The Apple tax ruling and collective EU financing of the Covid-19 fund beg the question whether EU taxes are now on the way? Frances Cowell thinks that unlikely any time soon – and anyway the real news is much bigger than taxes.

Many Europeans find it somehow unfair that some EU members make it so easy for tech giants to pay so little tax. Should there be more harmonisation of tax rates between EU member states? It’s a good question, and one the first of our Future of Europe podcasts early in August tackled head-on with some good arguments both for and against EU taxes and tax rates.

Taxes and tax rates are only one part of a bigger picture. As well as collecting revenues, you also have to think about how governments spend them, and how they plug the gaps between what they collect and what they spend. This fiscal management in turn cannot be separated from monetary union (a.k.a. the Euro).

The Eurozone is unusual in that it has a unified currency but disparate fiscal regimes. Any student of economics will tell you that this is an unstable situation, and indeed the history of the Euro includes plenty of wobbles. It also means that national economies are harder to manage than if each had its own currency. The Greek debt crisis that started in 2009 shows why.

When it found it wasn’t earning enough to pay its debts, Greece normally would have let its currency slide. That would have made its exports more attractive to foreigners: more tourists taking advantage of cheaper holidays in Greece, among other things, would have bumped up its revenue in drachma terms. But to do that it would have had to abandon the Euro, and nobody wanted that. Neither was anybody prepared to lend it any more money to plug its income gap, so it had to cut spending, lower Greeks’ incomes and sell assets to raise cash: the brutal austerity programme its creditors insisted on. Valuable assets were sold at fire-sale prices, and a populist government installed in Syntagma square (which anyway found itself complying with creditors’ demands).

Greece was hardly alone. Spain and Italy, both with their own income gaps, have struggled to establish stable governments ever since their austerity programmes, and all have suffered long-term damage to their economies. Brutal austerity is good for vulture funds and populists, but bad for everyone else.

Did the EU learn anything from this?

 The recovery package that emerged recently from tortuous five-day negotiations is the strongest possible evidence that it has. Unimaginable only a few weeks earlier, the EU will for the first time borrow collectively, harnessing the credit-worthiness of the Union itself, rather than its member states. Italy and Spain will now not be sent to debtors’ prison for having fallen victim to a pandemic.

You can sympathise with the objections of those in “healthy” economies to paying for what is seen as the profligacy of less pecuniary members. But that ignores how much those strong balance sheets depend on those “weaker” members. Were it not for Italy, Greece, Spain, Portugal et al, the Euro would be worth much more, relative to other currencies, such as US dollars and yuan, than it now is. Holidays in the Austrian Tyrol, fun weekends in Amsterdam, Volkswagens and BMWs would all be a lot less affordable if they had to be paid for in schillings, guilder or deutschmarks, rather than euros. Those countries would export much less and lower export income would in turn soon “weaken” them.

Yes, but will this collective debt lead inevitably to collective EU taxes? Almost certainly not- or not soon. For one thing, it will be paid for, not with taxes, but through spending cuts in other parts of the EU’s seven-year budget. Many see that as a flaw in the deal, and flawed it certainly is; but those flaws are what made the deal possible, so may be a price worth paying for the important precedent of collective EU debt. For another, as Conor McArdle pointed out in our podcast, imposing a new “EU tax” would be a spectacular own goal for the EU. And setting common taxes is both harder than it may look, and is by no means the only, or even the main way to bring about more uniformity in members’ fiscal management.

To see how hard it would be to try and impose uniform, or even similar, rates of income tax across EU member states, look at how diverse EU member economies are. At the end of 2018, Germany had a median income of €28,500, while in Bulgaria, the comparable number was €3,069 (of course, the cost of living is less in most parts of Bulgaria). Set a common income tax regime and pretty much every German will be in the top band, while most Bulgarians will be in the bottom one. The Bulgarian treasury would soon have a big income gap and the German electorate would be in revolt.

And that’s before you even start to consider tax on different kinds of corporations and other types of organisation, tax on pensions and endowments, investment capital, and deductions for various expenses.

You cannot easily separate taxes from spending on things like policing, education, health, social welfare and pensions. How governments prioritise their taxes and spending reflects the preferences of their electorates. Some countries value the individual’s choices, self-reliance and minimal taxes, while others value social solidarity or cradle-to-grave security, and are happy to pay for them with higher taxes. There is some way to go before the EU can think about a one-size-fits-all tax and spending template.

But fiscal harmonisation can be advanced in other ways. One is through standardised regulation of products and commerce that ensures a “level playing field” between members. This was a major concern in the Greek bailout. It wasn’t just that Greece was seen to be living beyond its means, its economy was also gummed up with seemingly pointless rules and regulations designed to protect this profession or that industry, but which in practice served to impede healthy competition and innovation, keeping prices for everyday goods and services artificially high for ordinary Greeks. Doing away with the most pointless of these rules would quickly provide a boost to the spending power of ordinary Greeks.

What is true for Greece is true elsewhere in the EU. Simplifying and standardising rules is the low-hanging fruit that can make existing resources more productive and competitive with other member states – and make people better off. We already take common standards of food labelling for granted (even if you need an electron microscope to read the labels), and have already seen, for example, big cuts in our mobile phone bills and cut-price services offered by neo-banks. But more remains to be done. Banking and bank supervision that eventually leads to a Euro-wide banking union would simplify our lives even more and would further integrate and strengthen the Eurozone without going near the third rail of members’ tax and spending priorities.

These are all necessary steps, but by themselves are not sufficient: the euro is still prone to those wobbles. That is because income gaps, where governments spend too much or too little relative to their revenues, are still a big problem for a single currency zone.

The Maastricht Treaty establishing the common currency envisaged rules governing the ratio of government revenues and spending – without saying anything about taxes and spending themselves. The Stability and Growth Pact was supposed to ensure that member states’ income gaps never got out of hand, as they did in Greece, Italy, Spain and elsewhere. But it was inflexible and focussed on budget deficits while ignoring equally problematic surplusses. These days it is applied more constructively, which has helped, especially in recessions, but by itself the Stability and Growth pact cannot guarantee the euro’s stability.

Lessons learned

 The decision to harness the EU’s immense heft to issue collective Euro bonds is the biggest leap yet toward Euro stability. New EU bonds can serve not only to finance recovery, but can also help smooth members’ budget surpluses and deficits. They serve as a benchmark for Eurozone interest rates – until now poorly approximated using German bonds. This in turn can help the euro one day assume global reserve currency status.

The consequences for the EU and the world go way beyond any effects that EU taxes might have.

Frances Cowell
Australian-born and European by adoption, Frances Cowell writes and speaks at conferences about investment risk and governance, financial market stability and business ethics in financial markets – and the implications for the wider political economy. She believes Europe must urgently assume the lead in protecting and preserving liberal democracy, the rule of law and the multi-lateral institutions and alliances that it depends on.

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