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July 09, 2020

Good and bad ways to make the case for an EU tax

The road to European disintegration is paved with the best intentions. The recovery fund is a potentially useful instrument to raise EU investment in key areas, but in the form currently being discussed we see it overburdened not only with too many policy goals, but also with false hopes and bad arguments. The EU is setting itself up for failure.

Bad reasoning is prevalent in Germany right now. One example of an outwardly logical but flawed argument is Ruth Berschens' latest commentary in Handelsblatt. She writes that pandemics, green investment and digitalisation are threatening to overburden national fiscal systems, and that the federalisation of EU tax policy is a logical consequence.

There is an appealing logic to such a utility-based argument. It has become a cliché to say that only together can we address global challenges, like climate change. But this is humbug. 

The reason why the eurozone, not the EU, needs a fiscal capacity is that a monetary union without it is neither sustainable nor desirable.

You cannot build a fiscal union on the basis of solidarity, let alone pity, simply because sentiments change all the time. Nor should it be based on dubious efficiency claims. Is EU-level spending really more efficient than national? Some is, some not. With the pursuit of such arguments, we might be setting ourselves up for failure. 

Berschens advocates a CO2 border tax, and that obviously requires a joint tax since the EU is a customs union. Customs and duties constitute a category of the EU's own resources. A border tax would fit into it. But we should also remember how everybody screamed when Donald Trump proposed a border equalisation tax early on in his presidency. These are instruments of protection. Do we want to base the case for a federal euro tax on protectionism? 

Berschens also advocates an EU digital tax, as US digital companies have found ways to circumvent national fiscal systems. This is about the Netherlands robbing Germany of its well-deserved tax receipts. The EU's digital problem is not one of taxation but of lack of investment. The EU is now discovering, to its horror, that the US is creaming off monopoly profits in this area. A federalisation of EU taxes solves the Dutch problem, in the unlikely event that the Dutch agree to it, but does not address the root cause: underinvestment.

The legal basis of the recovery fund makes it a one-off instrument. It may give rise to some EU taxes, but the lion's share of this package will be funded old-school through member-state contributions. A federalisation of tax policies is not possible under the existing treaties. This is why we have been arguing that the EU's old one-step-at-a-time approach does not get it closer to a eurobond. Instead it creates false narratives and delusions. The case for EU taxes should be made on the grounds that a monetary union cannot exist without them. 

As long-suffering observers of the UK's descent into euroscepticism, we have become sensitive to narratives taking on a life of their own. Another example is Wolfgang Schäuble's essay in FAZ, which pushes in a very similar direction. We all remember the role he played in the hot phases of the eurozone crisis. How often did we contrast his earlier advocacy of European integration with the reality of his later support for austerity? Schäuble argues the case for European integration on the basis of solidarity and protection. We have some sympathies with the view that investment in green technologies is done most efficiently at EU level. But we find it difficult to see why we would want to base the advocacy for a federal tax structure on such arguments. There would be a lot more genuine solidarity in a progressive tax system that is applied eurozone-wide than in state-to-state transfers. There are poor people in rich states, and rich people in poor states. The case for a European tax is stronger than ever, but we don't see it being made. 

The situation reminds us of how the pro-Europeans lost in the UK: they felt a pro-European message would not sell so well as a fake scare story. It could happen again. 

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July 09, 2020

Castex' budget promises and reform grip

Jean Castex, the new French PM, is already promising an array of new expenditures in his first interviews. This includes more money for justice, €7.5bn for health-care workers, and more means for the environmental transformation and for youth. With near zero interest rates on public debt, the message is that the government will do whatever it takes to keep the French economy afloat.

Insee, the French statistics office, expects GDP to rebound by 19% in the third quarter after a fall of 5% in the first quarter and 17% in the second. The government is doing its part and promises to keep funds flowing until 2022 and not to raise taxes in the meantime. Expect different professions, sectors and communities to come up with their own demands, even if that requires dramatising their own situations a little. This autumn is likely to heat up.

What about the reform agenda? Can Emmanuel Macron really risk a failure of the emblematic pension reform? Macron suggested to keep the essence of the reform, unifying all funds into one point-based system, and to negotiate the financing.

Everyone understood these negotiations as foreshadowing the end of the reform. Now Castex indicated the contrary. Forget the contours of the reform, and focus on the financing. It is clear that, without action, both the general and complementary pension funds are heading towards a deficit. The burden could be reduced as of 2021, by accelerating the slow but progressive increase in the period required for a fully paid pension, which is already in the books. But the state has to get the trade unions, the large and influential CFDT in particular, to accept this. This is a moment when the deficit risks seem large in the absence of social contributions. But, once the economy rebounds, these contributions will rebound too while the state's treasury will be depleted by then. The message is thus mostly political, writes Dominique Seux. The government is saying it is serious about balancing the pension, and so should the public.

But, politically this may be a tricky moment to talk about pushing back the retirement age. This is especially true ahead of a return from the summer holidays in September, when traditionally people bring their social grievances on to the streets. It will depend on how the trade unions integrate the lockdown and the expenditure promises of the state into their negotiation stance over the pension reform. 

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