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European Economic Government and Fiscal Sovereignty

The European Exit Strategy from Financial Crisis

, by Guido Montani

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The crisis in the Monetary Union is at a crucial turning point. On the 9th May the EU governments created a stabilization facility of 750bn euro in an attempt to avoid financial breakdown in heavily indebted member states but because France and Germany do not agree on the nature of European economic government there is a risk that this decision might turn out to be insufficient.

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The European Parliament, on the other hand, has for quite a time held the common position, recently reasserted by the leaders of the four main parties (People’s Party, Socialists, Liberals and Greens), that the only way to solve the complex problem of the present economic and institutional crisis is by resorting to the “Community Method” (or “federalist method”, according Jean Monnet). In brief, the European Parliament wants the Commission to become the EU’s “economic government”. But President Sarkozy and Chancellor Merkel do not agree. In their view the Council, not the Commission, should be the economic government of the EU.

In order to shed light on this disagreement we must point out that fiscal sovereignty is at stake in this debate: namely, that economic government and fiscal sovereignty are two sides of the same coin.

Fiscal sovereignty

The roots of the present crisis of the EMU go back to the Maastricht Treaty which cautiously instituted the Monetary Union with its own Central Bank while leaving the issue of Economic Union undetermined. In fact the EU budget, i.e. the means at the disposal of the Commission and European Parliament for European policies, is now becoming inadequate, being only 1 per cent of European GDP, while 90 per cent of its revenues come from national budgets. The EU budget therefore is not considered a powerful enough instrument for a European economic policy. This explains why the EU has no economic government.

It can easily be seen that the main cause of the present EMU crisis is the lack of adequate EU financial resources. The ratios between deficit and GNP, on one hand, and total public debt and GNP of the euro zone, on the other, are better than those of the USA. But, because the EU has a fiscal system split into national watertight compartments, international financial speculation was able to hit the weak point: Greece. In comparison, if the USA had no federal budget, but only 50 states’ individual budgets, some of those states would certainly have suffered the same speculative attack.

With reference to this, the President of the ECB, Jean-Claude Trichet, affirmed: “Nous sommes une fédération monetaire. Nous avons maintenant besoin l’équivalent d’une fédération budgetaire” (Le Monde, June 1st). Mr Trichet is right. If the EU were a fiscal federation – with a reform similar to the proposal of Delpa-von Weizsäcker of the Bruegel Centre, i.e. funding the 60 per cent of European member states’ debt, substituted by a Blue Bonds issue – the European financial market could reach a size similar to that of the USA: an alluring prospect for many international investors. Real European own resources are the key to strengthening the euro as a global currency.

EU’s own resources to be assigned to legitimate and autonomous European institutions

Yet Germany strongly opposes this perspective because she does not want a “union of fiscal transfers”. The rough exchanges between the Germans who do not want to pay for Mediterranean spendthrifts and the Greeks who do not want to be judged like robbers are a clear indication that the time has come for a solution able to avoid a revival of nationalism. The right course to follow would be European fiscal federalism, i.e. that the citizens supply each level of government with its “own” fiscal resources. The Monetary Union was founded by transferring monetary powers from the nations to the EU with the creation of the ECB. Fiscal sovereignty is a more complex procedure by which Europeans decide how much to give to EU institutions and how much to keep within the nation state. The fiscal pressure on European citizens should of course remain unchanged. Nevertheless, citizens should be aware that the European Union’s own resources, whatever their size, must be assigned to “legitimate and autonomous” European institutions, i.e. to the Commission answerable to a bicameral parliament (this means co-decision between the European Parliament and the Council). Today, citizens are probably not aware that the EU spends 1 per cent of their income. Transparency in public finance is a crucial step toward European democracy.

If the problem of EU finances is considered from this point of view, any possible quarrel among national governments disappears. European citizens will certainly accept a minimum of fiscal solidarity to finance policies which increase the general wellbeing of all, be they German, Greek or any other EU nationality. European defence is a European public good, and so too is the Galileo satellite system and so on. Everyone can benefit from these services. Nobody is excluded. For this reason, it is necessary to single out, as the European Parliament has done, certain taxes as being especially suitable to European finances. The best and most likely solution would be a mixture of ecological and capital taxes plus a percentage of VAT.

