It seems that weekends are only reserved for Lady Ashton. On Sunday 8 August, Mr Janusz Lewandowski, the (Polish) EU budget commissioner started floating around the idea of a European tax to be levied by the European Commission on banks, financial transactions, carbon emissions (permits) and air traffic. Berlin, Paris and Westminster were not amused, but Poland, Austria, Belgium and Spain seemed to not dislike the idea too much. Anyway, this is part of the ongoing process of preparation for the 2014-2019 budget which will be presented by the afore mentioned Commissioner at the end of September 2010. Most interestingly of all for me was the response that the proposal received from the Financial Times. I believe that unless you've subscribed to the ft, even if only for free, you can't read this article. It's not complicated but I assume not everybody can be bothered to do it. As such I feel compelled to report some of the comments which are rather strong:
"The economic logic is almost irrefutable. As the debate over Greece’s debt made clear, a monetary union requires political and fiscal union, or at least unity. "
"The tax proposal may not get anywhere, but even if it does, the political hurdles to a full fiscal union remain big. (...) A fully sovereign European Union still looks like a pipe-dream. But then again, a common currency was widely considered impossible just a few decades ago."
The short version of the irrefutable logic that argues in favour of a common fiscal policy for the Euro-area, says that in case its composing economies are open and not economically homogenous they'll be exposed to asymmetric demand and supply shocks that may negatively affect some countries but not the others. As a result the exchange (interest) rate policy that'll stabilise the situation in the shocked country will not be low enough to pull it out of its shock, while being so low as to overheat the economy of the non-shocked country.
The specific appropriateness of the types of taxation advocated is also informed by the debate on the effects of externalities and pigouvian taxation. In this context, the best type of fiscal arrangement is one where taxes are levied on negative externalities or on economic variables whose economic increase depends on negative externalities.
The European Commission would be the best institution to do this because it does not suffer from the coordination problems that cause countries voluntary and ad hoc arrangements to be time inconsistent.
Finally the practicality of such an arrangement is dependent on the ability of the relevant institutional actors to legitimately advocate their position and efficiently galvanise direct democratic support for this tremendous and "irrefutable" shift in the status quo. In order to maximise the likelihood of success, the creation of an EMF, along the lines of what Gros and Mayer argue (rather than the very ad hoc and fractionalised system we have now) should precede this institutional battle.
Both of these battles should be fought on the basis of enhanced cooperation, where member states can voluntarily enter into agreements with each other and create new arrangements to manage integration of new policy areas. This would bi-pass the much dreaded need for referendums, as countries (except Ireland) could simply ratify this process through a parliamentary vote.
The longer version is more comprehensive and thus easier to understand. I’ll dedicate the next four posts to the relevant parts of this argument.
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