77th International Atlantic Economic Conference - PowerPoint Presentation

Slide1

77th International Atlantic Economic Conference

Madrid 3-5 April 2014Slide2

Einaudi, EU competencies, fiscal policy and the missing Maastricht criteria

b

y Angelo Santagostino

Jean Monnet Chair ad personam

o

f European Economic Integration

Yildirim

Beyazit

University, AnkaraSlide3

Luigi Einaudi and EU competencies

In his two pivotal works:

For an European Economic Federation

(1943)

and

The economic problems of the European federation

, (1944)

Luigi

Einaudi lists the mandatory tasks of the European Federation:

single market with free circulation of goods and capital

internal migrations

monetary union

common commercial policy

common defence policy

diplomatic service

taxation: import duties, excise duties, income tax (a competence to be shared with Member States)

international transports, by train, air and sea

industrial and intellectual property.Slide4

EU competencies

The reason for limiting to a minimum indispensable the competences of the Federation is explained by Einaudi in the following way

:

for

attenuating the suspicions and fears of large currents of public opinion or strong interest groups, to

minimize the number of essential tasks

entrusted to the Federation from the beginning. Over time, the experience and the growing consensus of the peoples will enable that the list of those tasks is expanded by observing the prescribed formalities for approval of amendments to the Federal Constitution.Slide5

EU competencies

Most

of the proposals of Einaudi on what the European Federation should do and how should be, have been gradually included in the various “editions” of the European Treaties. Out of the list so far seen, only the common army, excise duties and income tax are not among today’s EU competences.Slide6

EU competencies

Subsidiarity and fiscal federalism are two

guiding principles for the allocation of

competences between different polity levels: local, regional, national and federal.

Einaudi doesn’t make explicit the underline principle guiding him in choosing what the European Federation should do. However the spirit of these two twin principles permeates his analysis. Slide7

EU competencies

In the last chapter of this work of 1944, Federalism and Spiritual Values, Einaudi deals with a problem which the opponents of federalism were then rising and are still rising seventy years later: that in a federated Europe national culture will disappears and that we will assist to a homologation of

thought.

To counter this argument he provides the examples of Switzerland and United States concerning university education

.

“Education

, culture, justice, safety, family relationships, protection of the weak, social security, the fight against poverty, land reclamation, reforestation. […] Liberation from matter and not subservience to it: this is the raison d'être of the Federation; consequently its raison d’être is not the humiliation but the exaltation of

spirit”.

Today we call Einaudi’s “exaltation of spirit” in much cooler

way

“heterogeneity of preferences”.Slide8

EU competencies

Scale economies are present in Einaudi’s analysis concerning the introduction of the single currency;

“

. If, everywhere in Europe or at least in the Federated territory, prices of goods and services, for example, to use a neutral word, in golden liras, how much things would be simplified, how easy payments, money transfers, regulations of balances would be

!”

Einaudi’s main argument in favour of the single European currency is however another one, based on subsidiarity considerations. For him the federal level is much more efficient than the national one in the production of a public good such as money. Slide9

EU competencies

The reason is that in the federal system is more difficult to produce a bad currency than at national level. Not just because bad currency is mainly produced in war times, but because…

”

[t]he great publicity of the debates in the Federal Assembly, the contrast of regional interests, the vigilant monitoring of Member States representatives contribute to the same

result”.

Here we

find

a germ of the regulatory capture theory developed by George

Stigler

Einaudi has in mind is a light Federation, but not exactly in the terms this is today presented. Light because not substituting national States, and light because its action is limited to a few essential tasks.

Today’s EU is over-dimensioned. Slide10

Einaudi and the federal finance.

The Federation holds the exclusive competence of external trade, as we know. Consequently all custom duties on imported goods have to be credited to the Federation. At the same time, as “logical inference”, also all excise duties must be credited to the Federation.

Import duties and excise duties are as Siamese brothers, where the first are the seconds appear. Slide11

Federal taxes.

The

transfer of taxes should be coupled with a correspondent transfer of spending competences from Member States to the EU.

“Common

army and common finance are inseparable terms. For one year the common army could be maintained by the contributions of member states […]. But this system cannot last. With that system nothing in common

exists”.

These new resources, in terms of a fraction of excise and production taxes, could finance the progressive constitution of the European Common Army. They will set the base of an European federal budget.

“

So that the Federation could live alive a life of its own, not dependent on national parliaments

”Slide12

Balanced budget.

Einaudi was the inspiration behind the first version of article

81 of the Italian Constitution:

“Every

year, Parliament shall pass the budget and the financial statements introduced by the Government.

[…].

The Budget may not introduce new taxes and new expenditures.

Any other law involving new or increased spending shall detail the means there

for”

Actually the

formulation in italics

is

a

watered

down version of the proposal advanced by Einaudi

in the debate on article

81.Slide13

Balanced Budget

His

proposal was the following:

“Projects

implying charges cannot be considered unless they are accompanied by the proposal concerning necessary means to cover the corresponding

expenditure”.

Ezio

Vanoni (1903-1956), a distinguished scholar in public finance, a pupil and assistant of Benvenuto Griziotti at the University of Pavia, later Minister of Finance in two governments presided by Alcide De Gasperi and Minister of the Budget in other governments, proposed a watered down formulation

:

“The

laws implying more financial burdens should provide for the means there

for”.