European economic government

The Franco-German proposal to base the economic government on the Council raises many questions. In particular, it would be impossible to avoid a directoire of strong countries. The effects of governance of this kind are already visible. Germany, for example, is imposing financial austerity on all member countries. Such a policy is not wrong in itself. A rebalancing of national budgets is certainly necessary. But it is wrong that one government should impose its policy on the others and also to imagine that this policy is the only one Europe needs. France, for example, rightly remembers that growth is equally necessary. Without growth, austerity policies in some countries (think of Greece) soon becomes unsustainable and leads to social discontent and political riots. Nevertheless, the French stance is barren, since only very modest growth can be achieved in Europe by means of purely national policies. Even great Germany will experience growing difficulties since at least half its exports goes to other European countries. Either the EU must launch an effective plan supported by public opinion – similar to the Commission plan “2020” – or the crisis will worsen.

In order to become a true economic government, the European Commission would not need a huge amount of financial resources. The European Financial Stabilization Facility, just created, is almost half the present Community budget. With a budget of 2-2.5 per cent of EU GDP as proposed by the McDougall Report it is likely that a good distribution between national and European financial resources can be achieved. With an appropriate size of Community budget significant savings for European citizens will become possible, thanks to economies of scale for the provision of basic European public goods, the rationalization of expenses and a reduction in interest rates. Indeed, a Blue Bonds issue could be held at interest rates lower than those of German Bund, because it will become possible to collect capital from a wider geographical area than at present and from global investors who today prefer US Treasury Bonds.

Conclusion

To sum up, we should abandon any idea that Europe can overcome the present crisis with provisional measures such as those proposed by the Council. The Financial Stabilization Facility is not so credible among international investors since it is again based on the potential of national budgets. If, for instance, Italy honours in their entirety her May 9th engagements the Italian public debt could grow from the present 106 per cent to over 120 per cent. The true guarantee for a public debt is rooted in the citizens’ confidence in the public institutions issuing it. Today, a European government would be more credible than national governments acting divisively.

A new European fiscal pact should be agreed.

Devising a European exit strategy is difficult because it involves institutional and political problems. The European Parliament must therefore take on the responsibility of opening a free and wide ranging debate on fiscal sovereignty without taboos. Today, two parallel reforms are on the table: the Community budget reform and a new Growth and Stability Pact. These two reforms must be unified. A new European fiscal pact should be agreed. This will not be easy. Member states’ governments lack of confidence in the Commission and their residual national instincts hamper fiscal federalism and need to be overcome. For these reasons, it is necessary to involve all citizens and their representatives, both in the European Parliament and in national parliaments, in the debate. Substantial steps towards a European federal fiscal system can be achieved without amending the Lisbon Treaty, although a new Convention could be convened if the European Parliament judges it necessary. What matters is that the European citizens should be involved in any reform concerning fiscal sovereignty. Any other way out, such as a committee of experts giving advice to the Council, would not only be anti-democratic, but also illusory.

Disclaimer: This article was first published in the publication Europe’s World - Summer 2010 - #15 as well as under Community posts of its online version on 1 July 2010;

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P.S.

Further reading:

- Mario Draghi: “We need a European economic government” – interview in Handelsblatt

- A European Economic Government Could Solve Europe’s Democracy Deficit by Stefan Collignon; source: Social Europe Journal

- Germany wants ’European economic government’: minister published by EUbusiness

- Plans for European Economic Government Gain Steam by Spiegel Online International

Image: EU Economic and Monetary Affairs Commissioner Olli Rehn presents the European Commission’s 2010 economic growth forecast in Brussels | copyright AFP/Getty Images, source: Google Images

Your comments

  • On 30 November 2010 at 20:49, by theyenguy Replying to: European Economic Government and Fiscal Sovereignty

    AfterQuotes relates Francois Mitterrand said: “Since each nation is undergoing a crisis, they all tend toward egotism. Each country first wants to rescue itself, whereas they will only be rescued together.”

    Marketwatch reports Michael Hewson, an analyst at CMC Markets. “It is now becoming increasingly clear that the only options open for a final solution are to either adopt closer fiscal policies across all European countries, and with austerity fatigue already creeping in across European populations that looks unlikely, or for the single currency to somehow restructure itself in a manner that represents the differences between the respective stronger and weaker economies.”

    I’m 60, living, in the Pacific Northwest, it’s only been recently that I’ve been interested in economics and investments, and have read some on Austrian Economics, and have benefited from insight into some of its principles such as debt deflation; but I’m not a libertarian, I am a Reformed Christian and bond-servant of Jesus Christ.

    Years ago, I stumbled across the book En Route To Global Occupation by Gary H. Kah, Huntington House Publishers, Lafayette, Louisiana, 1992. And now its chapters come back to memory to fit in with the Bible’s prophetic Book of Revelation Chapter 13, to help me understand that out globalization, waves of carry trade investing, quantitative easing, and a currency union in sovereign crisis, ten regions of global governance are forming.

