772 EUROPEAN FISCAL UNION. A SOLUTION TO SAVE THE EURO? Sabău -Popa Diana University of Oradea, Faculty of Economic Sciences A monetary union with… [613152]

772 EUROPEAN FISCAL UNION. A SOLUTION TO SAVE THE EURO?
Sabău -Popa Diana
University of Oradea, Faculty of Economic Sciences

A monetary union with strong connections among banking systems but without a fiscal union may pose
problems because the national governments may be tempted to increase inefficiently their public debts,
which, in case of contagion, may have serious repercussions on other economies.
This article analyses the idea – widespread among specialists – of the integration of fiscal policies in the
Euro Area as a solution to overcome the sovereign debt crisis. The situation has become critical for
countries such as Greece, Portugal, Ireland, Spain.
Key words: fiscal union, Euro Area, fiscal policies, sovereign debt crisis, fiscal treaty
JEL code: E62, E63, F36

Introduction
The current economic and financial crisis highlighted the fact that the institutional regimes and
the EU common policies, more precisely, of the Euro Area, are not adequate. Even before the
crisis, the economic growth in the European Union was low, pointing at deep structural problems
in the EU Member states. The macroeconomic imbalance created a European Union with
divergences in productivity and competitiveness.
The response of the involved countries to the sovereign debt crisis in the Euro Area was slow and
weak because of the supranational character of the European Union and of its budget, limited to
1,24% of the community GNI. In the opinion of several specialists, to which I equally subscribe,
in order to try to overcome this crisis, it is necessary to promote as soon as possible an initiative
to start a political project envisaging the creation of a European Fiscal Union, just like the
Economic and Monetary Union was created.
In this scientific research, my objective is to analyze the idea of the European Fiscal Union,
mentioned as a long-term solution for the Euro Area to overcome the sovereign debt crisis. I
chose to realize this analysis of the idea of a fiscal union because it is a topical issue, taking into
account that at the beginning of March 2012 the Fiscal Treaty was signed, introducing new rules
concerning the budgetary discipline.

Analyze of the economic literature
For two years, the Euro Area has been confronting with a debts crisis, its long term viability
being under question mark. The problem is that the Euro Area doesn’t have adequate institutional
arrangements to help it manage a major crisis, nor mechanisms for amortizing the asymmetrical
shocks and for burden-sharing. The fiscal reactions of the member stated differ according to the
level of debt, of budgetary expenditures and of the budgetary revenues as percentage of the GDP
(EIR, 2011: 21).
This Monetary Union possesses that € 440 billion European Financial Stability Facility,
created in 2010, and the € 800 billion European Stability Mechanism , created in February 2010.
The declared purpose of the European Financial Stability Facility is to save the Euro Area
countries if they cannot solve their economic problems, each country being allowed to borrow
up to € 440 billion. The European Stability Mechanism , which will enter into force in July 2012
aims to contribute to the amelioration of confidence and to guarantee the financial stability of the
Euro Area.
The Euro Area doesn’t yet have a framework for the political cooperation between the
European Central Bank and the national governments, even though the single currency creates
the need of a tighter cooperation. The absence of a place where a common position for monetary
and budgetary policies can be defined makes the institutional organization of the Euro Area more

