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Need to Know - Back to the drawing board


Following the German court's decision it is clear that eurozone fiscal union would require a treaty change, concludes Celia Hampton


Fiscal union is often urged as a solution to the eurozone’s problems. It is not a solution now, nor will it ever be, unless the EU, or at least the eurozone, agrees to become a full-blown federal state. Given a moment’s thought, the reason is obvious enough – “no taxation without representation”.

On 7 September, the German Federal Constitutional Court endorsed this venerable principle: “Deciding on public sector revenue and expenditure is a fundamental part of the ability of a constitutional state to democratically shape itself. The German Bundestag must, with responsibility to the people, decide on revenues and expenditure.” Moreover, the Bundestag cannot bind future parliaments. All significant taxing and spending decisions must be made by those who represent the people.

International liabilities are no different. The Bundestag may not agree to an inter- governmental mechanism that commits Germany to take responsibility for other governments’ voluntary indebtedness where the sums involved might prove to be a huge burden. If it agrees to a limited mechanism that nevertheless has serious financial implications, as with the EU’s bail-out facility, every decision to allocate tax revenue to a partner country must be specifically approved. Furthermore, the Bundestag must have sufficient influence over how it is spent.

Approval of spending decisions may be given by the Bundestag’s Budget Committee, not the full house, so the process can be relatively swift. Fault was only found with a section of the bail-out legislation that said that the government must “strive to reach an agreement” with the committee. That is not good enough. It must secure the committee’s approval.While the court’s ruling has no disruptive impact, the outcome does nothing to help resolve the euro crisis. As a matter of principle, all 17 eurozone countries should reserve budgetary matters to parliamentary represent-atives. Decision-making comes down to the speed of the slowest, and the parliaments might impose conditions. The Finnish demand for collateral from Greece put a spanner in the works that remained at the time of writing.

Eurozone fiscal union would mean collective, democratically accountable, government with power to levy taxes directly from the citizens by force of law. The EU institutions can only gain such power through change to the treaties. The functioning of the EU is “founded on representative democracy”, but fiscal matters are either excluded from the EU legislative process or given special treatment that is antithetic to democracy.

Taxation’s budgetary side – how much tax is levied – is reserved to the member states, but the EU may legislate on how to levy it. For example, EU law can alter the structure of indirect taxes (VAT, customs and excise) because consistency is indispensable to the working of the customs union and common market.

The normal process, where the Council and Parliament play a more or less equal role, is ousted in these areas. Instead, the Council has to agree unanimously, after consulting the Parliament. “Consulting”  does not mean taking notice of what it says.

The Council represents the member states, not the people. It is accountable because its members have to answer to their own parliaments. But accountability is not represent- ation, and happens after the fact. If the Council tried to impose a direct tax, the legislation would not be undone if one of the governments that supported it was voted out of office as a result. The law would still apply to the whole EU, including that country, although the European Court might strike it down for contravening the general principles of law recognised by member countries.

This process is a great deal less democratic than it would be for, say, consumer protection or employment, where the people’s representatives have the right of both amendment and veto. Yet it is presumably what those who say that fiscal union should be introduced without delay have in mind. Popular uprising would not be an irrational response.

It is clear that eurobonds in their present form, backed by EU government guarantees, cannot resolve the euro crisis in useful time. All other options are unappetising. These include money-printing by the ECB and treaty revision to allow exit from the eurozone. The ECB cannot lend to governments and creating money would violate its basic mission in life. However, something might be possible in its capacity as banker of last resort to the eurozone banks that hold an uncomfortably large amount of troubled government debt.

Given the urgency, EU governments could limit treaty revision to the essentials, for once. Default and exit from the eurozone is a possibility in any event, even if the treaties are silent on the subject. In the absence of any agreed process for resolution or winding up, it will certainly be a very disorderly and painful experience.
Celia Hampton is a freelance legal writer