What changes are needed to have a serious Political union in Europe?

–
Franco Perotto – franco.perotto@studenti.unitn.it

ABSTRACT: This paper reviews how the fiscal discrepancy and lack of harmonisation between the member
states of the EU is detrimental not only in a Macro-Economic perspective for both single states and the EU
as a whole but also for an eventual dream of political unification. In the last years many countries in Europe
have decided to lower their corporate taxes in order to draw foreign investors and increase their tax
revenues and employment, yet there is no evidence that revenues have increased while this taxation
strategy has raised the internal competition crippling the system and the overall stability. Also we face the
problems of the Europe institution. This dissertation aims to provide an analysis of the social and economic
problems affecting the EU, to assess how they influenced state policy-making, and to understand why some
countries diverted from the path to a closer union.

KEYWORDS: European Union, Tax competition, Tax coordination, Europe political composition,
Euroscepticism

JEL CLASSIFICATION: H25, H73, H87, E62

1 INTRODUCTION:
Ideas of a European Federation where flourishing since the 19th century, but was only with the WW2 that
this idea has solidified to prevent future crises and economic wars. Thus the creation of a Federalist union
started (spinelli and rossi, 1941) Yet the first bargain had the misure of intergovernamental agreements, for
very purely practical reasons. In fact a Federal union need common institution that didn’t yet exist. From
the 1957 European Economic Community we arrive to the now a day European Union (EU), yet the frame is
still incomplete and this create tension and friction between the member states.
The idea behind all this process was that slower and more vulnerable economies could converge and
increase their resilience through an enlarged market, fiscal security and greater financial discipline. Yet the
political and economic discontinuity that influenced policymakers during the years didn’t allow Europe to
reach an integrated Optimal Currency Area (OCA) ; giving birth to two different Europes , one formed by
resilient and stronger countries (Germany, Netherland, France…) and one by vulnerable ones (Italy, Spain,
Greece…). Therefore, there is the need to stress the benefits that the single market brings to both Resilent
and Vulnerables countries, especially in a period where Euroscepticism is growing all over Europe, due to
the rise of socio-economic problems, which are not more relegated to the poorer class but are now also
faced by the middle classes who have seen a drastic decrease in their real purchase value.
Vulnerable countries need to reform their system resolving their disadvantage compared to the resilient EU
states, but here lays a problem: how to guarantee vulnerable countries that ” — if they proceed with
the costly reforms as they are required — they would not be at a permanent disadvantage. The
danger is that vulnerable countries are unable to invest due to the lack of their own resources and
inability to attract external resources, since they offer unattractive rewards or greater risk”. (Bruno
Dallago (2016). “One currency, Two europes”. University of Trento, Italy.)
My main analysis focuses on which structural, political and social problems the European Union has,
giving major attention to the economic ones, discussing also the institutional reforms needed to solve
the most pressing problems such as fiscal discrepancy and asymmetry between states through an
analysis of data taken from Eurostat, OECD and from previous analytical sources.
The structure of the paper is as follows: I will first discuss which problems afflict disadvantaged countries
and why lowering taxes is so attracting while being detrimental, in the second part we will see why we
need to complete the institutional architecture of European Government to solve both Fiscal issues
and Euroscepticism. In the end, I will try to summarize problems and solutions and give a personal
opinion.
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2 2 EUROPES, MANY PROBLEMS
While formerly only one Europe exists- in reality- there is a clear division between Vulnerable and Resilient
countries that proceed at two different paces. This is due to an uncompleted One currency Area and a
Labour market which is free only by design and not in reality 1. This problem was already present before the
2002 EURO introduction, but the single currency exacerbated 2 this problem and the 2008 crisis showed
how weak in reality the Euro1 zone is. To react to this problem, the EU commission asked the more
vulnerable countries, which were those who most suffered the crisis and its consequences, to accelerate
their convergence towards the stronger economies. The tight measures imposed allowed only for austerity
polices, leaving countries with the only choice of introducing slow reforms that ended up with mediocre
results and open to moral hazard. An example was what was done by the three Baltic states of Estonia,
Lithuania and Latvia and after by Hungary and Poland which lowered both public wages and Corporate
taxation to attract foreign investors. Moreover OECD commission foreseen in 1998 (OECD 1998) That the
failure of the EU to establish either standard minimum corporate tax rates non-incorporated businesses or
a common principle of tax progressivity, (as well as minimum standards of what constitutes taxable
income) has opened the door to destructive tax competition between the 27 member states, if not by
design then clearly by default. This was probably one of the cause that raised Euroscepticism in the last
20years as we can see in image 2.1.

