Recently there has been a heated debate over a fiscal harmonization inside the Eurozone. Many politicians and economists ask for the unification of fiscal power and this request has become even more powerful with the exit of UK from the EU.
Enrico Letta, an important Italian politician and academic, has lately published an article sustaining that as Brexit has become a fact, the EU should take advantage from Britain departure from the scene in order to revitalize itself by removing some of the vetoes imposed by the London government.
A crucial Britain veto is that on taxation.
Clearly, with the UK being extremely hostile to a unification (and/or coordination) of taxes, a fiscal harmonization was not even thinkable and this, according to Letta has created an “hybrid system”.
Let’s go step by step and try to understand and summarize how the structure of powers is organized inside the EU.
It is well-known that the economic policy framework of the European Monetary Union (EMU) combines a supranational monetary policy, conducted at the euro level, with decentralized fiscal policy that remains responsibility of national governments. What does this mean? Basically, each member of the EMU cannot use monetary policy, but it still has the chance to use fiscal policy.
Since fiscal policy is conducted at the national level, theoretically each country can implement whatever action it wants, isn’t it?
In principle yes, but fiscal policy actions may spill over to other countries through a variety of channels; such spillovers, called externalities, mean that one country’s fiscal policy actions can help or hurt other countries. Therefore, countries subject to each other ’s externalities would prefer to have some degrees of coordination among fiscal policies. While, formally, fiscal policy remains a national prerogative, it seems natural to ask whether a deeper economic integration among eurozone countries calls for some sort of coordination.
Let’s make an example. Consider two monetary union member countries who both suffer a recession: then each government would adopt an expansionary fiscal policy. But the question is, to what extent? If each government ignores the action of the other, their combined action might be too strong; if, instead, each government relies on the other to do most of the job, too little might be done to pull each country out of the recession.
The conclusion is that there is ample room for mutually beneficial cooperation.
Moreover, going back to the article, the presence in the Eurozone of countries which are tax heaven makes the action of other governments’ fiscal policy even more difficult.
What does this mean?
Making it simple, suppose you have two EU member states with two different structures of taxation, one with low level of taxation and the other with high level of taxation. Now I ask you: which one would you prefer to live in?
Easy question! The answer is obvious because, between the two, the first country would be much more attractive. But what’s the point?
First of all, discrepancies in taxation -as Enrico Letta stated in the article- makes the implementation of some fiscal policies at the hands of some governments harder, and I would add also powerless. Second of all, in my opinion, this creates imbalances between countries which are part of a supranational institution, which not only should be seen as a unique entity, but also should act as a unique government.
In order to pursue this objective, if a first step has been made though a monetary unification, a further step must be done.