Dare democracy: How tax collection would make the EU more responsible

Imagine. How would public interest in European issues change if the European Parliament was fiscally sovereign? What if the parliament was allowed to charge taxes or go into debt? Therefore, the members of parliament would discuss heavily whether the – for example – European VAT should be raised so that European climate policy could move forward, or a European army could be built up, or the economic consequences of the corona pandemic could be combatted successfully, or … How much attention would the European Parliament get? 

Any bet, it would gain a lot of attention, since Europeans would decide how much money they  give to EU institutions and how much they wanted to keep within the nation state. And they would – with their vote – determine what the money would be spent on.

There are regular complaints that Europeans are paying too little attention to the European level. If the European Parliament had financial autonomy, this problem would be solved overnight.

The European Parliament has almost no financial sovereignty, but the European government, the EU Commission, does. The Commission is not yet allowed to raise taxes but – since recently – to make debt. These days, the issuance of European Union bonds to finance NextGenerationEU has begun. The NextGenerationEU is the common recovery programme agreed upon by member states during the summer of 2020. 

It is the first time that the European Union went into debt to a greater extent.

With these debts, the EU will become one of the major borrowers in Europe in the coming years. In total, the European Union is allowed to incur a total of €800 billion in debt. That is 5 per cent of the euro-area’s economic output for one year. It will already issue €80 billion this year and could issue up to €150 billion per year in the next five years, putting it on a par with major European sovereign issuers, such as Germany, France and Italy.

There may be good reasons for such a programme. In their recently on Social Europe (more about the platform here) issued text “EU borrowing – time to think of the generation after next“, Rebecca ChristieGrégory Claeys and Pauline Weil name some. Interest rates are low. Therefore, the costs of the borrowed money are low as well. Even at negative rates at the moment. That means the European Union will have to repay less than it borrowed. And large-scale EU-level debt could bolster the resilience of European financial markets – the authors argue – , “by reducing the potential magnitude of capital flights in times of market distress since the issuance of common debt sends a strong signal that European countries want to stick together in the long run.” 

Another argument for borrowing on the European level is that European monetary policy could finally do what it is there for: securing a stable currency

The Maastricht Treaty with the Monetary Union and its own central bank left the issue of an economic union undetermined. That made the European Central Bank the saviour of economic crises in Europe – and threw the bank into conflicts of interest. Because a central bank that buys government bonds for two reasons, to prop up countries and to control inflation, runs into a problem when it can’t achieve both goals (saving the economy and ensuring stable money) with a single means. For example if the central bank buys government bonds to back up the state but brings through this more money into circulation and increases inflation as a result.

Fiscal policy is a better way to help economies in crisis. But are European Union bonds to finance NextGenerationEU the way to go? 

I am having my doubts.

As we have seen with the NextGenerationEU, one problem is that the decision-making process for an immediately necessary rescue policy is far too long when 27 states have to agree. The pandemic may soon be over, and the rescue program is just starting.

Another problem is that the same 27 states have to agree on how to spend the money. Distribution conflicts take precedence over meaningfulness.

The main problem: lack of accountability. The citizens of Europe do not elect the European Commission. The European Parliament has some influence on the Commission, but it is primarily appointed by the EU member states’ heads of state and government. What if the borrowed money is spent differently from what the citizens want it to be spent on? What if the citizens are of the opinion that no more money should be spent on the consequences of the corona crisis because the corona crisis is over? Would the Commission stop spending? 

As mentioned above, within the NextGenerationEU programme, up to €150 billion can be spent annually for five years. I suspect reasons will be found for why the money should be spent anyway. Those who can spend money are powerful. 

A responsible democracy goes along with accountability. Because only those who can be held responsible for their actions also have the incentive to act responsibly. And voters are able to make the right choice when they know who is responsible for which activity.  Hence, accountability ensures correct decisions at the level of politicians and voters alike. Then democracy works. Then politicians and parties are elected – or voted out of office – for their actions.

Upshot: The decision about how much money to take from people and what the money should be spent on is one of the most important and responsible ones. To decide on the country level how much money should be spent and leave the execution to the Union level doesn’t fit the textbook of good democracy. Especially not when – as in the case of NextGenerationEU – the future generation’s money is being dealt with. Therefore, I advocate well-made financial autonomy at the European level – with financial sovereignty in parliament. Admittedly, there is a lack of political majorities in Europe for such a relevant change. One could therefore say that the NextGenerationEU programme is second-best. One could also say that this is a bad start for fiscal sovereignty on the European level.

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