ourEconomy: Opinion

In the face of a crumbling Europe, a fiscal union can maintain unity

At a time of deep-seated division within Europe, pooling decision-making power on national budgets could help keep the project alive.

Oliver Murphy
17 January 2020, 8.33am
Image: Rock Cohen, CC by 2.0

Perhaps there was a sense of deja vu as MEPs assembled in the European Parliament’s Petition Committee room on 11 November 2019. From private complaints to appeals to European bodies to adopt a position on a specific matter, the Petition Committee embodies the provisions of Article 227 of the Treaty on the Functioning of the European Union: the right for any EU citizen to petition the European Parliament.

As members debated the numerous items on the agenda, one petition seemed to stand out. Submitted in early 2018, it reignited one of the most polarising issues of European integration, the Euro. In a bold appeal, the petitioner called on the Eurozone to develop elements of a common fiscal policy to resemble how national governments use revenue and expenditure to influence their economy. These included initiatives such as greater levels of risk sharing to preserve and protect further attempts at financial and economic integration. Member States should tackle financial shocks together with an empowered centralised mechanism, or a jointly run institution, to resolve stressed financial entities and provide fiscal relief to Member States.

As debate was opened up, MEPs from Italy’s Five Star Movement and Germany’s Christian Democrats all spoke in favour of the petition, calling for “robust action”. After what appeared to be universal consensus following its discussion, the committee decided to progress the petition and wrote to the European Commission on 20 November 2019 for further information on how it will respond.

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The Euro: a contradiction in terms?

Despite the positive reception of the Petitions Committee, there is no escaping the fact that governments continue to express concern at the current state of affairs of the monetary union, let alone the very prospect of closer cooperation between states on fiscal matters. The fact is, the very edifice of Europe is crumbling. Why? Three words: The Euro Crisis.

The European Sovereign Debt Crisis, to coin its full-name, came into being when several European countries experienced the collapse of financial institutions, followed by high government debt. It was a crisis in which Eurosceptics and Europhiles agreed: the Euro is a half-built project. Indeed, we have a monetary union that to function well requires fiscal union, but we have no such fiscal union.

We should not doubt the common currency for one moment; it is the pioneering symbol what the European Union stands for. Without it, currencies would be free to compete against each other on the global markets and this would greatly inhibit trade.

But a common currency on its own is not enough. If Europe is to indeed remain united, only a well-constructed fiscal union with the ability to avert the kind of monetary shocks experienced in the Euro Crisis, which saw the budget deficits of some western nations exceed ten percent, can stand a chance.

So, simply put: the Eurozone must begin to develop elements of a common fiscal policy, including greater levels of risk sharing in order to preserve and protect further attempts at financial and economic integration. Without even a degree of union, the region will continue to experience existential shocks that will only act to exacerbate the rifts created by the Euro Crisis.

In other words, a more or less limited fiscal integration will never be enough. Marzinotto, Sapir and Guntram Wolff, for example, in 2011 called for the EU to have its own fiscal resources. Such resources could be redistributed to stabilise the Eurozone and help individual states.

‘We’re all in this together’: risk-sharing and pooled-sovereignty

Perhaps one of the biggest advantages of greater fiscal unity is the greater emphasis placed on risk-sharing. Were Europe’s Economic and Monetary Union (EMU) like any other currency area, such as the United States, then members would tackle financial shocks together with an empowered and centralised power – or jointly run institution – to resolve stressed financial entities and provide economic relief to member states.

However, because the Economic and Monetary Union (EMU) is not a political union, member states are left exposed to economic or financial shocks, especially where public debt levels are high and governments have little maneuverability to respond with individualised fiscal policies. When Greece, for example, was subjected to stratospheric levels of debt, it could not devalue its currency, a common method for reducing debt burdens, because it was part of the Euro Area.

But, of course, talk of greater fiscal union is immediately stalled by the role of ‘nationhood’. The ability to collect taxes and spend public resources symbolises a fundamental act of self-determination of each political community and thus requires strong democratic participation.

Indeed, European taxpayers in more prosperous nations may begrudge how their income is being spent elsewhere. Whilst political values influence the strength of resentment, differing national loyalties exacerbate the strength of these grudges. Further tensions undoubtedly stem from the fact that currently, nations cannot vote on each other’s economic policies.

While the adoption of the single currency alone is incompatible with the preservation of national economic sovereignty, through creating overarching democratic and transparent policies, such as an autonomous EMU budget, sovereignty would in fact be enhanced. The imposition of European taxes would shift focus towards a supranational outlook, namely, the welfare of all citizens. Due to the reliance on interdependence within a monetary union, the Member States would, therefore, be responsible for their economic policies not only to their national citizens but to all citizens of the union. Essentially, as the Eurozone shares a currency, uniting fiscal policy is the most logical answer.

The current sovereign debt crisis in Europe, now threatening the existence of the Euro, has revealed major faults in the design of the fiscal framework of the Eurozone. It has inspired a heated debate in which the goal of European integration is no longer shared by all.

While we live in time of deep-seated division within the bloc, a fiscal union could well be the antidote to further divergence and instead foster a climate of unity. With economic convergence, further pooling of decision-making power on national budgets, the founding principles of the Euro have a far greater chance of being kept alive.

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