Democratising the Euro zone

Thomas Piketty

The Euro zone needs a proper government : a joint budget, common rules of taxation, an investment and borrowing capacity, a growth strategy and a model for sustainable and equitable development. But to achieve all these, the Euro zone must first focus on creating democratic institutions enabling common decision making. There is no point in discussing a government for the Euro zone if the democratic structure to which this government will be responsible is not clearly stated.

At the moment, the main decision-making instance in the Euro zone is the Council of Finance Ministers. The problem is that this Council is usually incapable of taking decisions. For years now, the Euro zone has been supposed to be adjudicating on the restructuring of the Greek debt which everyone knows is unsustainable and these decisions are constantly deferred.

Inaction

Take another example: for years now there have been a growing number of corporate income tax scandals. Everyone knows now that there is widescale avoidance of this tax by multinationals that often pay rates which are derisory. However, the Euro zone has still not been capable of taking the slightest tangible decision. We are still at the stage of discussing the setting up of a common tax base and we have still not seriously considered the question of a common minimal tax rate. What meaning is there in agreeing on a common tax base if each country can then fix a rate close to zero and attract all the company head offices?

The reason for this lack of action is that in operation, the Council of Finance Ministers usually observes the principle of unanimity: on taxation, a veto from Luxembourg is enough to block everything. Some rare decisions can in principle be taken with a majority vote but in practice the major countries have a right of veto. Thus Germany and its Minister for Finance stick obstinately to the absurd idea that Greece must produce a huge primary budgetary surplus of 3.5 percent of GDP for decades to come, and this idea blocks any decision.

The problem lies in the very structure of the Council of Finance Ministers, which is a machine for opposing national interests to each other (or erroneously perceived as such) and leads to inertia. As soon as one single person represents a country of 80 million inhabitants (Germany) or 65 million inhabitants (France), it is almost impossible for this person to quietly accept being outvoted. This prevents any level-headed majority decision—and even any public deliberation.

A new parliament for the Euro zone

Therefore the Council of Finance Ministers should be replaced by a true parliamentary assembly for the Euro Zone, in which each country would be represented by a certain number of elected members from their respective national parliaments, in a number proportionate to the country population and the various political groups. For example, there would be 30 members from the German Bundestag and 25 from the French National Assembly, on an all party basis. We would quickly realise that opinions on the Greek debt or corporate taxation rates vary considerably within each country, including in Germany, and it would become possible to take majority decisions which enable them to move beyond national oppositions. We should also bear in mind here that Germany makes up 24 per cent of the population in the Euro zone while France, Italy and Spain together constitute 51 per cent with Belgium, Greece and Portugal and the other countries constituting 25 per cent.

An alternative solution would be to fall back on a sub-formation from the Euro Zone within the European Parliament. It seems to me distinctly preferable to base the Euro Zone Parliamentary Assembly on the national parliaments. On one hand, because they have the requisite democratic legitimacy to engage national taxpayers and on the other, because it is essential, by means of this major democratic innovation to formally recognise the existence of a hard core which is more closely integrated than the European Union as a whole, and has its own institutions.

Whatever the case may be, it is essential for the candidates in the forthcoming French elections to finally make specific proposals concerning the setting up of a democratic government for the Euro Zone, without which all the discussions on re-launching Europe and the economic government will remain wishful thinking.

This is part of a sequence of posts by Thomas Piketty and colleagues on democratising the Euro zone. Read the full story at Le blog de Thomas Piketty