Progressive Fiscal Policy for Europe

The European Union (EU) faces a series of major challenges. The Corona crisis has hit many EU member states hard and exacerbated existing inequalities. In the coming months the European economy will need a boost from a stimulus and growth package, so that it can find its way out of the crisis. Without a fiscal impulse of this kind the danger is that economy and society will suffer permanent damage.

But there are also reasons for hope. The Corona crisis offers an opportunity for the European community to come closer together and resolutely drive the necessary social-ecological transformation forward. Thus the question arises, what common fiscal policy does Europe need to enable all EU member states to take a leap onto a socially just and environmentally sustainable growth path?

A new narrative

First of all, European policymakers must change the narrative. The narrative of the old EU was the neoliberal claim that freer competition and the market economy will offer everyone a fair shake and generate lasting prosperity. This promise was not kept. From an economic standpoint, that is scarcely surprising, because in reality market failure and exclusion due to unfair competition are the rule.

The failure of the neoliberal agenda has not led to a significant increase in inequality in all EU member states. But generally speaking, where the neoliberal agenda was implemented most relentlessly society has become more unequal. Social justice has suffered because inequality of life opportunities has risen. Furthermore, intergenerational justice has weakened because there is a risk that we will pass on an uninhabitable planet to our children and grandchildren.

But what narrative can replace the old one? The EU’s new narrative must be that only Community action and solidarity can create a fair Europe and increase everyone’s quality of life. In other words, there will be social and intergenerational justice in Europe only when EU policymaking is based on the fundamental principles of solidarity and community.

In keeping with the new narrative Europe also needs a new fiscal policy. It not only has a decisive role in crisis periods, but is also a key driver of the necessary social-ecological transformation. In order to fulfil this dual function a progressive European fiscal policy must comprise three pillars: solidarity, Community financing and Community projects.

European solidarity

The European Union must show solidarity with the member states and the regions hit hardest by the Corona crisis. To that end, even before Easter the European finance ministers had reached agreement on a package of aid measures in the amount of up to 540 billion euros, thereby providing a threefold security net. First, for employees the European SURE programme was set up to safeguard national short-time-working programmes. This step raised a programme that had been very successful in Germany to the EU level and paved the way for European unemployment insurance. Second, the European Investment Bank (EIB) ensures the supply of liquidity to small and medium-sized enterprises (SMEs) in Europe via credit guarantees, similar to what Germany has with the KfW Bank. Thirdly, the modified European Stability Mechanism (ESM) offers all euro states a real opportunity to finance new borrowing on favourable terms and almost without restrictions.

But the help provided by these initiatives is insufficient. They are largely based on loans and thus represent only a weak form of solidarity. Strong solidarity requires direct subsidies. That is why the Franco-German proposal of 20 May 2020 on the structuring of the planned 500-billion-euro European recovery fund was such an important step. This proposal puts the emphasis on direct subsidies and joint projects from which countries that have been hit disproportionately hard, such as Italy and Spain, will benefit. This was a strong Franco-German signal of solidarity, creating the conditions for the European Commission’s proposals of 27 May 2020, the so-called “Next Generation EU”. These proposals represent an opportunity for a fundamentally new European economic policy, based on the principle of a common investment and transformation policy.

Community financing

The second pillar of a progressive European fiscal policy requires the Community financing of part of the EU budget. The Franco-German proposal and the European Commission’s new strategy are also path-breaking in this respect, because the bulk of the recovery fund’s spending is set to be funded by the issue of Community bonds. According to the European Commission’s plans, besides the normal budget expenditure of the Multiannual Financial Framework (MFF) of 1,100 billion euros there will be a further 750 billion euros of new debt on top of the MFF from the time-limited new economic stimulus and investment programme. That makes good economic sense because it allows all EU countries to run a more expansive financial policy without overstraining the ECB’s monetary policy. Furthermore, it is an important step in the direction of closer integration of the EU states.

Besides Community bonds a common tax policy would be an important measure of European integration. As things stand, tax policy is entirely a national competence. To be sure, tax policy will remain predominantly national also in future, but a common strategy in the following two areas would be economically and politically wise.

On one hand, the ruinous tax competition needs to be reined in by way of minimum taxation and alignment of tax bases. That is because in the medium term this form of “competition” damages all member states and over the long term represents a serious danger to the sustainability of public finances. On the other hand, the European Union needs a common tax in order to part fund Community projects. A Europe-wide digital tax or a CO2 tax suggest themselves here. This kind of Community tax would permanently strengthen the economic and ecological sustainability of European fiscal policy.

Community projects

The third pillar of a progressive European fiscal policy is perhaps the key component: the European Union needs common future projects. Hitherto, this pillar has played a subordinate role in the public debate. That is regrettable because without common flagship projects, for many people in Europe the EU will remain an unloved bureaucratic monster.

Climate protection is particularly suitable for the development of European flagship projects, such as a European hydrogen initiative. The decarbonisation of the economy requires the production of green hydrogen based on solar energy in large quantities, for which purpose facilities in Southern Europe and, in the medium term, also in North Africa will be increasingly necessary. The development of production plants and transport infrastructure would trigger a surge in ecologically sustainable growth. Furthermore, progressive Community projects in health (virus research) and transport (“Europe tact”) come to mind.

The abovementioned future projects will increase the quality of life of everyone in Europe only if public-interest-oriented firms play an important role in them: state (public interest) before market (lobbying). The issue of corporate structure draws a dividing line between progressive economic policy and conservative stagnation. Because even those on the conservative side would like to be able to promise people a golden age with an ecologically sustainable economy. What they have in mind, however, is a lick of green paint on the same old neoliberal agenda: everyone for themselves, market over state and a CO2 charge to enable green souls to sleep soundly at night. It is the political task of social democrats to make this contrast between progressive advance and conservative stagnation clear to the general public.

(Translated from the German)
 

The views expressed in this article are not necessarily those of Friedrich-Ebert-Stiftung.