773 oriented towards knowledge exchange than towards the identification of guidelines for the
coordination of activities.
The European Central Bank, lacking trust concerning the budgetary decisions of the national
governments, tends to protect its freedom of action in order to be able, if necessary, to counter-
attack their tendencies toward governmental deficits. The national governments, unable to
convince the European Central Bank to pay more attention to the specific conditions of their
economies and not knowing the budgetary conduct of the other governments are reticent about
cooperation, ready to counter-attack any restrictive position of the monetary policy and stubborn
in accepting the additional diminishment of their fiscal sovereignty (Panico Carlo &Vazquez
Suarez Marta, 2008:16).
But economic theory , based on the optimum currency area model , shows that the single currency
benefits outweigh its costs only when economic integration – under the form of commercial
exchanges, similar conditions and economic cycles – is strong enough.
The German Chancellor Angela Merkel, one of the most appreciated political personalities
leading the European Union, publicly specified, more than once, that there is a concord regarding
a possible step towards a fiscal union, towards a coordinate approach of the fiscal and economic
policies, but on medium or long-term. For the beginning, the basis of the fiscal union must be set
up from political and legal point of view. A fiscal union would imply a single ministry of finance
and a single treasury, an idea agreed by Germany, France, Holland, Belgium, Luxemburg, but
less wanted by countries like Portugal, Italy, Finland and Greece, which face financial
difficulties. A viable monetary union supposes the use of tools which amortize the asymmetric
shocks and the creation of a federal budget in the Euro Area, which proves to be more than
necessary.
In the opinion of several specialists, to which I equally subscribe, in order to try to overcome this
sovereign debt crisis, it is necessary to promote as soon as possible an initiative to start a political
project envisaging the creation of a European Fiscal Union, just like the Economic and Monetary
Union was created.
The first stage, according to Alberto Majocchi (2011) should be the creation of a European
Fiscal Institute , whose main task should be to save those countries that risk being swept away by
the sovereign-debt crisis and to pave the way for the subsequent institutional move toward a
Federal Fiscal Union and the institution of a European Treasury.
During a second phase, an issue of Eurobonds would be necessary to supply the UE the financial
means needed to support the setting up of a recovery plan of the European economy, to favour a
productivity and competitiveness increase. The European budget should return to a system of real
resources, substituting what is known as the fourth resource, based on member states’ GNI, with
a European surtax on the national income taxes paid directly by the citizens and the limited
liability companies to the European Treasury. Thus, the European Union budget, based on own
resources, would be managed by a Federal European Treasury, responsible for the coordination
of the EU economic policy and the transition to a sustainable economy. (Alberto Majocchi, 2011:
79).
Therefore, the European Union could and should have a federal budget, able to play a counter-
cyclical role in case of conjectural ”asymmetric” shock. This is the role of the federal budget
within a federation: in case of a shock which affects only a part of the federation, the resources
originating from this region diminish, while the transfers in its favour increase. In a Union in
which the labour-factor is characterized by a low mobility, possessing a federal budget could be a
precious advantage, but requires a radical evolution of the budgetary expenditures and revenues:
the Union’s revenues should be activity -based taxes and its expenditures should be, at least
partly, related to conjecture. In these circumstances, in order to have a microeconomic impact,
the EU budget should highly exceed the current ceiling of its own resources, in order to represent
about 7- 8% of the Union GDP. (Sabău -Popa Diana, 2010: 11).

774
Fiscal implications of the Treaty on Stability, Coordination and Governance in the Economic
and Monetary Union
In order to overcome to sovereign debt crisis in the Euro Area, 25 Member states of the European
Union signed in Brussels, on the 2nd of March 2012 the Treaty on Stability, Coordination and
Governance in the Economic and Monetary Union , which introduces a set of golden rules
concerning the budgetary discipline. Only two countries of the European Union refused to sign
the Treaty: the United Kingdom and the Czech Republic.
Some of the most important provisions of the Treaty on Stability, Coordination and Governance
in the Economic and Monetary Union, also called the Fiscal Treaty are:
/g120 The annual structural deficit must not exceed 0.5% of the GDP ; the annual structural
deficit of the public administration means the annual cyclically adjusted deficit net one-
off and temporary measures.
/g120 Non-Eurozone countries join the Eurosummits whenever are discussed issues of general
interest with regard to the single market, competitiveness or the modification of the Euro
Area strategy.
/g120 Where the ratio of public debt to GDP is significantly below 60 % and where risks in
terms of long-term sustainability of public finances are low, the structural deficit can
reach at most 1.0 % of the GDP.
/g120 In the event of significant observed deviations from the maximum ceiling of the
structural deficit or the adjustment path towards it, a correction mechanism shall be
triggered automatically.
/g120 When in one of the 25 Member states which signed the Treaty the ratio of public debt to
GDP exceeds 60% the state shall reduce it at an average rate of one twentieth per year as
a benchmark.
/g120 Financial sanctions can be imposed –which may not exceed 0.1% of GDP of the Member
State in question – if, based on its own observations or on the European Commission
report, one of the 25 Member states which signed the Treaty concludes that another state
failed to comply with the above-mentioned ceilings and brings the matter to the
European Court of Justice.
The treaty mentions the necessity to develop ever-closer coordination of economic policies
within the Euro Area, therefore it tries to push the governance of the Union toward more
integration, going thus beyond the scope of a fiscal treaty. It specifies a very true and important
issue – that if a monetary union which doesn’t rely on the disciplining of the actual budgetary
executions has a very precarious way of functioning.
Actual government deficit has two components: a cyclical one, based on automatic stabilizers and
a structural one, based on discretionary policies. Structural government deficit, mentioned in the
treaty represents the fiscal position when the GDP is at its potential level, that is the economy is
halfway between economic expansion and recession. The annual modification of the structural
deficit is due to the effect of discretionary decisions of fiscal policy.
But structural governmental deficit is an indicator lacking transparency and inaccessible to the
population, difficult to understand and to verify. Its formula is: Structural deficit=Structural
expenditures-Structural revenues=Expenditures*GAP ec -Expenditures*GAP ev . GAP represents the
production differential calculated as ratio between the potential GDP (normal rhythm of
economic growth in a neutral year, form a cyclical perspective) and the actual GDP.
The new 0.5% of GDP limit of the structural deficit will impose a very strict control on the public
finances of the 25 countries, which may have advantages and disadvantages. For Romania, which
in the past had a discretionary procyclical fiscal policy, it will make impossible to practice a
procyclical fiscal policy, that co uld be a significant advantage (Ionuț Dumitru, 2012: 5).

