Just Another Pact

Federations, however constituted, have to work by consensus; their centres can find getting member states to agree on common policy taxing and time-consuming. The European Union has developed a method. It gets its member states to agree on policies in one of 14 areas, which are then embodied in directives. When a policy does not lead to sufficient action or requires greater specification, the European Commission issues an action plan. Thus it has an action plan on sharks, on drugs, on enhancing the security of explosives, on energy efficiency, on e-signatures and e-identification, on adult learning, one for Euro-Mediterranean energy cooperation, for intelligent transport systems, for sustainable consumption and production, for European neighbourhood policy, for animal health strategy, and many others. An action plan must be divided into points. The commission tries to keep the number of points under ten; if the number cannot be restrained, it uses decimal points to keep down the number of integral points.

The action plan proposed by the President of France and the Chancellor of Germany follows the rules. It has nine points, but only six are counted. The other three are supposed to specify indicators to measure whether the other six have been obeyed — measures of price competitiveness, fiscal stability and desirable investments in research and development, education and infrastructure. These measures are still to be defined.

The six policy measures are no less ambiguous. Indexation of wages and salaries would be abolished. But a number of European countries need to reduce their real wages, not just to promise not to raise them with prices; but there can be no universal agreement on wage reduction. Members of the EU must recognise one another's education qualifications. They may well do so; but that hardly matters. The question is whether employers will recognise equivalence of the qualifications; if a Polish doctor cannot speak Spanish, he would not be much use to a Spanish hospital. Harmonisation of corporate income tax is a laudable objective; but it is difficult to see why the two heads of state stop there. The EU should harmonize all taxes, rebates, exemptions and concessions, except on immoveable assets, if it wants to avoid distortions. Sarkozy and Merkel want bankrupt member states to stop giving generous retirement pensions, but they phrase the demand too delicately to expect much action. 

Little clauses in the constitutions of member states which would require them to issue debt alerts sound like action; but they will not stop the states from getting into debt crises. And national crisis management regimes for banks make no sense when the banks themselves are spread internationally, and when some of the countries will be incapable of overcoming a crisis in their banks.

There are two issues Angela Merkel and Nicolas Sarkozy do not touch. If the European Union is to come to the rescue of member states in crisis, it needs to have access to the capital market on its own; and it cannot do so unless it has its own fisc. That means the the Union needs a common system of taxation. It does not have to take over all taxation from member countries, but if it is to have significant borrowing capacity, it would also need to have a significant share of revenue. The simplest way would be to give it a fixed share of the revenues of all member countries; but transfer of specified taxes, such as corporation tax, can also be considered.

Addition of these two issues to those that the heads of state have to agree upon would make consensus even more difficult. In the circumstances, it would not be out of place for them to consider an alternative, namely providing for bankruptcy of member states. Cities have gone bankrupt in the US, and been run by state governments until their financial health was restored. The same thing can in theory happen to a US state; it would be rescued by the federal government. Europeans may be shocked by the idea of, say, Spain, being taken over by a liquidator from northern Europe, but these are extraordinary times which require exceptional solutions. Sarkozy and Merkel have taken a step towards finding a solution, but it is too modest and timid. Time is not on their side; and if they cannot compel their fellow heads of state to accept a solution, no one can. The time for pussyfooted diplomacy is over; now is the time for some hard-headed redesign of the antiquated architecture of the European Union. France and Germany may still fail to persuade other member states. But it is better to have tried and failed than to make a show of trying.

(This story was published in Businessworld Issue Dated 28-03-2011)

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