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Fiscal Policy and Democracy in Europe Ö sterreichische Nationalbank, Wien, 5.11. 2004 . Stefan Collignon Professor of European Political Economy LSE. Europe’s fiscal Constitution. The Constitutional Treaty brings many innovations Efficiency in policy making Greater role of EP
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Fiscal Policy and Democracy in Europe Österreichische Nationalbank, Wien, 5.11. 2004 Stefan CollignonProfessor of European Political Economy LSE
Europe’s fiscal Constitution The Constitutional Treaty brings many innovations • Efficiency in policy making • Greater role of EP • Citizens and states as equal source of European sovereignty (art.1)
Europe’s fiscal Constitution But the Constitutional Treaty • Has not innovated on fiscal policy • Has even reduced the EU-budget powers of the European Parliament • Instead: SGP passes from rule-based to arbitrary arrangement among governments Pre-democratic fiscal policy
Europe’s fiscal Constitution Fiscal policy matters for economy • Automatic stabilizers smoothen disposable income and demand • Discretionary tax policies aim at supply side effects • ECB Monthly Bulletin, April2004 But also for democracy • Imposing rules on democratically elected Govts? • The irony of new MS: surrender democracy at the door • “No taxation without representation” • Therefore: only national competence?
Europe’s fiscal Constitution Fiscal federalism assigns functions to jurisdictions: • Allocation policy : decentralised • Preference heterogeneity • Stabilisation policy: centralised • Collective action problem • Redistribution policy : centralised • Collective action problem
Europe’s fiscal Constitution Europe’s fiscal Constitution is not optimal: • The bulk of spending is through national budgets • EU budget only 1% of GDP • SGP is only loose coordination tool • What matters for macroeconomic stability is the interaction of monetary policy with the aggregate fiscal stance
Europe’s fiscal Constitution Stabilisation policy is not optimal • Automatic stabilisers work • But SGP is far from being applied • Uncoordinated fiscal policy led to monetary tightening • SGP can not guarantee coherent aggregate fiscal policy stance • SGP introduces rigidity into the conduct of fiscal policy
Europe’s fiscal Constitution Efficient stabilisation requires: • Capacity to respond to symmetric and asymmetric shocks • Vertical flexibility responds to symmetric shocks • Horizontal flexibility responds to asymmetric shocks • Reflect collective preferences about the intergenerational burden sharing
Europe’s fiscal Constitution Vertical flexibility • In EMU the appropriate response to symmetric shocks are determined by the interaction between monetary and aggregate fiscal policy • At the moment fiscal policy is constrained by Excessive deficit procedure • Balanced structural budgets are not realised • the main burden is on monetary policy • Performance since the start of EMU has been benign • Shocks have been less severe • What about the future?
Europe’s fiscal Constitution Horizontal flexibility • Asymmetric shocks also have been less severe • Are symmetric shocks disappearing in EMU? • Danger of heterogeneous collective preferences if political system does not allow collective deliberation and choice
Europe’s fiscal Constitution Horizontal flexibility can be achieved by • Intertemporal transfers • Regional governments borrow to sooth income • Constrained by SGP • Interregional transfers • Federal system compensates asymmetric shocks • E.g. Länderfinanzausgleich
Europe’s fiscal Constitution • In the EU interregional transfers do not reflect asymmetric shocks • EU interregional transfers exclusively follow a redistribution logic • EU budget redistributes income to farmers and poor regions
Europe’s fiscal Constitution • Asymmetric shocks lead to transnational intertemporal borrowing • The mode of financing the EU budget causes distortions in national budget policies • EU budget is financed by a levy on national budgets • Net contributors use domestically raised income for expenditure elsewhere • Hence, they borrow for others
Europe’s fiscal Constitution For example: • Germany’s net contribution is 0.24% of GDP • Its actual deficit in 2002 was 3.53% • Without Net Contribution: 3.28 % • France: Net Contribution of 0.14 % • Actual deficit 3.10 % • Without net contribution: 2.96 % • Portugal received net contribution of 2.08 % • Actual deficit: 2.71 • Without net contribution: 4.79 %
Europe’s fiscal Constitution This system is unsustainable ! • National finance ministers will wish to reduce net contributions • especially when under the pressure of reducing deficits under the SGP • The European Union will have less and less the financial means to implement its policies Europe’s present fiscal constitution carries the risk of European Disintegration
Europe’s fiscal Constitution • What is the solution? • We need to integrate fiscal policy at the European level • Integrate national and EU budgets • Define aggregate fiscal policy stance in Euroland • Finance EU budget by Euro-tax • Create democratic input legitimacy in addition to efficient output legitimacy
Europe’s fiscal Constitution • Defining the aggregate fiscal policy stance • Top down: define the aggregate deficit that is desirable given the economic environment • Vertical flexibility • Give democratic legitimacy to this choice • If EU policy stance must have authority over partial national preferences, it requires a vote reflecting all European citizens • European Parliament should vote macroeconomic framework law: BEPG • Democratic debates will transform collective preferences • Josef Christl: “dialogue will help bridge the gap between political European elite and European citizens”
Europe’s fiscal Constitution • Assign deficit quota to decentralised jurisdictions • Horizontal flexibility • Tradable deficit permits most elegant solution • Solves problem with “domestic stability pacts” • Makes decentralised fiscals decisions accountable and coherent with monetary policy
Europe’s fiscal Constitution • Reform the financing of EU Budget • The “own resources” must become own resources • Introduce Eurotax • Vat • Corporate tax • Capital income • Energy tax • Make the European Parliament responsible for taxing and spending • Only European-wide debates can foster European collective preferences for public goods • Co-legislation with Council as there may exist esternalities
Europe’s fiscal Constitution To summarise • Europe’s fiscal constitution is severely handicapped • The Constitutional Treaty does not remedy • With the single market and the euro European citizens share many more public goods, their res publica • These goods need an efficient and democratic common management
Europe’s fiscal Constitution Conclusion Ceterum censeo: pactum stabilitatis esse delendum Et rem publicam europaeam esse errigendam