A FTT to immediately start the Fiscal Union

, by Roberto Palea

A FTT to immediately start the Fiscal Union

The measures announced recently by the ECB seem to be able to ease, at least in the short term, the market turbulence and reduce the differential in interest rates on the new issues of government bonds both in Spain and Italy. The ECB can certainly do a lot but, as has also been authoritatively explained in the Document of the Four Presidents (Towards a Genuine Economic and Monetary Union) of June 25th, 2012, it alone cannot save the euro and facilitate the evolution of the Eurozone towards a federal Union led by a democratic government.

A key step in this direction, which could also help reassure Germany, is to rapidly advance the project of fiscal union. However, this should not only imply the acceptance of the Fiscal Compact, thus subjecting all Eurozone economies to a necessary budgetary discipline. It must also give the Eurozone the financial levers needed to make the European economy grow under unitary direction.

The proposal, which is supported by many, is to grant the Eurozone the independent power of taxation to mobilise additional resources through the adoption of appropriate European taxes in order to stimulate the European economy, which is overall stationary, and, in some countries, in recession.

For the time being, the idea of establishing a Financial Transaction Tax (FTT), once strongly advocated by the Italian, French and German governments, has gone by the wayside and should be made a priority.

This tax, which cannot be effectively applied by individual Member States due to their small size, would be suitable for financing the Eurozone as a whole, resulting in very high tax revenues.

Moreover, if the FTT were linked to the need to powerfully revive the European economy, also by reducing national taxes on business and employment income, it would be positively welcomed by European citizens. These two reasons , i.e. its capacity to generate significant tax revenues to finance the Eurozone, which are not charged to the budgets of individual States; a high degree of social acceptability, would be enough to largely justify such European taxation.

At the same time, the European FTT would help put a stop to those highly speculative operations in financial markets which, taking advantage of globalisation without government, and, hence, of the absence of proper rules and effective international constraints and controls, have helped trigger the global financial and economic crisis.

Setting aside, in order to be necessarily realistic, the idea of a global tax on financial transactions, which would be the most efficient and effective tool to equip the UN as well as its specialised agencies with their own financial resources to address global “emergencies”, such as climate change, drought, hunger, etc., many rightly fear that such taxation , applied to a single monetary zone, the Eurozone, may encourage a flight of capital to areas of the world with more favourable laws.

Besides, even though it is very easy to move capital, it is also true that nowadays it is just as easy to check information and, hence, to monitor capital movements from the Eurozone, by using modern computer technology.

The tax avoidance effects might be combatted through a specifically designed European rule, inspired by the general guidelines of the Court of Justice in Luxembourg on the abuse of rights. In this way, rates might be even higher than those so far proposed by the Commission and the European Parliament (in the fear of capital outflows, for tax reasons), thus increasing the overall effectiveness of the FTT.

Finally, the proposal for a European FTT would be an opportunity to accelerate reflection and clarify the proposals on the role that the Eurozone really intends to play to regulate as well as control capital movements and to change the global financial architecture, keeping in mind that financial affairs cannot be managed as they were before the crisis.

Some important European regulations under discussion confirm that only Europe can take the lead in initiatives aimed at helping the movement of capital regain its own goals, related to the financing of investments and international trade in a free but organized and regulated market.

The rules of the Lisbon Treaty seem to allow for the establishment of a FTT between a large number of EU Member States, using the tool of “enhanced cooperation” which, therefore, should be initiated.

The problem of how to allocate the revenues directly to the European Treasury in order to implement the increasingly urgent measures to revive European sustainable development, remains unsolved. However, only strong political willingness will overcome all legal obstacles in order to create a “road map” towards a “genuine economic and monetary union”, as called for in the above-mentioned Document of the Four Presidents.

Your comments

  • On 16 September 2012 at 20:40, by I want out Replying to: A FTT to immediately start the Fiscal Union

    Well that’s the solution then, impose a FTT, generate lots of income and at the same time reduce the tax paid by individuals and small companies. As an individual who pays tax why should I not support this suggestion? It is what we have all been looking for, a source of revenue with no downside.

    There is a good reason why a tax “once strongly advocated by the Italian, French and German governments, has gone by the wayside.”, the analysis by the EU itself suggests that 90% of derivative trading would promptly go to another financial centre, this after all was the Swedish experience when they imposed just such a tax. So the sum of money claimed as tax revenue would in fact be massively lower than the number quoted.

    The same EU analysis suggests that overall the tax is likely to have a negative impact on the overall economy, the exact amount being determined by the mitigating factors put in place. To get these benefits we have to believe that an entity as corrupt and bureaucratic as the EU can invest wisely and prompt growth. Can we please remember that this is the same EU that in March 2000 stated that by 2010 the EU would be the ‘most competitive, dynamic and knowledge based economy in the World.’ (Lisbon European Council) and then in 2005 quietly dropped all the work aimed at delivering this target.

    If life was as easy as the article suggests I am sure the Americans and others would have adopted a FTT years ago. The reality is that without a global approach the money will simply move away to a place where it is not taxed as highly (and in fairness when was 0.1% high ???)

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