Concerning the Development of a Fiscal Policy of the European Union.
A commentary on a paper by Guntram Wolff.
by Christian Heinze
A sub-page to the page: pro-re-publica.eu
2018 01 10
“Bruegel” is an organization founded, sponsored and controlled by authorities of institutions or member countries of the European Union. Its rules call for independent contributions of thought to actual political problems. Following this call, the contribution by the Director of “Bruegel” Gutram Wolff on European fiscal policy is highly critical of the present stage of European fiscal policy as well as of very different and hardly reconcilable suggestions made by personalities purporting to represent leading political tendencies prevailing within the European Union.
I.
The essay by Wolff starts with three convincing but negative points of departure:
- The existing fiscal rules of the EU are overly complex, opaque, even incomprehensible and often faulty and do not provide for the stabilisation policies needed. Their “interpretation” constitutes “an impossibly difficult task”. The Fiscal Compact has failed to achieve debt reduction. Loopholes and unclear interpretations prevent clear and meaningful decision making.
- Juncker’s proposal of a center of European fiscal policy (EFP) or rather governance, the center and its president making “policy recommendations” based on a ‘political’ interpretation of the Stability and Growth Pact (SGP) to member states to be sanctioned through “political and market pressure”, and of European fiscal policy to be controlled by the Commission and its Vice President as a European Finance Minister who simultaneously presides over the Euro Group and over a euro-area budget is incompatible with national competence and would mix the roles of Commission and Council.
- Schäuble’s proposal of fiscal surveillance to be centered on the intergovernmental institutions o the European Stability Mechanism (ESM) transformed into a European Monetary Fund (EMF) eventually monitoring euro-area compliance with the Stability and Growth Pact (SGP) and with fiscal rules neglects that national fiscal policy “matters” for the euro area not only for sustainability reasons but also for the provisioning of public goods and effects on inflation and growth; Schäuble also disregards “the numerous spillovers from European fiscal policymaking”.
Wolff adds that European level (fiscal) stabilization and management of sovereign debt crisis is unlikely to be available soon. No-bailout-clauses based in “tailored” rules lack credibility, and creation of a EU-treasury would require a “leap” to federation which must be ruled out at the present stage.
II.
Wolff supports alternative projects for developing European fiscal policy.
- He suggests to relativize the current focusing on sustainability and avoidance of excessive deficits through managing sovereign debt crises by strengthening the Euro Group (the Group and its president to be endowed with a formal status based on the support of the euro-area ministers) and of the European Stability Mechanism (ESM). He envisages the eventual merger of the Group and “embedding” the ESM in a governance framework. The Euro-Group should be in charge of “political assessment” and of making “increasingly binding recommendations” to states on the application of fiscal rules “computed” by the Commission thus continuing in charge of fiscal surveillance. Wolff calls for a “simple rule” allowing for each country’s needs. The ESM is to “manage and prevent sovereign debt crises” together with the European Central Bank’s Outright Monetary Transactions programme (OMT). He would allow super-majority decisions of the ESM as an organ “executing” decisions of “political leadership” of its chair.
- Wolff suggests, as a step towards centralization and federalization, instituting an office for a “Eurosystem of fiscal policy” to act, in the long term, in personal union with the heads of the euro-group and the ESM, with a “substantial” budget and the power of taxation (e.g. a corporate or carbon tax), of spending and of borrowing. Such a “non-minister” would - without overruling national fiscal policy or national responsibility for debt, fund EU border control, research, universities, exchange programs, defense, security and common goods. Structural Funds amounting to 50-70 billion Euro or 10-15% of the EU budget should also step in stabilizing countries with “little fiscal space” in case of “significant need” or an “asymmetric shock”.
- Wolff welcomes a banking union as being essential for a stable euro area without discussing their details in this essay.
III.