Finally a further watered down version, where the word “necessary” was eliminated, was approved and embedded in the Constitution.

Slide14

Balance Budget

On 11 May 1948 Einaudi was elected as first president of Italy. A few months later, on December 13

th

, in a letter to the Treasury Minister Pella, Einaudi provides the authentic interpretation of article 81

:

“If

we assume that the last clause of article 81 cannot be separated from the concept of balance, we can deduce the consequences that the legislator would want

confirm the obligation of governments and parliaments to make any effort to balance the budget.

So, when there is a deficit, the constituents would have obliged parliaments and governments all their effort to increase revenue and reduce spending or both so that the budget is

balanced”

The authentic interpretation of article 81 is thus that it implies the respect of the equilibrium between receipts and expenditures. Unfortunately for Italy this interpretation did not survive Einaudi’s presidency. Slide15

Einaudi and Pubic Debt

In 1938 Einaudi had written:

Even a simple man, after a short reflection, observes: If the State takes loan of one billion and makes public works useful now or in the future, the nation's wealth has not changed [...];

if the State instead throws the money from the window in luxury unproductive works [...], the billion that before was there was doesn’t exist anymore. The national wealth has diminished or increased [...] because of bad or good use made from the proceeds of the loan.Slide16

Public Debt

And some 25 years before:  

It happens [...] that debt repudiation takes place [...] when the loan was made not to satisfy a need felt really by the society, but to provide funds for the benefit of the class, or group or fraction, which is in power. We can read several examples of this behaviour in recent history of Egypt, Turkey and South American republics. When the Khedive of Egypt, before the English domination, used to contract big loans at usury conditions, in order to satisfy his whims or grandiose and useless building plans; or when the hundreds of millions that European capitalists used to lent to the Sultan of Constantinople were used to build the palaces of the

Bosphorus

or madly squandered in parties and gifts to women of the Seraglio, eunuchs and

favorites

, or the proceeds of loans to South American republics instead of being employed in railways, posts or other public works, as they had promised, it was rapidly divided between dealers, presidents, ministers and

grredy

generals.

 Slide17

Public Debt

Be the way, Einaudi’s examples could be easily updated to include, as the recent debt crisis has shown, some Eurozone Member State. Spending borrowed money in an unproductive way is an ancient but persistent defect of States and Governments, irrespective of their form, be it absolute or democratic, monarchist or republican. We can thus find an ethic value in Maastricht fiscal discipline and, more generally, in fiscal rules.Slide18

The missing Maastricht Criteria

Fiscal deficits in the Eurozone gradually reduced from 7% in 1995 to reach 0.7% of GDP in 2007, the subsequent rise is the consequence of the financial and economic crisis. At the same time we notice that ratios of fiscal pressure and public expenditures over GDP in the same period have remained

at

high levels. Slide19

The missing Maastricht CriteriaSlide20

The missing Maastricht Criteria

An insightful view of these trends has been provided by Francesco Forte and Silvana Leali.

Having

explored evidence from OECD countries in the period 1981-2009, they argue that unemployment is aggravated, in the long run, by fiscal deficits and or by large public spending.

Consequently

“fiscal theories oriented to balance the budget – particularly those reducing too large public spending – should be taken seriously […] “

as well as “rules of constitutional ranking, such as those of the new EU fiscal compact on the limits to debts and deficits accompanied by limits to taxation

[…]”. Slide21

The missing Maastricht Criteria

As it is well known the Maastricht Treaty provides two basic fiscal rules: public deficits and public debts should not exceed, respectively, 3% and 60% of GDP.

The two parameters give the Governments a free hand in circumventing deficit and debt constraints by increasing taxation. Basically they allow Governments the possibility to maintain a strong presence in the economy, measured by the incidence of public expenditure on GDP, by keeping tax pressure high. Slide22

The missing Maastricht Criteria

The Maastricht Treaty lacks a criteria. The third Maastricht parameter should be limiting the level of tax revenues and or public expenditures, establishing a ceiling to the ratio of these aggregates to GDP.

The

combination of the three constraints would have imposed to States a slimming cure. Freeing resources for investment and consumption, would have resulted in an improved efficiency and overall demand (due to increased disposable income), such as to make structurally higher rate of growth and thus creating new jobs and improving the employment levels. Slide23

Vaniscono

le

speranze

…

In 1959 Einaudi wrote his sole comment to the Treaty of Rome, entered into force a year earlier, which is also his last thought on Europe:

The unification of Europe was an idea that, after the Treaty of Vienna, had taken the name of the Holy Alliance, and that at the end of the last century it was said of the «European concert». […] The prophetic dream has not come true; but some

partial unions

caused by fear of the enemy assault and economic agreements intended to make them stronger prior to closer partnerships between the members of the Western civilization? […]

Hopes

in the

United States of Europe

vanishes;

but it wouldn't be the first time that the fear of war

gets her away and

creates new types of political organization among men who profess common ideals

.Slide24

Hopes vanishes…

Hopes vanished in those years have yet to materialise.

Einaudi's ideas are always the best way for his dream to become reality.