This blog is hosted on Ideas on EuropeIdeas on Europe Avatar

Enlightened Europism

European affairs of the present and future

Reform #3: Finance and economy (vol. 1) – Finance

Introduction

As previously discussed (see Reform #2), the reformation of the united Europe’s political system is the precondition of introducing further reforms related to Republic of the United Europe’s (or RUE) finance, economy, social system, armed forces, and foreign policy. In this volume, I am going to focus on the most critical topics related to finance, such as the creation of a fiscal union, the reformation of the European Central Bank, the introduction of a common tax system, and the handling of government debts on the European level. My aim is to propose principles and guidelines rather than exact policies.

 

Fiscal union

In the Great Recession, Europe learned it in the hard way that the common currency was introduced without an establishment of a competent European institution, which could have supervised and co-ordinated the economy and fiscal policy of each member state. Many experts and politicians blamed the euro for the outbreak of the financial crisis – wrongly –, failing to recognise that the primary reason of the Euro Area crisis was the utter failure of neoliberal management policy designed in Berlin and Brussels. The euro has plenty of obvious benefits, such as the elimination of currency exchange costs, removal of bank charges related to transactions, price parity, economic stability, and low inflation – boosting trade and investments, and creating a political union eventually. In my view, the euro is advantageous and necessary, but the lack of proper regulations and capable institutions is harmful.

Recognising the same fact, the member states of the European Union agreed to ratify the Stability and Growth Pact (or SGP), which has since been reformed in the packages of Sixpack and Fiscal Compact – latter being the fiscal chapter (Title III) of the Fiscal Stability Treaty, which contains regulations regarding fiscal discipline (e.g. balanced budget, debt brake), co-ordination, and governance. Even though, the treaty is an improvement, it is only patching up the rifts of a structural dysfunction instead of replacing it with a new functional system. Some of the solutions proposed by economists are the conduction of bank and fiscal union (via deposit insurance, common regulations, resolution procedures, etc.), the authorisation of a European finance minister (tasked to set and execute fiscal rules), the raising of resources, common supervision of banks, and common European representation in international organisations, but these ideas have many dissensions amongst the member states.

The current monetary union is vulnerable, unstable, and incomplete without a fiscal union, whereas the creation of a fiscal union is senseless without establishing a political union first. The legal and political framework of the Republic of the United Europe could provide the perfect base for a fiscal union, using multiple elements of the already existing financial regulations to develop a stable European financial system.

In the Republic of the United Europe, the European Government (or EG) – in co-operation with the national governments, the European Parliament, and the President of the RUE – is going to be responsible to determine the common fiscal policy (e.g. synchronisation of tax systems and rates, collection and expenditure of taxes), setting the cornerstones of the member states’ budget by prescribing frames and directives to ensure financial stability and economic prosperity. By doing so, the EG must review at least the figures of inflation, government budget deficit, and government debt. It is imperative that the ratio of the annual general government deficit to GDP does not exceed 3% (except deficit related to investments), whilst the ratio of government debt to GDP does not exceed 60%. Those member states burdened by a government debt of more than 60% relative to their GDP must set the reduction of that as a primary target in their budget. In order to ensure relatively low government debt and unemployment rates, generating sustainable economic growth is also going to be absolutely critical, when preparing the budget.

The results of a centralised fiscal union – under democratic control – are economic stabilisation through debt management (Eurobonds to finance collective euro debts), common risk sharing, active control of national budgets, stricter fiscal policy, and the avoidance of financial crises. The fiscal union also necessitates an independent and powerful European central bank.

 

The Central Bank of Europe

The European Central Bank (as it is called currently) is the central institution of the European Economic and Monetary Union, which’s purpose is the co-ordination of economic and fiscal policies (including a common monetary policy and the euro). The ECB’s primary task is to maintain price stability by keeping inflation under control (below 2%), but the Frankfurt-based bank is also responsible for setting and implementing monetary policy (Euro Area), for supervising national banks, and for conducting foreign exchange operations – amongst others. The ECB has an 11 billion euro stock capital held by the National Central Banks of the member states (or NCBs) as shareholders (shares in the ECB are not transferable and cannot be used as collateral). It is the ECB’s exclusive right to authorise the issue of euro banknotes (member states may issue euro coins after consulted with and approved by Frankfurt). The European Central Bank and the national central banks of all EU member states form the European System of Central Banks, which’s main objective is to maintain price stability. The Eurosystem constitutes the European Central Bank and those national central banks, whose currency is the euro.

The decisions of the European Central Bank are made by the Governing Council, the Executive Board, and the General Council. The Governing Council is formed by the members of the Executive Board and the governors of the Euro Area NCBs. Since 2015, the governors of NCBs take turns holding voting rights in the Governing Council. The ECB’s Executive Board comprises the President, the Vice-President, and four other members, who hold permanent voting rights. They are appointed by the European Council by qualified majority on a recommendation from the Council after it has consulted the European Parliament and the Governing Council. Their terms of office are eight years, which is not renewable. The Executive Board is responsible for implementing monetary policy in accordance with the guidelines and decisions laid down by the Governing Council. The General Council exists only until every member state adopted the euro as their currency.

The Central Bank of Europe (or CBE) should function as the national bank of the Republic of the United Europe, supervising the NCBs, whilst co-operating with them. In the RUE, the application of the euro as a common currency is going to be mandatory for every member state; therefore, operating a common fiscal policy is crucial. This will certainly reduce the national governments’ control over their national banks, but they will also gain financial stability and security in an era, when it can be confidentially stated that the global financial sector cannot be controlled merely in a national sphere.