Image 2.1. CISE elaboration

To worsen the situation there is the problem of the so called “revenue Paradox”: the decline in the
corporate tax rates has not been reflected in the tax-to-GDP ratios, as we can see in image 2.2, which
shows the tax burden over the years, and the image 2.3 which shows the total Tax revenue of % GDP. We
can see how the general lowering of Corporate taxes and indirect taxes hasn’t decrease the revenue of
Taxation, encouraging states to keep lowering taxes, confirming then a tax-driven competition among
them. The downward pressures on corporate tax rates were not translated in a fall in corporate revenues
over the time. (for further info on this subject see tax and economic growth economics department
working paper no.620 by Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia)

1
It is well described by Bruno Dallago in “One currency, Two europes”. Specialy in Part 2.
2
The European single currency express some clear ambivalence, while it has exacerbated the asymmetry
between member states it has in the other hand hastened trades and made easier.
2
 Total Tax Revenue of % GDP
0.05

0.045

0.04

0.035

0.03

0.025
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FRA DEU HUN ITA NLD OAVG EST

Image 2.2: Own elaboration from OECD data (2020)

Statutory corporate income tax rate

60.00

50.00

40.00

30.00

20.00

10.00

0.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

France Germany Hungary Italy

Latvia Netherlands Media
Image 2.3; Sown elaboration from OECD data (2020), the data refers since 2000 until 2019

This is due to the broadening of the tax base since lower taxes attracts more investor, but this game can be
carried on only until other countries keep a higher taxation. A lowering of taxes in one country trigger a
chain reaction were everyone start lowering the taxation as well, generating a cyclical process, the so called
tax war. What we are left is with countries that lower their tax income, achieving an undesirable
equilibrium, where the only receivers are companys. while member states should be seeking to achieve the
opposite, that is an end to beggar-thy-neighbour macro-economic policies and the promotion of tax justice
throughout Europe.

We can see that Fiscal unity is a mandatory aspect for Europe to survive and keep seeking his social and
moral principles. We could say that like in Macroeconomy for corporation, collusion is always preferred to a

3
any sort of competition, this is also true for countries that could reach a higher surplus colliding, and
deciding how much taxes they want the corporation to pay.

3 AN ILL-STRUCTURED PROBLEM, THE NECESSARY INSTITUTIONAL REFORMS

In his inaugural speech to the European Parliament at the beginning of his second term, Jacques Delors,
said “that the Community can only retain its attractiveness if it accelerates its integration.” In his view,
Member States should lose sovereignty to the sake of the European commission, and as a consequence,
there will be an “expansion of the powers of Parliament.”

Where do we stand now? How does the European legislative process work? The EU’s standard decision-
making procedure is known as 'Ordinary Legislative Procedure’. Directly from the official site of the
European Union: “Before the Commission proposes new initiatives It assesses the
potential  economic,  social  and  environmental  consequences that they may have. It does this by
preparing  'Impact assessments'  which set out the advantages and disadvantages of possible policy options.
[…] The European Parliament and the Council review proposals by the Commission and propose
amendments. If the Council and the Parliament cannot agree upon amendments, a second reading takes
place.

In the second reading, the Parliament and Council can again propose amendments. Parliament has the
power to block the proposed legislation if it cannot agree with the Council.

If the two institutions agree on amendments, the proposed legislation can be adopted. If they cannot agree,
a  conciliation committee  tries to find a solution. Both the Council and the Parliament can block the
legislative proposal at this final reading. “ (Jacques Delors, Speech to the European Parliament, On 9
September 1985)

