* * * * *
In May 2014 there will be elections for the second largest "parliament" in the world, but nobody seems to notice. After the People's Congress in China, the European Parliament is the largest representative body on earth. With 750 members, it is bigger than the Parliament of India, the House of Representatives in the U.S., and the House of Commons in the U.K.
Unlike other parliaments, the European Parliament has no final say on the laws of the European Union. That power rests with the Council of Ministers of the 28 member states for each specific area of government. There is a council for agriculture and fisheries, economics and finance, transport, justice, and so forth. The ministers in these councils are politically not accountable to the European Parliament but to their respective 28 national parliaments. Imagine the power of federal legislation in the U.S. finally resting with a council of state governors, each responsible to the state legislature in their state!
Unlike other parliaments, the European Parliament cannot bring down the European government by a vote of no confidence because there is no European government. The power to govern is divided between the European Commission and the Council of Ministers. The commission has the exclusive power to initiate European legislation. The council has the power to finally block or approve all legislation. The European Parliament must be consulted in the legislative process and it has the power to amend some legislation, but final approval is not within its power.
Unlike national governments, the commission is not a government with a political program that is accountable to a parliament. The members of the commission are not proposed by the majority party or parties of the European Parliament. They are proposed by the national governments of the member states, which represent the political parties in power in the member states. The European Parliament can reject or accept these proposals, but it cannot make a proposal of its own. The result is that the commission members represent a welter of political opinions that do not necessarily reflect the majority of the political parties in the European Parliament.
Most will agree that this is not an institutional framework capable of operating a federal state. Yet elections are to be held for a body that is supposed to operate within this framework as a kind of "democratic" parliament. The elections are contested along national, not European, party lines. Because the European elections are not about a European government, many voters see the elections as a golden opportunity to show their discontent with the policies of their national governments without any danger of causing a national political crisis as a consequence of a negative vote. Traditionally, the debate in the campaign is about national themes, which will sound very familiar to U.S. voters: unemployment, pensions, the economic crisis, immigration, the rising cost of healthcare, and crime. Political parties position themselves on these issues at the European level in the same way as they do on the national scene. But this time there is a difference, because the debate is also about Europe.
A Bleak and Static Future
Many very complicated European questions have been reduced for election campaign purposes to simplistic battle cries against Europe. This is, of course, deplorable, but also understandable because the European Joe the Plumber does not understand what is going on in the brave new euro-world. With the exception of Germany, most euro member states have been stagnating for more than five years. Hungary, Ireland, Italy, Portugal, Spain, and, above all, Greece and Cyprus have been going downhill and are wrestling with massive youth unemployment and severe poverty, even in the middle class. All of them face a bleak and static future at least for the next few years. For young voters in particular, there is little hope. There is no prospect of a great leap forward in standards and quality of living, as has been the case in the period between the founding of the EU in 1957 and the introduction of the euro in 2000. The popular perception is that in this century, so far, the great leap forward has been made by the BRICS countries -- Brazil, Russia, India, China, and South Africa -- not by Europe.
The fury against the EU is concentrated against European measures aimed at controlling the excessive budgetary deficits and debt ratios of several member states. Each member state of the eurozone has the obligation to submit its budget for approval to the European Commission before approval by its national parliament. During the review process, the commission recommends on the taxing and spending policy of each member state. Although the member states can make their own budgetary decisions, the commission has the power to impose hefty financial sanctions in case of noncompliance and, in times of crisis, financial emergency aid is made conditional on strict compliance with EU budgetary targets. When a member state accepts this budgetary aid, the whole economic and fiscal policy is taken over by a "troika" of officials from the commission, the IMF, and the European Central Bank.