The CBE is going to be accountable to the European Parliament and will be under the tight supervision of the European Government (Ministry of Finance). The Governing Council will include the governors of every NCB of the RUE – bringing the General Council to a natural dissolution –, whereas the Executive Board’s composition will remain the same, and its members (including the President of the CBE) are going to be appointed by the EPC. Also, the Eurogroup is going to cease to exist automatically, whilst the responsibilities of the Eurosystem is going to be transferred to the EG’s Minister of Finance and to the CBE.

The CBE’s role will not be reduced to the supervision of the national banks and of the euro, but it will focus on keeping inflation and unemployment as low as possible, influencing long-term interest rates, and providing loans to European enterprises, to member states, or even to foreign countries and enterprises. The member states’ government debts must be raised from national to European level, placing it into the responsibility of the Central Bank of Europe. Those member states above 60% of government debt to GDP will have to be given budgetary cornerstones and directives by the EG in order to reduce it. Common risk sharing will result in a de facto debt-restructuring, protection from foreign elements (e.g. foreign countries, private institutions, IMF, World Bank), and a monopoly of debt management (paying and taking) of the European institutions. Should it be still necessary to intervene financially, it is the CBE’s exclusive authority and duty to help out the member states.

This way, the member states’ debt burden would gradually decrease, whilst the appetite for investment would increase all over in Europe, which can be translated into sustainable economic growth, creation of jobs, and higher quality of life. The European Investment Bank and national development banks could enhance targeted investment in sectors and regions that are in need. Once Europe’s economy is significantly stronger and the European government debt decreased to a manageable level, the CBE could even provide loans to other countries, challenging the AIIB, the IMF, and the World Bank.

The CBE must find a way to challenge virtual currencies as well. There should not be any currency in circulation, which does not have a known and secure background. The simplification or abolishment of need for bank accounts, financial intermediaries, and clearing parties; and the introduction of electronic cash, directly deposited at the CBE, could be a viable response to successfully tackle the challenge of virtual currencies.

The Central Bank of Europe must be reformed in the context of the new enlightened political system of the Republic of the United Europe, meaning that it has to be the centre of a fiscal union, focusing on the general well-being of all member states and the ordinary people, not only on the interests of certain powerful ones and financiers – as the European Central Bank does.

 

Tax system

The introduction of a common tax system through the synchronisation of the member states’ tax systems and rates, and via the collection and expenditure of taxes on a European scale in the entirety of the Republic of the United Europe is imperative in order to achieve financial stability (via control and discipline), economic prosperity, and global competitiveness. The tax systems and rates vary in each member state. For instance, some apply progressive tax systems (e.g. France) and some operate with single-rate tax systems (e.g. Hungary). The national tax systems must be replaced by a common European scheme. As the reasons behind the different structures and measures are complex, thorough examination and careful analysis is crucial.

The EG’s Ministry of Finance could divide the RUE into specific tax districts, and set the frame of rates for each district. The borders of tax districts would not necessarily follow the national borders, as categorisation should be decided by factors, such as economic development, infrastructure, GDP per capita, etc. Europe could be divided into no more than five tax districts, ranging from most developed (e.g. Bavaria, Lombardy, Tyrol) to least developed (e.g. Croatia, Greece, Southern Italy). Enterprises operating in the more developed areas should pay more corporate tax than in the less developed areas. Both corporal and personal income tax rates would be the highest in the most developed and lowest in the least developed area, whereas the personal income tax system to be applied should be progressive (perhaps in three stages). Within the frames suggested, the member states would set the exact measures as it suits them the best. Applying the same principle to the citizens as well (personal income tax) is not only fair, but efficient to the economy. The implementation of such principles would result in a system, which gives the authority to the EG to set measures according to the interests of the greater good, whilst preserves the liberty of the member states to maximise the potentials of the framework.

The EG would propose different tax measures based on the aforesaid principles in the European budget. After the budget is approved by the EP and by the President, the tax rates would serve as frames, which would permit the member states to apply different rates as long as the frames are not exceeded, providing a wide range of liberty over taxation. The exact measures must be decided by experts, but looking at our main competitors’ (e.g. China, Russia, UK, US) average rate of corporate tax ours could be set somewhere around 19-25%.

Paying less tax would significantly reduce capital flight and labour migration from the less developed areas to the more developed ones – affecting Central and Southern Europe most negatively. Moreover, enterprises would be highly motivated and interested in investing and producing in the eastern and southern regions of Europe, which would definitely boost employment in those member states, in which the pressure of unemployment is the most urging already. Besides creating jobs and increasing net wages, a centralised tax system would help to close the gap between the less and more developed member states in a natural way, instead of using artificial funds (e.g. Cohesion Fund). The introduction of the new tax system would not only solve a series of issues (e.g. economic growth, employment, cohesion), but would also result in saving money.

 

Conclusion

By completing the political union, the desired and necessary fiscal union of the member states of the Republic of the United Europe is going to have the institutional tools to create a well-functioning mechanism via regulations, co-ordinating Europe’s finances in a disciplined, legitimate, and efficient manner. The European Government’s Ministry of Finance co-operating with the Central Bank of Europe is going to be responsible for synchronising the tax system (and rates) of the member states, which is one of the cornerstones of the European budget. The gained financial stability is the key to economic strength and general well-being in the Republic of the United Europe.



Comments are closed.

UACES and Ideas on Europe do not take responsibility for opinions expressed in articles on blogs hosted on Ideas on Europe. All opinions are those of the contributing authors.