorities, including pharmaceutical products“21.22 Other proposals include the set-up of a joint unemployment insurance23 or the adjustment of common wage policies and a single retirement age.

3.2 Advantages and Disadvantages of the fiscal union

Naturally, the introduction of a common fiscal policy comes with advantages and disadvantages. However, it can be noted that the same aspects its supporters claim as advantages, are deemed excessive risks by its opponents.

Many claim that the EU or at least the EMU will not be sustainable without more fiscal and political integration.24 The incompleteness of the system is seen as a financial and internal political burden that can lead to confrontations and renationalization.25 The fiscal union would be a step towards true political unity in the EU, towards a kind of federal state system.26 In a globalized world, it is important for the EU to be able to keep up - economically and world politically - in terms of power - with the USA and Asia. This can be maintained more easily with a more integrated Europe which has a single voice and joint actions.27 28 The proponents of a fiscal union forecast that in the future many european economies can no longer succeed in the world market. Obviously, the EU can act with a larger budget more cost-effectively and efficiently.

At present, the countries in the monetary union are very independent, but they are also more exposed to systemic macroeconomic shocks.28 Previous debt crises have shown that the current monetary union cannot provide sufficient support for the EU's economic system without some sort of federal structure to oversee revenue collection and expenditure. “Combining supranational monetary policies with national fiscal policies is unsustainable. A fiscal union run by a fully empowered EU finance ministry under proper democratic oversight will give the union strength and stability, mutualizing credit risk while imposing tough fiscal discipline.”29

The so called “no-bailout-clause” (Art. 125 of the Treaty on the Functioning of the European Union), prohibits the union or especially single governments from paying for each other’s debt. The fiscal union would make it possible to share financial risks together.30 Member states would use the tax to protect each other from financial shocks.31 Today economic policy errors are mostly compensated with the help of the EU budget, so that national governments must bear their own economic policy mistakes to a smaller extent.

[...]


1 Cf. EU Haushalt - Bundesministerium der Finanzen (2017); Reflexionspapier über die Zukunft der EU- Finanzen (2017).

2 Belgium, Germany, France, Italy, Luxembourg and the Netherlands.

3 Werner Plan (1970).

4 Cf. Treaty on European Union, Maastricht (1992).

5 Belgium, Germany, Estonia, Finland, France, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovakia, Slovenia, Spain and the Republic of Cyprus.

6 Bulgaria, Croatia, Poland, Rumania, Hungary and the Czech Republic.

7 Cf. EU Haushalt Jahreszahlen.

8 EU Haushalt - Bundesministerium der Finanzen (2017), p. 7.

9 Cf. Reflexionspapier über die Zukunft der EU-Finanzen (2017).

10 Cf. Die Europäische Union erklärt: Haushalt, Europäische Kommission (2014).

11 Cf. Die Europäische Union erklärt: Haushalt, Europäische Kommission (2014).

12 Cf. Reflexionspapier über die Zukunft der EU-Finanzen (2017).

13 Cf. Issing, Otmar, in: Der Euro in stürmischen Zeiten, CFS (2016).

14 Including the french President Emmanuel Macron,14 the german Chancellor Angela Merkel, the president of the EU Parliament Antonio Tajani14 as well as numerous EU finance ministers.

15 Cf. Erklärung der Staats- und Regierungschefs des Euro-Währungsgebiets, Europäischer Rat, Brüssel, 9. Dezember 2011.

16 Cf. DB Research (2013).

17 Cf. Fiskalpolitische Institutionen in der Eurozone Gutachten des Wissenschaftlichen Beirats beim Bundesministerium der Finanzen, Bundesministerium der Finanzen, Januar 2012.

18 Cf. Der Euro in stürmischen Zeiten, CFS (2016).

19 Cf. Fünf Präsidenten Bericht (2015): presented by Jean-Claude Juncker, president of the European Commission, Donald Tusk, president of the euro summit, Jeroen Dijsselbloem, former president of the euro group, Mario Draghi, president of the European Central Bank, and Martin Schulz, former president of the European Parliament.

20 Cf. Fünf Präsidenten Bericht (2015); Matthes, Jürgen/ Sara, Anna/ Busch, Berthold, in: Die Zukunft der Europäischen Währungsunion (2016)

21 Die Fiskalunion ist mehr als eine Versicherung, Frankfurter Rundschau (2017).

22 Cf. Chancen und Risiken einer Fiskalunion, PwC (2013).

23 Cf. EU Haushalt - Bundesministerium der Finanzen (2017); The Euro Area Needs a Fiscal Union, IMFBlog (2018).

24 Cf. Die Zukunft der Europäischen Währungsunion (2016).

25 Cf. Chancen und Risiken einer Fiskalunion, PwC (2013).

26 Comparable to that of the United States of America (USA).

27 Cf. Chancen und Risiken einer Fiskalunion, PwC (2013).

28 Cf. The Euro Area Needs a Fiscal Union, IMFBlog (2018).

29 Debating Europe.eu.

30 Cf. Die Zukunft der Europäischen Währungsunion (2016); The Euro Area Needs a Fiscal Union, IMFBlog (2018).

31 Cf. The Euro Area Needs a Fiscal Union, IMFBlog (2018).

Excerpt out of 16 pages

Details

Title
Would the European Union benefit from a supranational fiscal policy?
College
Zeppelin University Friedrichshafen
Course
Global Society and Integration
Grade
1,3
Author
Year
2017
Pages
16
Catalog Number
V510350
ISBN (eBook)
9783346091390
ISBN (Book)
9783346091406
Language
English
Tags
would, european, union
Quote paper
Charlotte Hüser (Author), 2017, Would the European Union benefit from a supranational fiscal policy?, Munich, GRIN Verlag, https://www.grin.com/document/510350

Comments

  • No comments yet.
Read the ebook
Title: Would the European Union benefit from a supranational fiscal policy?


Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free