The proposal by the French president and the German chancellor for a €500 billion recovery fund refocuses attention on the EU budget—but that raises wider issues.
The Covid-19 crisis is prompting a reform of the European Union which has been delayed for decades, regarding the responsibilities of the triangle of governing institutions: the European Council, the European Commission and the European Parliament.
In 1973, in the midst of an economic crisis, the EU founding father Jean Monnet proposed a ‘provisional European government’ to the French government—converting the European summits into a council, with regular quarterly meetings. He also proposed that that council adopt further reforms: direct election of the parliament, to give European citizens a voice, and abolition of the right of member-state veto, to enable the council to function democratically.
Developments since have shown that the council has become ‘permanent’ to all intents and purposes. Indeed, during the 2008 financial crisis, it acted improperly as the ‘non-democratic government of the union’.
Insufficient instruments
The pandemic has shown that, to save the European economy, the union must equip itself with sufficient financial instruments to drive the recovery. Thanks to the use of existing resources, approximately €540 billion has so far been allocated. But this is not enough. Discussions in the council appear to be heading in the direction of a compromise between northern and southern countries. This would make it possible to increase the European budget and issue European public securities—recovery bonds by any other name.
At the end of April the Spinelli Group in the parliament—acknowledging that the current union was a hybrid, part federal and part confederal—proposed splitting the union’s budget (at present 1 per cent of European gross domestic product) in two. National contributions (about 70 per cent) would remain unchanged, to ensure national governments would not have to pay in any more funds. The part concerning ‘own resources’ would on the other hand be greatly increased, from new sources: a plastic tax, a digital tax, a CO2 tax and a corporate tax, as the parliament has already proposed.
In this way the European budget could reach 2.5 per cent of GDP, which would enable €400 billion worth of bonds a year to be issued during the next multiannual financial framework. These new resources should be invested in mass vaccination against Covid-19, Europe’s 5G capacity, research and development for 6G and artificial intelligence. Moreover, the group said, ‘a new sustainable and future-oriented industrial policy, part funded by the EU, will be a necessary component of keeping the single market up and running’.
In short: ‘Macroeconomic stabilisation is a federal function.’ The stability of economic and monetary union is a European public good.
Important side-effects
Such a proposal could engender two important side-effects. The first concerns the banking union, one of the pillars of EMU. The Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) have been established. But the European Deposit Insurance System (EDIS), fruitlessly discussed since 2015, remains off the table. This is however an essential pillar which would stabilise the banking system in the event of sudden risks, through European deposit insurance.
If one of the objectives of the banking union is to sever the connection between national sovereign risk and the fragility of the banking system, a European public security would represent a decisive vehicle both for a more integrated European capital market—savers could invest in a safe European security—and for the banking system, because banks would be able to differentiate and make their portfolios more secure. This would facilitate the convergence of interest-rate differentials on national securities towards a European average. In addition to contributions from the banking system, a European deposit-guarantee fund could be financed by both European funds and contributions from member states.
The second side-effect would concern the European tax system. The need to implement a serious system of own resources would be an opportunity to resolve the current scandal of unfair tax competition. By definition, there is tax competition between states if one gains what another loses. In a resolution in March 2019, the European Parliament asked the Council de facto to include the Netherlands, Ireland, Luxembourg, Malta and Cyprus in the list of countries classified as tax havens. The council naturally ignored this request.
Long-overdue reform
When the emergency is over, the long-overdue constitutional reform of the union will be unavoidable and the Future of Europe conference, announced by the commission on its installation last year, must have that on its agenda. Among the problems to be addressed, there is one priority, indicated by the former commission president, Jean-Claude Juncker, in his last ‘state of the European Union’ address—abolishing the right of veto.
The union needs a democratic government. The commission, as the executive, must be accountable to a bicameral parliament—the representatives of European citizens (the extant parliament) and the representatives of national governments (the Council of Ministers, voting by majority). Only thus can the union’s contradictorily hybrid character finally be resolved.
Guido Montani is professor of international political economy at the University of Pavia. He is a former president of the European Federalist Movement in Italy. He founded in 1987, in Ventotene, the Altiero Spinelli Institute for Federalist Studies. His latest book is Anthropocene and Cosmopolitan Citizenship: Europe and the New International Order (Routledge, 2024).