    Bible prophecy portends that those living in the Eurozone, as well as all the world, will see a loss of national sovereignty, and live in debt servitude to the beast system of global corporatism, ruling through mankind’s seven institutions and in ten regions of global governance, as held forth in Revelation 13:1-4 where a beast, having seven heads and ten horns rises from the sea.

    We are witnessing the rise of global corporatism, that is state corporate rule in the Eurozone as David Cameron, Dominique Strauss Kahn and Olli Rehn wrapped up a seigniorage aid bailout plan for Ireland, surrounding what the International Monetary Fund chief described as sovereign crisis, as Philip Aldrick, Economics Editor of The Telegraph wrote in November 19, 2010 article, IMF Chief Dominique Strauss-Kahn Urges Leaders To Cede More Sovereignty To EU.

    Sovereign crisis arose November 5, 2010 as bond vigilantes sustained the interest rate on the US 30 Year Government Bond, $TYX, above 4%, as the US Federal Reserve’s Quantative Easing 2, constitutes monetization of debt; and as Econogirl related on November 10, 2010, that the German government has stepped up its insistence that bond holders must take on some of the costs for any new bailout of sovereign debt; and with Germany’s Merkel call for a sovereign default mechanism at the meeting of the European Task Force On Economic Governance on October 28, and October 29, 2010.

    As a result the currency traders sold the world’s major currencies, DBV, and emerging currencies, CEW, causing the US Dollar, $USD, to rise. This caused World Government Bonds, BWX, and International Corporate Bonds, PICB, to sell off. And commenced an Elliott Wave 3 Down to start in the Euro, FXE, world stocks, ACMI, as well as in the S&P, SPY.

    Now, a Core of Europe is emerging in the midst of a sovereign crisis. Rompuy, Merkel and Sarkozy on November 28, 2010, negotiated and announced, a Leaders’ Framework Agreement to establish a permanent crisis mechanism, that will replace that European Financial Stability Fund, EFSF, that expires in mid-2013. This sovereign debt default mechanism is called the European Stability Mechanism, ESM.

    We see that today, Germany is one of the power forces, in attempting to find a way out of Europe’s sovereign crisis. Ambrose Evans Pritchard commented, on May 2, 2010, in the Telegraph.co.uk, in words reminiscent of Margaret Thatcher: “If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a ‘European Germany’ with the silken chords of emu, they failed. Monetary union has delivered a ‘German Europe’ after all. And he continues, We now know the answer to Henry Kissinger’s question: “Who do I call if I want to call Europe?” Only one person matters. The Chancellor of Germany.

    Evidence abounds that Portugal, Italy, Ireland, Greece and Spain no longer have sovereign debt seigniorage, and are not viably obtaining and will not be viably obtaining revenue from sovereign debt sales; any upcoming bond sales are being done by banks, which submit debt or have submitted debt to the ECB for funding of new debt issues. Such means of obtaining money is simply a Ponzi financing, it is monetization of debt, and cannot be sustained much longer.

    Theyenguy believes the sovereign crisis will intensify, and that out of Götterdämmerung, that is an investment flameout, according to Bible Prophecy, a Sovereign, Revelation 13:5-10, and a Seignior Revelation 13:11-18, an Old English term for top dog banker who takes a cut, will emerge to establish fiscal sovereignty and credit seigniorage for both Europe’s financial institutions and residents as well all the world.

    Jean-Claude Trichet in address Global Governance Today, made before the Council on Foreign Relations, CFR, on April 26, 2010, called for this new financial state-of-being where he said: “For the good and appropriate functioning of global finance it is extremely important that we, in this new ownership of global governance, have — particularly on both sides of the Atlantic — the implementation of the same rules in the same fashion.”

    Soon there will come unified regulation of banking globally, as referred to in the James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework, where The Seignior will oversee all matters of debt and credit, most likely through the Bank for International Settlements, and will eventually implement a global currency system. Carroll Quigley, in his book Tragedy and Hope, relates that the BIS will “create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.”

    Francois Mitterrand, was a great prophet in saying “they will only be rescued together” — their deliverance if it be called that, will be the rule of fiscal sovereignty and monetary seigniorage coming from Europe’s Core, that is Brussels, Frankfurt and Basel. Won’t that be a shocker to all anarcho capitalists. Such was God’s Plan from Eternity Past.

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