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Magazine / ISSUES & IDEAS

Europe Must Jointly Tax And Spend

The absence of a common European fiscal policy has hobbled international efforts to ease the downturn.

June 13, 2009

There are many lessons to be learned from the current international financial crisis. Foremost among these may be that policy makers wrestling with a range of global economic challenges need a full complement of tools to do their jobs successfully: notably the powers to tax and spend.

The fact that the European Union, as a body, lacks these basic policy instruments has complicated international efforts to ease the downturn. The absence of a common European fiscal policy hobbled recent global economic stimulus efforts, and it could undermine initiatives to build a firewall against future financial contagion.

Most important, the E.U.'s shortcomings call into question a united Europe's competence at a time when the world needs the Continent to act forcefully and as one. The Obama administration is open to working with its European allies on a range of issues. But to be partners, Europeans have to be able to deliver results.

 

Since 1957, a united Europe has spoken with one voice on trade policy. A majority of E.U. members have had a common currency and monetary policy since 1999. But two-legged stools cannot stand. Europe needs a fiscal policy so it can coordinate taxes and spending.

The trans-Atlantic spat over economic stimulus spending in the run-up to the April G-20 summit highlights the problem. The E.U. had no money to spend to fuel recovery. Pump-priming by European national governments often fell far short of the International Monetary Fund's recommendation to spend 2 percent of gross domestic product.

This lack of cohesion is also likely to hinder proposed E.U. efforts at joint financial regulation. Some member states are already resisting the European Commission's plan for a European Systematic Risk Council to assess the stability of the banking system. Opponents argue that national taxpayers will ultimately be responsible for bailing out failing financial institutions, so national regulators alone should be accountable for their oversight. It is a compelling argument as long as the European Union lacks a pot of money of its own to cover such emergencies. Why would Washington take Brussels seriously as an interlocutor on financial regulatory issues as long as there is no centralized capacity to assess risk and then impose regulation?

Moreover, the lack of collective fiscal tools threatens to undermine the single European market that makes Europe an attractive partner for the United States. Germany's recent decision to bail out Opel at the expense of jobs in Belgium was a one-country solution in a multicountry association that could distort competition.

If automobile subsidies are necessary in these perilous times, then they should be done with common European funds, under a uniform set of rules, and in a way that does not discriminate against individual national companies. Without such capacity, Europe risks becoming a less attractive market for future American investment.

Europe's ambition to play a larger role on the world stage is now hamstrung by the shortcomings in Brussels. The Obama administration is open to new ideas from Europe. But the E.U.'s lack of fiscal policy tools is likely to circumscribe trans-Atlantic cooperation at a time when the American-European alliance, and the world, need that partnership more than ever.

Europeans acknowledge their failings but say that domestic political opposition and assertions of national sovereignty make a common policy on taxing and spending a nonstarter. This is a 19th-century rationalization that Europe's allies can ill afford in the 21st century.

As the Obama administration ratchets up its dialogue with Europe, it is time for a frank discussion about how such European nationalism harms mutual efforts to cope with shared policy challenges. Europe will undoubtedly counter that it faces problems created by American federalism. To be fair, insurance, professional services, and much of the public procurement in the U.S. are still regulated by the 50 states, a decentralized system that is not always in tune with a global economy.

Consequently, any trans-Atlantic exchange won't be an easy conversation. But meaningful ones never are. What better time to start such a discussion than at the beginning of a new American administration, with a new European Commission and a new European Parliament about to take office and the European Union likely to have new powers soon thanks to its first constitution?

So let the dialogues begin. And nothing, no matter how politically sensitive, should be off the table. That is one lesson the economic crisis should have taught us.

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