This system of European budget enforcement is fiercely resented by the governments of the member states as a blatant attack on their national sovereignty. It was the main reason why Spain refused any outside aid in spite of its banking crisis. The measures taken by the member states to implement the fiscal and budgetary recommendations of the commission are very much resented and opposed by the population at large, while national governments use the commission as a scapegoat for unpopular budgetary diktats. The main culprit has been the budgetary squeeze imposed by the commission on national governments, leading to record levels of unemployment in Greece, Ireland, Italy, Portugal, and Spain. Some measures have been more specific. In the Netherlands, tax deductions for mortgage loans were reduced, resulting in a painful decline in the real estate market. In Greece, salaries of civil servants and pensions were repeatedly cut by 20 percent or more and tens of thousands of public employees were sacked. The public broadcasting service was completely shut down, and a new service was started with barely half the number of employees earning reduced salaries. Because of a lack of funds, hospitals invited patients to bring their own medicine and food supplies. In Italy, funds for higher public education were slashed. In Cyprus, savings accounts in excess of $130,000 were confiscated. However, except for Greece, which is a special case of a partial meltdown of society, there has been surprisingly little protest against overspending by national governments, although national overspending was one of the major causes of all this budgetary misery.
All this explains the repeated and massive demonstrations with fiery rhetoric against Europe. The worst expectation is that right-wing nationalistic and left-wing anti-European parties, together with protest parties, may realize an anti-European-monster score of up to one-third of all 750 seats in the European Parliament. That would amount to a democratic revolution, but it would not necessarily be a bad thing for Europe. Finally, the European Parliament would resemble the division of the public opinion in Europe, with a solid majority in favor of European integration and a solid minority opposed to it.
Strong Views on the EU
Some of the protest parties have rather provocative platforms. The United Kingdom Independence Party, for example, wants the U.K. to leave the EU. The Front National in France wants the reinstatement of national border controls, the reintroduction of the French franc, and the primacy of the French parliament over European legislation. The Party for Freedom in the Netherlands wants to leave the EU and the euro and join Norway, Iceland, Switzerland, and Liechtenstein in a kind of European free trade area. The theatrical Beppe Grillo group in Italy wants the abolition of all austerity measures, but is less clear in its platform on the EU. The Greek extreme right-wing Golden Dawn party has ideas that are very similar to unreconstructed Nazism, and therefore totally opposed to any form of European integration. Even if they would represent a substantial part of the European Parliament, it would still be very difficult to draw a clear line in this very diverse group. However, this division of opinion would open the opportunity for a real political debate about Europe, not in the national parliaments, but in the place where this debate ought to be held: the European Parliament. It will not be enough for the majority parties to extol the virtues of more Europe without indicating precisely how these virtues will benefit the European voters.
The pro-Europe parties have to explain the stark choices facing not only the commission, but all the national governments of the euro member states and their ministers in the council. They should explain that the most important issue facing Europe now is not more or less Europe, but how to build an effective and democratic decision-making mechanism that can serve both the internal market and the European Economic and Monetary Union, which are the two very different but main objectives of the European treaties.
Europe is not one single bloc, but consists of two blocs: the internal market and the eurozone or EMU. This situation is complicated by the fact that all 28 states are members of the internal market, but only 18 states are members of the eurozone. Right now, the European treaties provide only for one single European system of government, which consists of the commission, the council, and the European Parliament. This system has been designed to regulate the internal market but has proven to be totally inadequate to regulate the eurozone during the financial crisis.
Except for the unanimity requirement in tax matters, the current European construction is more or less satisfactory to run the internal market. Most agree, however, that the absence of an adequate decision-making mechanism for operating the eurozone is the major flaw in the European construction and that remedying this flaw will soon be the major, if not the only, European challenge. The absence of a decision-making mechanism is also the main cause of the prolonged economic crisis in Europe. Remedying this flaw is not only in the interest of the euro bloc, but of all member states and even of the world at large, because an economically dynamic and healthy Europe makes for an economically healthy world.
Obstacles to a Political Union
We all know the history of this disaster. When the euro was introduced in January 1999, many economists pointed out that a common currency was not workable without a political union. Of the then-15 member states of the EU, only the U.K. government drew the logical conclusion of this position and clearly indicated that it would not accept a political union and therefore would not accept a common currency.
