EU’s new budget deal has shown us that the European Union (EU) is moving in the wrong direction: The creation of the European Stability Mechanism (ESM) has induced a feeling of 'bail-out fatigue' in Germany and other Northern member states. A truly European budget needs to integrate the ESM into the political system of the EU in order to both strengthen the accountability and fiscal capacities of the EU.
From a present-day perspective, the 1977 MacDougall-Report (a report conducted by experts on the behalf of the European Commission), made a bold suggestion: a fully-fledged federation in Europe would need a federal budget equivalent to the size of 20-25 % of EU Gross Domestic Product (GDP). Since the authors of the report were aware of the fact that such a federation was unlikely to develop within the next decades, they claimed that 5-7 % of GDP would possibly suffice for a transitional period of time. In the light of these numbers, it is quite sobering to see that the members states have cut the budget by 3,5 %. Altogether, the current multiannual framework only accounts for about 1 % of total EU GDP.
When examining these numbers, it seems valid to argue that the current EU budget does not address major economic problems within the Eurozone and beyond. Though unemployment rates are skyrocketing in Southern Europe, Northern member states, most prominently Germany and the UK, were less willing to coordinate more financial resources on the EU level. Why was this the case? Why were European leaders reluctant to assign larger budgetary responsibilities to the EU? The answer is both simple and alarming: Nouriel Roubini correctly identifies the emergence of 'bail-out fatigue' in the affluent Northern European states – a feeling that could hardly be reconciled with a budget increase for the EU. Thus, political opportunism seems to counter political-economic common sense in this case: As persuasively argued by the MacDougall Report, the EU's federal budget is clearly underdeveloped to tackle economic shocks.
With the establishment of the ESM and the Open Market Transactions (OMT) programme of the European Central Bank, European leaders have created large financial backstops outside of the scope of parliamentary control in order to avoid the meltdown of the Eurozone. Although both facilities exclusively function as a lender (of last resort) rather than a durable financial transfer mechanism to debt-ridden states, the risk of default could potentially only be stemmed by European taxpayers.
One could arguably take the stance that a central bank needs to be independent from day-to-day politics in order to avoid political business cycles. But how can we possibly defend a lending scheme that is not even part of the EU's political system, as in the case of the ESM? Despite the fact the ESM has been ratified by national parliaments, it remains an open question how parliamentary control will be maintained since only the national Finance Ministers and their respective deputies will have a say in the governance framework of the ESM. In the treaty of the establishment of the ESM we find clear evidence of the lack of accountability: article 35 exempts all decision-makers from legal proceedings. More simply put, taxation does not only demand representation, as claimed by the Boston Tea Party, but also democratic accountability.
Lastly, we need to clarify what a more accountable European Budget may look like. There are broadly speaking two possibilities: Either we strengthen the supervisory control of national parliaments or we include the ESM into the political system of the EU. If we choose the former, we may incentivise national parliaments to decrease or repatriate contributions to the ESM. The gentle reader may soon object that the European Union faces an input legitimacy problem. Notwithstanding such claims, the current campaign for the European Parliament Election points in a different direction: the future President of the European Commission will need to legitimise his policies vis-à-vis his electorate more than ever in order to get re-elected. Therefore, we should integrate the ESM into the political system of the EU in order to avoid one-dimensional nationalist discourses. Such a solution would strengthen the influence of all EU organs by putting the ESM under EU law. Last but not least, the fiscal capacity of the ESM could also be used to further stabilise indebted countries by investing in demand-side projects – a task that has only been poorly performed by the current EU budget via the structural funds and the Common Agricultural Policy.
Summing up the aforementioned ideas, we should use the ESM to increase the overall budget of the European Union. Although the ESM remains a crisis mechanism, which only lends money to states in financial trouble, it should be put under EU law-making to guarantee more accountability. This would mark a significant step forward to close the fiscal imbalances in the federal system of the EU.
To go further
On Nouvelle Europe :
- Dossier of Februray : 2014 : A manifold turning point for Europe ?
On the internet :
MacDougall-Report, The role of public finance in European integration, Brussels: Commission of the European Communities, 1977.
© European Union - 2012