The Wolff-essay impresses as a theoretical exercise almost exclusively dedicated to institutional or organizational planning. It is typical of a widely heeded popular approach to the project of European Unification that attaches primary importance to the creation or planning of institutions, procedures, competences and even to individual personalities for performing tasks and solving problems even before the legitimacy of their competence or the substance of their objectives (aims, tasks) is established and defined. The essay by Wolff lacks descriptions and analyses of the many obvious and unsolved problems and of legitimate, rational and substantial suggestions for their resolution. The required legitimacy would consist in a binding constitutional link between the will of the sovereigns and the institutions suggested. A definition of the solutions to be applied would consist in a clear description of and agreement on their substance to be realized by means of executable regulations, decisions and executive measures. The main impending real problems of fiscal policy are widely disputed and very much in need of such description and, in the case of the EU, of agreement by national governments and of support by national populations.
Dealing with questions of fiscal policy requires at the outset agreement on the meaning of that term. It appears appropriate to restrict it to the raising of state revenues (mainly taxes and borrowing) and their spending, in particular the drawing up and executing of the state budget as the plan for their expenditure. This is to distinguish fiscal policy from monetary policy as the policy concerning the making and administration of a currency which sometimes seem to flow together in the contributions not only by Wolff but in public discussion.
1.
As concerns legitimacy, its lack appears from such phrasing as that describing Schäuble’s suggestions being based on questionability of legitimacy of the Commission (for making binding rules or decisions on fiscal policy). This questionability is certainly not resolved by reference to a principle like the Commission being commissioned as “an independent guardian of the treaty”. Neither can legitimacy be derived from - using words by Wolff - being based on the “European process”. Because “the treaty” or this process can, in direction or substance, pursue many paths towards European unification differing in their service or damage to the interests of parties concerned to the degree of political incompatibility. Legitimacy requires rules and decisions emanating in their precise substance from its source, leaving only limited space for discretion of executing organs of the EU. For example, the contracts forming the European Union cannot provide in themselves legitimacy for a certain fiscal policy but can only provide the framework for certain organs transforming the real will of the sovereign with respect to actual problems into particular regulations and decisions in favor of or against the interests concerned. This fact together with the importance of a budget constituting the unfolding of states in every respect is the reason why modern constitutionality of democracies relies fundamentally, in law and in history, on the state budget being enacted by the people, and not on assumptions such as mentioned by Wolff that suggestions made in the 2017 Sorbonne speech by Emmanuel Macron are “probably supported by many citizens of Europe”.
At several points of his paper, G. Wolff himself appears preoccupied with a preference for a European “leap” to the level of a European Federation (in the meaning of a veritable State), and his concrete suggestions are designed in a way to enhance development toward this goal. The political reality is however far remote from the requirements of a true federation and federation lacks the support of an established political will of any government of a member country or of any distinct political will of the population of the EU. The preoccupation indicates a weakness of his argumentation, because it constitutes no more than a very long term framework for current politics. (The recent call voiced by the chief of the German Social Democrat Party -SPD- for the “United States of Europe” to be created within a couple of years only adds to signify the lack of political capacity of Mr. Schulz and the decline of that party.) Reference to federation adds an air of wishful thinking to the contribution as a whole as it does to political aspirations adopted and actions taken by organs of the EU under the leadership of its Commission and by the European Central Bank (enjoying, to a degree, the - often silent– support of EU member-governments). It sometimes appears from suggestions concerning EU policy as if that leap had already taken place or can be performed in following the suggestions in question. This is however not so but qualifies as wishful thinking detrimental to the viability of suggestions made.
As almost all of the competences provided in the suggestions discussed here consist in “increasingly binding suggestions” backed by political pressure of sorts, this reflects an idea obviously underlying much of the politics pursued by pretenders of advancement of European unification, which is the “development” of a state-like federation by exercising competences lacking legal legitimacy based on real sovereignty or on a constitutional mandate emanating from it. The history and the rational theory of the (notion and reality) of the State refutes the viability of such an idea which is rather destined to create strife and even bloodshed as a result of unfounded expectations and of reliance on imagined “rights”.
