A renewed Fiscal Union

Economic, social and political realities are changing in Europe as a result of the financial meltdown. Both our economies and our economic policies have become increasingly interdependent over the past 50 years. Most citizens are now aware that many important decisions can no longer be taken at national but global level and look at the European Union in the search for a stronger response to a dramatic crisis that has thrown millions of people to the ranks of unemployment and poorness.

The coordinated action taken by governments to bailout the banking sector was needed to restore confidence in markets and the credit flow. But the bailout also helps to understand how a problem of household over indebtedness and a highly leveraged financial sector became a threat to the sustainability of public finances and to our European model of social protection.

The European Parliament and the Council have adopted a number of initiatives intended to improve the resilience of the financial system and to correct the underlying macroeconomic imbalances. On the one hand, the EU has embraced the G20 process of reforms to tackle a number of regulatory and supervisory weaknesses in the banking sector such as the case of hedge funds or credit rating agencies. On the other hand, the European institutions have understood that returning to the path of growth in an integrated economic region requires taking action aimed to correct the underlying macroeconomic imbalances of our economies.

Some actors and market participants want to impose their political agenda focusing the important ongoing discussions of the economic governance package on the austerity measures. Fiscal responsibility is indeed fundamental to recovery. But a budgetary policy based on cuts and sanctions alone will not be enough to enhance job creation and achieve a smart, sustainable and inclusive growth unless combined with a sensible set of incentives, strengthened monetary policy and additional revenue tools. Furthermore, we have learnt from the past that equality should not come second to growth. On the contrary, a fair distribution of wealth generates growth. Dismantling our welfare system will only result on further expenses and constraints to the coming generations. The economic reforms should therefore take into account “the guarantee of adequate social protection, the fight against social exclusion, and a high level of education, training and protection of human health” as required by the Treaty.

This context of shared challenges across Europe offers an increased room for a renewed Fiscal Union that puts innovative financing at the service of a sustainable economy. A European Debt Agency could provide a system based on incentives by pooling part of the stock of national debts together and converting it in a common bond that would lower interest payments and consequently give Member States some breathing space. Such an agency could also issue debt securities tied to investment projects at Community level and thus attract much needed foreign and domestic capital to match the investment needs that the goals of the Europe 2020 Strategy require.

The Fiscal Union would also be reinforced with the establishment and management of a European Transaction Tax focused on speculative transactions that would accomplish the threefold purpose of responding to the call for a greater contribution of the financial sector to the burden-sharing of the crisis, discouraging harmful practices whilst favoring long-term investments and bringing more transparency and stability to the markets.

The Commission should step up and lead the fight against fiscal dumping among Member States and Tax Havens. There is a wide range of actions (namely: the automatic exchange of information between tax authorities should become the rule, a new anti-fraud strategy in the field of VAT should be developed, common consolidated corporate tax base and tax rates should be introduced) that would foster this process and improve the functioning of the internal market.

Finally, whilst the establishment of a common treasury still seems a mere federalist ambition, the Council and the European Commission could bring together the European Debt Agency, the Central Bank, the Eurogroup, the newly created Systemic Risk Board, the ECOFIN Council and both the Directorate-General of Economic Affairs and the Directorate-General of Taxation and Customs under the joint command of a High Representative for Economic Policy. This would certainly help to improve the coherence and success our economic policies.