European Fiscal Federalism (Part 3): Pigouvian taxation, and redistribution - Externalities, mobile assets, and euro interest rates

So far, I’ve been describing the economic logic for fiscal federalism. However I have not qualified it. It's all nice and easy to argue that we need to tax the richest and subsidise the poorest, but how do you do this? Which pockets should the EU reach into and what should it pay for?

In the next lines I propose the following Euro-level fiscal tools : (1)Taxes on mobile factors that cause negative externalities, (2)an Income tax, and the maintenance of a (3)common education policy as well as a (4)common defence policy, with a tendency for expansionary military R&D expenditure during recessions. Finally I also argue in favour of (5)the establishment of an European Monetary Fund (EMF) to switch from cooperation to coordination of euro-area fiscal policies. This would be the best tool to keep and improve the theoretically good monitoring devices created by the SGP, while replacing its very ineffective legalistic procedures, in order to improve fiscal stability across the board.

I believe these are the necessary tools for the EU to minimise its risks of suffering from asymmetric shocks, while endowing it with the policy tools to deal with them, should they arise, as they inevitably will. They may however not be sufficient...

Markets, Information, Communication and the Euro-zone Fiscal crisis

Above you can see a segment from an extremely good article by Carmassi and Micossi which can be found at VoxEU. It is about the chronology of the fiscal crisis in Greece and how miscommunication between the European Commission and Germany may have made a mess. To be honest it should be said that they do survey a very limited and rather biased sample of newspapers (Thompson-Reuters and the FT), but it is a fairly acceptable simplification from constructing a weight matrix for a larger number of newspapers that would provide a rather limited improvement of the explanation. A "must read" nonetheless!

Jean Quatremer interviews the Greek finance minister

The full article as it was published online in his blog at the website of Libération, can be found here. I've excluded the introduction. I am impressed by the apparent serenity of the Greek official. Please check ou the original website for more content. There's a particularly intriguing article about British disinformation and the Greek isles of the Aegen sea... You do however need to read French to follow the article. Alternatively run it through google translate. Here it is:

The EU and Economic reform in June 2010: Not Enough...

EU to publish bank ‘stress tests’

Europe: A tent to attend to

‘Shared sense of direction’ at EU summit

Reining in Europe’s deficits is first step - By David Cameron and Fredrik Reinfeldt

The Southern European Problem: Not Speculation, Not Just Fiscal Profligacy, but Structural inconsistencies

Wolfgang Munchau of the FT has a very good article published online last night, about the problems in the Eurozone, particularly in its southern members. (here's a little trick for accessing restricted news reports from the FT: Copy paste the title of the relevant article on google and click on the relevant link. For some reason this grants you access to otherwise restricted articles) It says that the problem is not speculative financial attacks on the debt of these countries, nor that it is just fiscal profligacy. It argues instead that the root problem is structural, and that there is a need for economic reform of the labour market, where wages are much above productivity. As a result these countries are not competitive vis à vis its northern neighbours.

I completely agree with it. But I need data to confirm this. I'll be updating this post.

The European Commission can Contract Debt on behalf of the whole of the EU!!

I am godsmacked by my own ignorance! I had no idea about this but apparently the European Commission has been able to contract debt on behalf of all of its member states since 1988. This is heavily regulated, but has been brought forward as a reform channel now that the EU needs to set up an emergency fund to calm down the markets.

I came across it on this article by Mr Anthony Barber from the FT.

After researching a bit, these are the relevant sources that I found:

The relevant press release, which among other things gives info on the debt:

"The EC has carried out three euro bond issues since last year to finance a first instalment of €2 billion for Hungary (disbursed early December 2008), a second instalment also to Hungary and also of €2 billion (disbursed late March) as well as a first instalment of €1 billion to Latvia (paid in February). The last issue, placed on 17 March and due on 7 November 2014 (5-year maturity), was priced 3.25%."(implemented to help Hungary and Latvia).

Council Regulation (EC) No 332/2002 of 18 February 2002 reforming the original 1988 regulation, forbiding its application to the Eurozone countries but allowing its use to non €zone countries. Also extending the fund to 25 Billion.

The original Council Regulation (EEC) No 1969/88 of 24 June 1988 establishing a single facility providing medium-term financial assistance for Member States' balances of payments.

More details on the implications soon to come, but for the time being I can think of this:

If the finance ministers intend to use this debt facility as a channel for dealing with and calming debt markets, then they will face 1 obvious hurdle and 2 potential problems. The obvious problem is that the regulation is very clear. This debt facility only applies to NON EUROZONE countries. At the very least they will have to pass another regulation by the end of the night in order to get it to also apply to Eurozone countries. Then there's the fact that I haven't et checked whether there's anything written about it in the Maastricht, Amsterdam, Nice or Lisbon treaty, that also specifies the scope of this regulation. If so it is an enormous problem, tantamount to requiring EU constitutional reform, which takes ages. Finally it is possible that the ECB may play a role in this and as such it would be interesting to see what obstacles it would pose to the expansion of this subreptitious European Monetary/Debt Fund.