Tag Archives: EU

Will Europe’s Politicians Let The Courts Make Fiscal Policy?

One overlooked aspect of the agreement struck by the member nations of the European Union over fiscal and budgetary alignment is the matter of enforcement. The failure to incorporate the proposed agreement into the EU’s basic treaty, the Lisbon Treaty, means that neither the European Commission nor the European Court of Justice will have standing to deal with recalcitrants. Both institutions’ writ runs only to treaty matters, not those covered by intra-EU sub-agreements and those between national governments, as this latest deal will be structured in the face of opposition by non-euro-using countries, notably the UK.

That is one reason that the agreement envisions the new fiscal and budgetary constraints being baked into national constitutions, and the European Court of Justice being given new powers to adjudicate on whether countries are baking in the Brussels-approved manner. This is a conscious attempt to put the governance of national fiscal policy under greater judicial and less political sway, just as the EU has used the courts to enforce central directives in other areas.

One of the failures of the Maastricht agreement that launched the euro 10 years ago was that countries’ compliance with the economic conditions for membership – holding budget deficits to no more than 3% of GDP was one of them, remember – was entirely in the hands of national politicians. For all the goodwill being expressed towards greater fiscal integration in the heat of the euro debt crisis, national politicians are not going to give up their power of economic policy making willingly. Many will see this as the judicial Trojan Horse that will lead to a Federal EU with full economic and political integration. National politics is going to continue to shape Europe’s fiscal integration, and markets will have to learn to live with all the uncertainty that implies.


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Filed under Fiscal Policy, Macroeconomy

The Transaction Tax That Never Was, Never Will Be

The ‘Tobin tax’ — the EU’s proposed tax on financial transactions named for the American economist who advocated taxing currency trades in the 1970s — looks increasingly likely to be stillborn. It will be politically hard enough within the EU to get all member nations to agree to it, regardless of its populist support in France and Germany. The UK has already set its face against it, unless it is implemented globally, which is even more improbable than it being accepted in Europe. The US, Singapore and China won’t readily throw away a windfall gain in competitiveness for their financial centres viz-a-viz London. And London knows it. A classic Catch-22. The lobbyists won’t even have to work that hard to scupper the proposal.

The details of the tax that will never be are as follows: The EU wants to introduce it in 2014, at a rate of 0.1% on the exchange of bonds and shares and 0.01% on derivative contract transactions. It would apply when at least one party to the transaction is located in a EU member state. We can only imagine that there would be a boom in transaction tourism to offshore havens.

Another reason the tax will be still born: though the EU Commission reckons that the tax could raise 57 billion euros ($77 billion) a year for EU governments’ coffers (the EU would set a base rate that national governments could top up), it also estimates that it could cut Europe’s long-term growth by more than 1.7% of GDP. That loss of growth would be the price for eliminating what the Commission reckons would be 90% of the derivatives transactions in Europe. Yet in today’s global markets, the business might disappear but not the risk. That would be a hard sell even for cash-strapped euro-governments.

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Filed under Market Structure