So the European parliament was meant to be the decisive political power of the Union, guarantor of the
popular will, yet it is more a facade than a real thing. Real decisions and true power lie within the European
council. Delors’ hopes were disregarded. In this context, single states worry more about their own personal
agenda than focus on the EU problems in general, abusing the Veto power for their own personal interests
rather than for the sake of all European countries as a whole (like done by Ciprus or Hungary) 3. This process
is jeopardazing all the system, since Europe has serious problems to react at a fast enough pace to the
various crisis that it faces. When in the end the EU manages to reach a solution, it is usually overdue or
sometimes even useless.
We have already established how fiscal unity is mandatory to improve the European Union, now we will see
why having fiscal unity is necessary to a political union. This change would probably be criticised and many
countries would vote against it, why? Well keeping aside the political reasons, from an economic point of
view having only 1 taxation for different countries and economies would be problematic. A taxation system
that works in Germany doesn’t mean it will work in Latvia as good, different economies need different
taxes. The solutions to this are multiple: The first one could be keeping a different taxation system for every
country, but who would guarantee that there won’t be any moral hazard? The second solution would be to
fasten the convergence directly financing with EU mutual debt in order for the Vulnerable countries to
proceed with the necessary reforms, like it was done with NextGeneration EU. But who would guarantee
that those necessary reforms are being correctly applied? Both solutions need a guarantor who would
check that there is no moral haza2rd and would ensure that the reforms are being introduced.

Moreover, to have a political union some key points are needed which are not strictly economic but also
social and political ones: first, we need to stress the evidence of the benefits of single market like the one
23
i am refeering to the Ciprus Veto of Bielorussian sanction ( A. d’Argenio. “Bielorussia, il veto di Cipro: nessun accordo
per le sanzioni UE”. Retrived 21 september 2020. From https://www.repubblica.it/) or the Hungarian Budget vetos.
4
we have nowadays. Data show how the increased competition between firms has increased the overall
productivity affecting larger economies but even more so the smaller ones ( for further info see “The
competition effects of the Single Market in Europe” Chris Allen, Michael Gasiorek, Alasdair Smith, Economic
Policy, Volume 13, Issue 27, 1 October 1998 ). We also need trust among countries, which was clearly
present during the first meeting in the ’40, but it has been eroded by time, “Mutual trust is sustainable only
if each participant in the integration feels that no member country is permanently advantaged or
disadvantaged. At least in the long run, the rules upon which interaction are based must guarantee that
integration is to the advantage of all participants in roughly the same way and measure. Thus, institutions
and their enforcement must be transparent, fair and impartial, long-lasting, and not subject to bargaining
or opaque pressures and dealings.” (Bruno Dallago (2016). “One currency, Two europes”. University of
Trento, Italy. Page 243) We can then see how an institutional reform is needed to introduce a financial
minister but also to establish some kind of political union and overcome the right of veto that has brought
to the European slowness to react.

4 CONCLUSION
Laying down all this information about now a day issues possible future ones and all the various possibilities
of political union, first of we can say how Is evident that Europe needs a fiscal unity or at least an
harmonization of it, the various Commission’s surveys done in the last years should be a source of
embarrassment, reflecting not just the absence of any active attempt to harmonise or coordinate tax policy
changes but, above all, the reemergence of intra-EU tax-driven location competition, whereas member
states should be seeking to achieve social justice and welfare distribution, putting an end to the beggar-thy-
neighbour macro-economic policies and promoting tax justice throughout Europe.

Secondly, Europe needs to deal with Euroscepticism which is not caused by real economic factors but it is
more about perspectives. It is clear how the so-called deficit of democracy has become a pressing problem
in the European Union: Given the expansion of the Community’s responsibilities and the increasing
regulation that is concomitant with it as well as the majority decisions made in the blurry of the various
minister formations, the European Council along with the low democratic legitimation of the Commission—
all this is no longer acceptable to the citizens. A reposition of Europe is needed, citizens should feel
participated of the continent and not feel as if some far scholars make choices for them, affecting their
every-day life. Cyclical crisis, the fact that real purchase value has lowered during recent years , the lack of
strong countermeasures approved by all and the general idea of being tricked by other member states has
exacerbated this sentiment.

Europe is at a crossroad, between going forward and pushing the integration to its next step or falling
apart. Yet, there are some good signs for the future, and I think that European identity will prevail and we
will reach a real European society. Evidence for that is provided by the ratification of the Lisbon Treaty, the
bank union and specially NextGeneration EU. During the pandemic we have seen how countries were
willing to accept mutual debt and how austerity is not a Dogma any more. All these instruments, even with
all the delays and all the half-measures could actually improve Europe and to deal with its acute problems.
In the end we can say that the political union, albeit desiderable, is not mandatory. What is mandatory is a
Fiscal harmonization and a mutual debt, both reachable or with a Federal Union or with Eurobonds (for
further information about this topic see “an analysis of Eurobonds”, Roel Beetsma and Kostas Mavromatis).

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