775 The major disadvantage of the treaty is linked to its reduced capacity to stimulate the economy,
especially in recession periods. The automatic stabilizers are the most effective in countries such
as Denmark, Holland, Sweden and Finland, their size being closely related to the tax system and
the size of the governmental expenditures. In Romania, like in the other Member states of Eastern
Europe, the size of the automatic stabilizers is significantly smaller, which requires the possibility
to apply some discretionary fiscal stimulus (higher structural deficit), stronger in recession
periods (Ionuț Dumitru, 2012: 8).
Some specialists, such as Joseph Stiglitz, recipient of the Nobel Prize in Economic Sciences,
strongly criticize this Fiscal Treaty, considering that the strictening of the fiscal policy in the
European Union is a wrong way of solving the debt crisis and might lead to a totally opposite
result.

Possible stages in the creation of the European Fiscal Union
The purposes of my own research are the analyze of the concept of fiscal union and then the
presentation of the possible stages in the creation of the European Fiscal Union.
If we analyze the concept of fiscal union, it refers to the integration of the fiscal policies of the
states. In a fiscal union, the decisions concerning the tax collection and spending public money
are taken by institutions common to the governments of the participating states. For example, in
federal states, such as the USA, the fiscal policy is largely decided by the central government,
empowered to increase the taxes, to make public borrowings and to spend public money.
A monetary union with strong connections among banking systems but without a fiscal union
may pose problems because the national governments may be tempted to increase inefficiently
their public debts, which, in case of contagion, may have serious repercussions on other
economies.
The sovereign debt crisis in the Euro Area is due to the breach between the common monetary
policy and the national economic and fiscal policies of each Member state. 17 EU Member States
are part of the Monetary and Economic Union, based on the Euro currency, but most of the
decisions regarding the taxes and public expenditures are taken on a national level, because the
fiscal policy belongs to each democratic state as the expression of its sovereignty. But direct
taxes, as well as the indirect ones distort the four main freedoms of the single community market.
The European Union has limited fiscal powers. The majority of the European Union Directives
refer to VAT, customs duty and excises. The VAT is harmonized at community level, the
taxation principle of the VAT is that of the destination of goods; the tax is levied on the delivery
of goods and the provisioning of services in the state where they are consumed. Member states
can apply the following types of VAT quotas: a normal tax and one or two reduced taxes. The
normal VAT tax must not be smaller than 15% and the reduced taxes must not be smaller than
5%. The products to which the harmonized excises are being applied are alcohol and alcohol
products, tobacco and tobacco products, energetic products, electricity; the community legislation
mentions the existence of a minimum excise applied to each category of products. Starting with
1968 no customs duties are levied on the goods transported within the territories of the European
Union Member states, and for the goods entering these states, the common external tariff of the
EU is applied. With regard to direct taxes, the community acquis targets the income tax and the
tax on capital and less the tax on the natural person income. Most of the provisions concerning
the direct taxes are left up to each Member state, as an expression of their sovereignty.
We can identify two possible stages in the creation of the European Fiscal Union.The first stage
should be the creation of a European Fiscal Institute, whose main task should be to save those
countries that risk being swept away by the sovereign-debt crisis and to pave the way for the
subsequent institutional move toward a Federal Fiscal Union and the institution of a European
Treasury. The Fiscal Institute could play the role, in the realization of the Fiscal Union, that had
been entrusted to the European Monetary Institution as a prerequisite for the start of the