The governments of the other member states were less clear about their intentions for a political union. They certainly underestimated the obstacles to such union. Theoretically, they were prepared to accept a political union, but they were not very explicit in the ways to achieve it. They vaguely put their hope in a new European constitution that would provide enough powers to the union, so that gradually a successful decision-making mechanism could be set up for a successful currency union. That scheme was skillfully scuttled by British diplomacy and two negative referenda in France and the Netherlands. The result was that the currency union started without a political union. To the surprise of the experts, the currency union was more stable and successful than expected; that is, until the financial crisis struck. By then, it was too late to abandon the project of a full EMU and return to national currencies. The European Central Bank was already in operation and the interest in the euro among the member states was stronger than expected. Then as now, there was and is no way back.
Therefore, the main question for the coming European elections is political: how to build a decision-making mechanism that will enable the eurozone to conduct a common economic and budgetary policy that will effectively support the currency. The answer to that question is also important for the non-euro members because disintegration of the eurozone would inevitably have negative consequences for the internal market. It is clear that the way the currency policy has been conducted in the eurozone since the beginning of the crisis cannot be continued. During the last few years, ministers of finance in the eurozone were busier managing the crises of the common currency in Brussels than running their own national economies. Emergency measures that should have been decided in hours or days took weeks or months because they had to be formally approved by all national parliaments. In a few cases, approval even depended on decisions of the German constitutional court.
The question within the main question is whether this decision-making mechanism can be built inside existing European institutions or whether a completely new framework should be set up. This can be answered in three ways:
- through the establishment of a European federal state;
- through an amendment of the European treaties changing the role of the commission; or
- through the creation of a brand-new decision-making mechanism outside the existing European treaties but having its legal basis in these treaties.
There are the radical proponents of a European federal state, like Guy Verhofstadt, chair of the liberal party of the European Parliament. A full federal formula would resolve the question of a common economic and budgetary policy at the eurozone level. However, that would not work because public opinion in the euro member states is not prepared to accept such drastic measures and any proposal in that sense would be defeated in democratic elections. Such a solution would be tantamount to a peaceful political revolution because it would imply a massive transfer of power and of billions of euros from the national budgets of the member states to the budget of the EMU.
Common European wisdom wants to seek a solution within the current framework as it exists in European treaties, by providing more economic and budgetary decision-making powers to the commission. That solution is difficult because it requires an amendment to the European treaties. Experience with the European constitution and the Lisbon treaty at the beginning of this century has demonstrated how cumbersome and difficult this procedure can be. It also requires a fundamental change in the role of the commission. The commission would acquire effective decision-making power on a substantial part of the national economic policies of the euro member states, requiring a significant transfer of power and making the commission politically responsible to the European Parliament. The principle "no taxation without representation" to which all EU member states subscribe requires such political accountability when the commission would acquire the ability to decide fiscal and budgetary measures that would directly affect the member states. It is unthinkable to make the commission politically responsible to each of the national parliaments; therefore, the only body fit for such political responsibility would be the assembly of the representatives of the euro member states in the European Parliament. That could result in a schizophrenic situation in which the same commissioner could be obliged to resign from his economic functions for the euro member states, while remaining in function regarding his competences for all states of the internal market.
This is the crux of the complicated question of how to design a new decision-making mechanism for the EMU. Because the power structure to achieve the two objectives -- the internal market and the EMU -- is so different, it may be a solution to split the powers for the internal market and the EMU in two separate bodies: one commission for the internal market without direct political responsibility to the European Parliament, and another commission for the EMU with direct political accountability to the European Parliament for economic and monetary affairs. The European Parliament would fulfill two roles: the current role as a consultative parliament for the internal market and a new role of effective political decision making for the EMU restricted to the representatives of the euro states in the same European Parliament. Article 136 of the Treaty on the Functioning of the European Union specifically provides that the Council of Ministers of the euro states has the power to establish rules for a common currency policy. With some political goodwill, this can be used as a legal basis for a completely new setup within the euro group, the club of euro member states. This is the solution of a "Europe à deux vitesses," but it would provide a legal framework for an already existing de facto situation. It may seem complicated, but common sense dictates that to steer one body that is a political union and another body that is not, there is a need for two different gears. Consider whether the German euro engineers would accept such a box with two different gears of which they would lose control of the most important one.
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact email@example.com