77th International Atlantic Economic Conference

Madrid 3-5 April 2014

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

by Angelo SantagostinoJean Monnet Chair ad personam

of European Economic Integration

Yildirim Beyazit University, Ankara

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.

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.

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.

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.

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”.

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.

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.

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.

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”

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.

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.

Balance Budget

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

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.

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.

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.

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.

The missing Maastricht Criteria

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-20

0

20

40

60

80

100

Graph 1Euro-18 Public Finances Indicators, 1995 -2012

Def/GDP Debt/GDP Gov Exp/GDP Goc Rev/GDP

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 […]”.

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.

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.

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.

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.