776 Monetary Union. (Alberto Majocchi, 2011: 91). An important step in this direction was the
creation, in February 2012, of a € 800 billion European Stability Mechanism. This European
Stability Mechanism aims to contribute to the amelioration of trust and to ensure the financial
stability of the Euro Area.
In a second phase it is necessary to start the issue of Eurobonds to contribute to the provision of
the necessary financial means to support the realization of the plan for the recovery of the
European economy. By issuing Eurobonds, The European Investment Bank could provide the
financing of the European public investments (secondary education, research and innovation,
new technologies, environmental conservation, renewable energies) that represent a conditio sine
qua non to guarantee a long term sustainable growth of the European economy (Alberto
Majocchi, 2011: 92).
Then, the fourth resource of the European Union budget, based on the GNI of the Member states
(representing more than 60% of the EU budget), which is not real own resource, could be
substituted by a European surtax on the national income taxes paid directly by the citizens and
the limited liability companies to the European Treasury. The European surtax on the national
income tax of the natural persons, paid directly by the citizens to the European Treasury would
guarantee a greater transparency of the levy and would strengthen the responsibility of those who
use the public financial resources. The European surtax on the companies’ income would have
the effect of neutralizing a little the impact of the company relocations within the European
Union and of reducing the fiscal competition among the Member States.
From 2013, the European Union budget could benefit from a new resource from a carbon/energy
tax. In a situation where the risks connected to the climate changes are by now more and more
clear and the need of replacing the fossil fuels with alternative energy sources is becoming more
and more pressing, a tax also in line with the carbon content of the energy sources appears as an
adequate instrument to start up the processes of energy-saving and of fuel-switching to renewable
energy sources, thus reducing the negative impact of the energy consumption on the
environment.
The policy-makers could also consider the European Commission proposal regarding the
introduction of tax on the financial operations of a speculative nature, in order to increase the
resources of the European Union budget and to guarantee a more orderly development of the
international financial system. The financial transaction tax should have a large application field
and it would be preferable to be applied to the national markets as well as to the international
exchanges. The Financial, Economic and Social Crisis Committee of the European Parliament
debated upon the advantages and disadvantages of a possible financial transactions tax,
estimating that such a tax, of only 0,05% could eliminate the short-term financial transactions,
ensuring a greater stability and contributing with € 300 billion to the European Union revenues
(Sabău -Popa Diana, 2010:152).
During the last phase, aimed at creating a real Federal Fiscal Union, the budget, based on own
resources, would be managed by a federal European Treasury, responsible for the coordination of
the EU economic policy and the transition to a sustainable economy. The European Treasury
should be the subject of a decision of the European Council, establishing the deadlines for the
different phases and, most of all, the final date that will mark the beginning of Fiscal Union
operations.
There is a basic difference between the Fiscal Union and the Monetary Union. The ECB is a
constitutional organ whose independence is ratified by the Treaty of Maastricht and whose task –
important but limited – is to guarantee price stability. The Treasury would be a constitutional
organ of a different nature and should be be subject to the democratic control of the European
Parliament (Alberto Majocchi, 2011: 94).
In conclusion, the decision to go ahead with the construction of the Fiscal Union, with a
European Treasury, must be backed by a contextual decision fixing the date for the start of the

777 transformation of the European Union – a supranational organization – into a European
Federation.

Conclusions
For a good functioning of the Euro Area, it is necessary that at least the common monetary policy
and the common fiscal policy work together. Therefore, in order to avoid the collapse of the Euro
Area and eventually the collapse of the European Union, it is extremely necessary to realize as
soon as possible the integration of the fiscal policies of the European Union Member states and
the creation of a European Treasury. If need be, the common defence policy and the foreign
policy of the European Union can wait until the conditions are favourable.
Therefore, the decision-makers of the European Union Member states must understand that they
must yield to the Union some of their budgetary and economic powers is order to complete the
construction of the Economic and Monetary Union, with the creation of a Federal European
Treasury which should guarantee an effective coordination of the national economic and
especially fiscal policies.

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