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Loosen up

13 December 2011 By Edward Hadas

Fiscal sovereignty is a great thing. A government is not really autonomous unless it can raise its own taxes, borrow on its own account and allocate its own expenses. Or so it is said. But in the euro zone, the fiscal sovereignty which all the members have agreed to sacrifice is not such a big deal.

Each nation will still determine the size and activities of its own government and will have no less say than before on the structure of the tax system. The one piece of sovereignty abandoned in the planned new treaties is the freedom to be irresponsible. And in theory, that had already been given up in the 1992 Maastricht treaty. France and Germany later decided to soften the rules when the economy turned down.

This time the limit in normal times is tougher – balanced structural budget instead of a deficit of 3 percent of GDP – and the enforcement mechanism is supposed to be harder to evade. There is flexibility for recessions and help for weaker members. Arrangements of this sort are required for the single currency to survive.

But the rules would make sense even if there were no euro. Any responsible government wants to keep its finances in order. Bond markets are supposed to help them along, but during the easy credit years, they were negligent in the euro zone – the spread of Italian over German 10-year government bonds averaged only 25 basis points between 2000 and 2007. The subsequent crisis showed that this attitude didn’t do governments a favour. Perhaps constitutional limits and the European Court of Justice can be more effective.

Besides, the new loss of fiscal sovereignty is far less significant than the authority all EU member governments have already transferred to the Union. Some tax rates are harmonised and capped, increasing layers of regulation are pan-regional, and the Court of Justice can overrule national laws on European grounds. The Maastricht treaty enshrined the principle of subsidiarity (the Union should only do what it can do better than nation states, and these should keep as much authority as possible). But the planned treaties are another small step in the EU’s long journey in the opposite direction.

 

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