It may be noted that the suggestions made by Wolff come close to the position held by Schäuble. While they deserve preference over the position held by Juncker because they pay more respect to national sovereignty of the member countries as a source of legitimacy than the latter, they are bound to meet with similar objections.
2.
What is urgently needed is European substantial and precise binding agreement on concrete basic solutions to problems of fiscal policy which are not yet solved by precisely formulated contents of the acquis communautaire and in particular by the rules developing the common market principles. The conditions under which competences as suggested to provide for the missing solutions may be applied as well as the aim or purpose, content and scope of regulations and decisions to be taken, orders and bans needed (“objective triggers”) require substantial authorization. As concerns this requirement, the essay by Wolff seems to rely on the wisdom and experience of the personalities in charge or offering advice and on vague guidelines such as the taking into account of “serious political concerns” or of the need for “sensibility” or of “delicate political balancing”, for example between interests of the euro area as a whole and national interests, or that debts should be “sustainable”. Or the essay relies on the need of fiscal rules being deployed in a broad forum with strong support from the member states that should be applied “evenhandedly”. It thereby offers no more than a naming of the task of developing substantial solutions but does not arrive at their description. The article mentions the obvious task of preventing and managing crises but does not explain how this should be done. Where is suggest action to be taken in cases of necessity or “significant” need or limited fiscal space of member governments or of an “asymmetric shock” it fails to differentiate between different causes of the problems involved or to offer criteria for the assumption of “significance” or “necessity” or relevant “limitations”.
- In urgent need of discussion appears the question whether any sustainable common European fiscal policy does not depend upon an broad agreement on the distribution of the responsibility for economic welfare to the State on the one hand and to the private sector on the other. This is linked to the even more basic question of the relationship between the supply of the individual and his/her responsibility for the production of goods and, therefore, to the question of how much life energy the different peoples of Europe wish to invest in the production of material goods. As long as such basic question is a main subject-matter of national dispute (with truly constitutional importance) it is difficult to imagine an effective common policy.
- While Wolff rightly mentions that states cannot “go bust” because of their revenue resources (for example Tax on wealth), the practical problem consists in agreeing on common criteria of “(un)sustainability” of increasing debt or taxes and on common measures preventing unsustainablility such as limitations of sovereign debt or public spending for the redistribution of wealth. At this point the need comes in to agree between the EU member countries on common guidelines on how (not) to exploit revenue resources. The suggestions that gross-domestic-product bonds or “European Safe Bonds” (ESBies) should not be advocated or that the ESM “should take losses first in case debt turns out to be unsustainable ex-post” are helpful but not sufficient.
- Wolff contributes the suggestion of flexible permission of higher deficits when the “output gap increases” and requirement of lower deficits the larger the debt level is compared with the 60% SGP benchmark. It appears doubtful, however, whether such guidelines would work when existing fixed limits are simply ignored for convenience. Returning to rules that can expect obedience would appear preferable.
- Of course, common European public goods, EU border control, research, universities, exchange programs, defence, security and fonds for measures of stabilization are splendid projects, but discussing a “substantial European budget” to finance such projects prior to agreements on what, which quality and amount, where, for which purpose, how and by which means to produce and maintain, to control, research, teach, defend, secure and stabilize is premature and missing the point.
- An obviously unresolved and even widely ignored point of concern is the far-reaching impact on or usurpation of fiscal policy through the production of money at an enormous scale by the European Central Bank. A resolution of this corruption of competence for fiscal policy forms a basic requirement for the solution of any problems confronting Europe in this field.
- When Wolff exemplifies asymmetric shock by “an increase of immigration”, a solution would depend on describing the ensuing problems, which greatly differ in cause, character and scope from member country to member country and their equally varying solutions. The essay does not proceed to attempt such a description.
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