Wednesday

15th Aug 2018

Analysis

We are not (yet) one people

  • This Friday, the heads of state of the 27 remaining EU countries will meet in Brussels to discuss the future of European finances. (Photo: European Parliament)

This is how revolutions started in the early days: the slogan "No taxation without representation" was the starting point for the 'Boston Tea Party' of 1773, the revolt of the inhabitants of the North American colonies against the British crown, which led to the independence of the USA.

Since then, this is the core of Western democracies: he who pays the piper, calls the tune. The people and their representatives decide how much the state can collect and what it can spend it on. The government likes to run the business. The funds for this must be approved by the parliament, that is, by the deputies representing the taxpayers.

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  • The UK's exit is tearing a hole in the EU budget (Photo: Chris Tolworthy)

On the other hand, those who raise taxes without granting the citizens a say, are in for a storm. The American Revolution, which began in Boston, ultimately forced the British Empire to retreat.

Fast forward. This Friday, the heads of state of the 27 remaining EU countries will meet in Brussels to discuss the future of European finances.

The exit of Britain, a net contributor, will cause a substantial gap in the budget. In addition, there are several new tasks that the EU is to take on: border security, defence, stabilising the euro, fighting youth unemployment and much more. All this is going to be expensive.

Where should the money come from? The EU Commission has given some thought to this and last week presented a paper so as to set the frame for discussions at the summit.

Jean-Claude Juncker, president of the commission, and his people want to give the EU its own sources of income.

So far, the Union's budget has been based on contributions from member states. Now money the commission suggests that money should be raised by allocating shares of certain types of revenues to Brussels. This, in turn, brings the EU closer to its own European statehood. Which raises some basic questions:

Is Europe prepared for such a step? Is that the stuff that's triggering revolutions?

All those beautiful billions

First, in principle, the EU commission is completely right. The EU and especially the eurozone need more money.

The EU budget is ridiculously small, at just over one percent of common GDP; unlike any other currency area, the eurozone has no budget of its own. If smaller state entities are insufficiently capable of acting on increasingly international problems - from financial and refugee crises to climate change - then a financially strengthened Europe is the correct answer.

Second, the proposed sources of revenue are by no means devious.

The Commission proposes that shares of VAT and of corporate tax revenues – tax bases would have to be standardised – should be attributed to the EU, as well as parts of the European Central Bank's (ECB) profits and revenues from the trading of greenhouse gas emission rights.

These sources could yield revenues between €143.5 and €441bn, depending on the calculation.

That may sound like huge piles of money, but in truth it's not. We are not talking about a single financial year, but about a planning period of seven years, namely 2021 to 2028.

The UK's exit is tearing a hole in the budget – British net-contributions over the last seven year period were about €50bn – which needs to be filled.

And if Europe is to do a lot more than it has done so far - for example, prop up its defence capacities in times when the United States is raising doubts about its assistance guarantee – additional funds are required.

So where's the problem? It's not the amount of expenditure or the structure of revenues that's troubling. It's the representation of citizens at the EU level we need to talk about.

A radical proposal for the EU finances

My colleague Wolfram Richter and I made a rather radical proposal last year. The EU should receive real own resources of considerable magnitude.

We believe that a new dual income tax system should be introduced.

Revenues from taxes on personal income should still flow to the individual member states. However, the taxation of corporate profits and other capital income would be standardised across Europe; these revenues would flow exclusively to the European level.

Note, that the EU commission's tax proposal is more modest; it focusses on standardising the bases of corporate taxation, i.e. the rules according to which taxable profits are determined. A share of this revenue would flow into EU coffers.

The key question, however, is who gets to decide how the EU raises its revenues and where it spends the money. This touches, as I said, the core of our notion of democracy.

If the EU receives own sources of income, then a common – equal – representation of the European people needs to be in control.

So far this is not the case. The composition of the European Parliament discriminates against citizens from bigger member states; a MEP from a large country, say, Germany or France, represents many more citizens than a colleague from a small country like Malta or Luxembourg.

Of course, equal European representation is conceivable. MEPs could be elected through transnational lists.

This would eliminate the problem of the very different sizes of member states. Each EU country already has a seat and voting power in the council. In a genuine two-chamber system, the people would be represented in the parliament (the lower house), while the member states would be represented in the council (the upper house).

If such genuinely democratic conditions prevailed, the EU could expand considerably in terms of tasks, expenditures and revenues. The European people and their elected representatives would have control over their common affairs. And they'd have the necessary resources at hand.

Why don't we just take this step? Why don't we create the 'United States of Europe', as Martin Schulz, former leader of Germany's Social Democrats, hailed just a few weeks ago? The reason is as simple as it is fundamental: we Europeans are not one people. Not yet.

Moving the nations

For democracy to work, a sense of belonging together is required.

Above all, communication spheres are needed in which we debate and negotiate political affairs. Within individual countries we do this through mass media.

Although social media are now adding to the spectrum, public opinion still crystallises in classic mass media. This is where you can measure what is moving the nations: what's important, what's problematic and what to do to improve the situation.

Politics are not only negotiated in parliament, but also in public spheres. What's self-evident at the national level, does not yet exist at the European one. Consequently, we debate transnational issues in national fora. And that's a huge obstacle to more integration.

In a recently published study together with Bruegel, the Brussels-based think tank, we highlight an example for this national bias.

We found diverging narratives about the euro crisis in elite media of the four largest member states of the eurozone. The French and the Germans, the Italians and the Spaniards have framed the crisis quite differently.

It is hardly surprising, therefore, that it's so hard to formulate common, viable solutions for the eurozone as a whole.

Democracy begins with talking and listening to one another. In the age of populism and polarisation this is becoming harder at the national level. In Europe as a whole, we have an even longer way to go. Therefore, talking about money – about EU revenues and expenditures - is not enough. The real issue is strengthening democratic structures at the European level.

Professor Henrik Mueller is chair of economic policy journalism at TU Dortmund University, Germany. A German version of this article was published by Spiegel Online.

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