 he future of the European Union depends crucially
on improving its economic performance. Continuation of the
present high levels of unemployment - touching 9% in the
Euro area as a whole - is both intolerable in itself and
a threat to political stability. It would be unduly alarmist
to compare the present situation directly with that between
the Wars, but the recent rise of the far right cannot be
unconnected with present economic conditions - for example
the youth unemployment rate of 27% in Italy. It is therefore
particularly unfortunate that the level of discussion of
these issues seems to have sunk to new lows in the context
of the proposed new EU Constitution. Instead of asking what
do we need to do and what is the best political machinery
for achieving it, comment seems almost entirely concerned
with whether the Constitution would involve any encroachment
on our national sovereignty.
This was exemplified in an article by Gordon Brown in the
Telegraph under the caption ‘Flexibility not Federalism’.
It is strange to find a British Labour minister attacking
other members of the EU for the social partnership aspects
of their industrial systems, better consultation and greater
job security. These are not only important to the workers
concerned, but also (as I know from my past experience with
the German steel industry), an important contributory factor
to their efficiency. As a recent study by the Work Foundation
has demonstrated, two of the attributes of our most successful
companies are ‘employee engagement’ and taking
heed of their stakeholders. Now that our industrial future
depends more than ever on technological innovation and firms
taking a longer term view of their investment and manpower
policies, the Government’s apparent obsession with ‘flexibility’,
and by implication ‘short termism’, is particularly
inappropriate. Making it easier to fire people (which is
what is meant by “flexibility” in this context)
is not the answer to Europe’s unemployment problem.
Reducing unemployment in countries like Germany and France
depends primarily on stimulating demand. Any further reduction
in the presently low level of interest rates is likely to
have little or no effect. The essential need today is to
adopt more expansionary budgetary policies, and increase
demand either by cutting taxes or increasing expenditure,
until unemployment is down to more reasonable levels. The
difficulty is that budgets are already in deficit and the
ironically named ‘Stability and Growth Pact’ is
putting perverse pressure on governments to move in the opposite
direction by raising taxes or cutting expenditure, thus accentuating
the recession. The longer no expansionary action is taken,
the worse the problem will become. Plant closures cannot
be reversed and industry will become progressively less able
to respond to any picking in demand. As far as countries’ fiscal
positions are concerned, they are in a vicious circle. Low
levels of output and employment, and hence low tax receipts
and higher social security costs, are a major factor behind
these continuing deficits. To get out of this situation,
finance ministers must be prepared to see a short term increase
in deficits as the price of longer term improvement.
Given the high level of intertrading, the countries concerned
need to act together. Firms need not only higher demand at
home but also in neighbouring markets. This calls for a series
of co-ordinated expansionary budgetary policies (as provided
for in the existing Treaties and the new Constitution). But
this would mean amending the Stability and Growth Pact to
permit countries to increase their budget deficits to boost
demand. Such an amendment is urgently needed and should not
impose any rigid guidelines on the lines of Gordon Brown’s
Golden Rule, but rather allow the flexibility needed to fit
the differing circumstances of the countries involved.
Another line of attack is the proposed European programme
of public investment in infrastructure. This could be tailored
to the needs of some of the worst hit regions and, if financed
by the European Investment Bank or the European bank for
Reconstruction and Development, would not run into difficulties
with the Stability and Growth Pact.
In this context it is important to distinguish the need
for co-ordinated action when countries are in a similar position,
from that for individual action where countries’ situations
differ: in this instance such expansionary measures would
not be appropriate in the UK where unemployment is relatively
low. The fact that countries need room for individual manoeuvre
does not, however, mean that there cannot, or should not,
be any harmonisation of taxes, as Gordon Brown suggests.
In inveighing against harmonisation, and calling so enthusiastically
for ‘tax competition’, he and Tony Blair are
taking the wrong side of the argument.
We are living in a world where there is a spectrum of taxes,
ranging at one end from those that can only be effectively
levied on an international basis to those at the other that
can be charged at different rates in different localities.
With the growth of global capital markets, we are fast reaching
the point where taxes on capital transactions, such as stamp
duty on share transactions, will have to be levied at internationally
agreed rates if they are to be effective. The same would
be true of the proposed ‘Tobin Tax’ on foreign
exchange transactions. Indeed the London stock exchange is
already arguing for the abolition of stamp duty on the grounds
that they stand to lose business to markets with lower or
no tax. Similarly the mobile rich will increasingly avoid
or evade taxes on their income from dividends and interest
if countries are not prepared to act together. The Chancellor’s
reluctance to co-operate with other EU ministers in tackling
this problem for fear of offending the London market was
quite remarkable.
Again, when it comes to sales taxes on goods there are
limits on the differences between states that are feasible
in a
common market - as the volume of French wine on cars coming
into Dover dramatically illustrates! On the other hand taxes
on property and local services such as restaurants or hairdressing
can be effectively levied at different rates within one country.
The field where tax competition is most tempting, but also
most dangerous, is that of corporate taxation. Low levels
of tax may be an effective way of attracting foreign investment,
but if everybody competes in this way, we shall end up with
companies paying less and less tax and the person in the
street having to pay more and more. Indeed it would make
it increasingly difficult to finance the levels of public
services that most of the electorate expect. One would expect
the Institute of Directors to be strongly in favour of tax
competition, but not a Labour Government.
Although harmonisation will reduce the ability of finance
ministers to vary taxes in individual countries to meet
differing demand conditions, there will still be sufficient
scope for
tax and expenditure changes to cope with differing individual
circumstances. Tax harmonisation does not mean there will
no longer be any scope for national budgetary policy, but
it will limit the instruments available.
In the long run, effective decision-making on tax harmonisation
cannot operate solely on a basis of unanimous agreement with
every country having a right of veto, particularly when there
are over 20 members. There must eventually be some form of
majority voting on tax harmonisation and various other economic
issues - such as social security benefits. The new Constitution
does not, however, provide for any such moves and Gordon
Brown’s violent reaction is somewhat premature. The
key constitutional question for the future is: at what level
should different aspects of economic policy be formulated?
(Their actual implementation may be partly or wholly delegated
to a lower level, for example the collection of harmonised
taxes.)
It is strange that the idea that the UK Government might
sometimes be in a minority has raised such a furore - particularly
among those (like Telegraph readers) who do not agree with
it anyhow! In any democratic structure we all have to accept
majority decisions which go against us from time to time.
We accept this on a local and national basis already, why
not at a European level? Although the present constitutional
proposals do not involve any extension of Qualified Majority
Voting on economic matters, it would be short sighted chauvinism
to rule this out for ever as our economies become more
and more closely integrated. But to go further down this
route
we need to be confident that the basic assumptions of other
members in formulating policy will be social democratic
- rather than neo-liberal as in the Maastricht Treaty which
set the rules for the Euro area. For this reason, I would
be happy, for example, to accept majority voting in the
field
of labour market policy, such as worker consultation and
employment rights, but would not be in favour of joining
the Euro area under the present regime. |
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