+

Post-Brexit Europe: The New Agenda

Center for Financial Studies, House of Finance

Goethe University, Frankfurt

21st February 2017

Paul Bernd Spahn

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+Brexit and the challenges

The book emphasises the chances that Brexit will offer for

Rethinking the European Union and her rationale

Establishing a revised agenda to consolidate her Eastern borders

Responding to new challenges in view of technologically advancing societies and globalizing economies

Translating the political implications of these developments into appropriate new policy directives

Reforming EU institutions to convey regional interests more forcefully and democratically

This will all become easier without Britain as a member that can block any change of the Treaties (European Union Act 2011) and has caused gridlock in the past, notably in drawing up the chapter of common foreign and defence policies and the drafting of a European Constitution

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+Part One: Scanning for Strategies

This part looks mainly into EU responsibilities by comparing

them with the canon of other federations (considering the EU a

“crypto-federation”)

The main functions are

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Function Degree of coverage in th EU

Common Defence Indirect/multilateral (NATO)

General Welfare Very poor; basically lacking

Interstate Commerce Core function

Citizenship/Naturalisation Powers not used; controversial

Single Monetary Policy Strong, but partial and defective

Fiscal Powers None

+Probing the EU budget

Deciphering the “spending puzzle” reveals that

The budget is tiny (≈ 1% of combined GDP)

94% of the EU budget is spent by Member States (EU budget as

an “apparatus for ‘churning’ transfer payments”)

The EU has to be in balance (no deficit or debt)

Administrative costs are about 6% of the budget, of which half

goes into salaries (i.e. 0,03% of GDP)

By comparison: Member States spend 21,2% of their budgets on

compensations of employees (or 10,2% of GDP)

The EU employs about 33.000 officials, which is exactly the

number of official of Munich or Derbyshire County

EU policy activities are expressed by “labeling” transfers

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+The EU spending pattern

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Sustainable

growth

41%

Global Europe

6%

Security and

citizenship

1%

Administration

6% Competitiveness

for growth

and jobs

12%

Economic, social,

and territorial

cohesion

34%

Smart and

inclusive

growth

46%

+The “juste retour” ideology

in practice

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+Conclusions on the budget

There is little room for “explicit” EU policies, there is mainly “labeling” (conditioning?) and “churning” back of resources

Since the core of EU responsibilities is on regulation, half of the 6% administrative costs, i.e. for the “EU bureaucracy”, is likely to represent the best value-creating EU activity

Given the subsidiarity principle, some important functions could be re-decentralised (in particular CAP), others could be fortified (security & citizenship)

Most importantly: some typical expenditure functions of federations are missing on the EU budget, in particular for defence, welfare, and own financing (taxation)

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+Part Two: Gauging for Action (1)

This Part has three sections

Defence

Military spending

Cooperation with NATO

Social Europe

EU pension scheme

Social floor income

Finance (fiscal Powers)

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+

Defence

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+World military spending in units of

US military spending

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0,9

0,6

0,4

0,3

1,2

0,6

0,7

0,6

1,3

0,4

2,7

2,2

0,5

0,6

1,0

0,02

0,03

0,04

0,07

0,07

0,09

0,09

0,09

0,11

0,16

0,17

0,32

0,36

0,72

1,39

0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 1,8 2,0

Pakistan

Turkey

Europe

Germany

Africa

France

India

UK

Russia

Other Americas

Saudia Arabia/UAE

Middle East

China

Asia & Oceania

USA/NATO

+NATO military spending

and spending targets

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Estonia

France

Germany

Greece

Lithuania

Luxembourg

Poland

Averagepost-BrexitEU

Turkey

UnitedKingdom

USA

0%

5%

10%

15%

20%

25%

30%

35%

40%

0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0%

Spendingonm

iitaryequim

ent

in%oftotalm

ilitaryspending

Militaryspendingtargetin%ofGDP

+The “Leagues” of the EU

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+EU military spending by “League”(% of GDP; prices 2010; years 2011-15)

0,0% 0,5% 1,0% 1,5% 2,0% 2,5%

NorthernLeagueDNKNLDBELLUX

EasternLeagueESTPOLHRVBGRROMSVNSVKCZELVAHUNLTU

SouthernLeagueGRCPRTITAESP

CentralLeagueFRADEU

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+

Command Structure

National authorities

Nuclear Planning

Group (NPG)

High-level Group (HLG)

(Advisory)

Committees and Sub-

committees

North Atlantic Council (NAC)

Committees and Sub-

committees

International Staff

Military Committee

(MC)

ACO

(SACEUR)

SHAPE

(Headquarters)

NATO Force Structure

(NFS)

ACT

(SACT)

SG

EU cooperation with NATO

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Social Europe

EU Pension Scheme

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+The quest for intergenerational

equity and citizens’ “ethos”

The Deutsche Reich had basically two legs in the outset:

defence and social policy

Bismarck realised the importance of social policy to create

“Gesinnung” (ethos) for the new entity

He introduced social programme to cope with four risks:

health, accident, disability, and old-age poverty

A EU pension scheme would do away with the massive

inequities that exist among member states, if would allow

“full portability”, and foster “EU ethos” at the same time

+The challenges of national pension

schemes

Most pension systems rely on a pay-as-you-go philosophy

These schemes face two main challenges

The aging of the population

Stagnating, or declining, contributions through rising part-time

jobs and precarious employments, especially in the next decade

or so (robotics, artificial intelligence)

The consequences are either heavier burdens on the young,

or increased risks of old-age poverty

National governments typically cope with these challenges

inconsistently, using ad hoc tax “gadgets” and populism

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+Could a EU pension scheme do

better?

A EU pension scheme could bring the focus back to the

“core” objective: transferring resources from now to future

A EU pension scheme would

have uniform rules for contributions and benefits, which remain

interlinked at the personal level

be stripped of all gratuities and “spending gadgets”, which

remain at the national level to be paid out of national tax money

index the pension age to life expectancy, so that the system

remains in balance over the long run (but beware of the structure

of ageing, which requires an equalisation-of-risks scheme, or a

“demographic buffer”)

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+Would a EU pension scheme be

feasible?

Bismarck had the advantage of working on a “greenfield”; the EU would have to convince national governments to dismantle and modernise their existing pension systems, and to relinquish the “core” of the system for the Union

If one considers the “core” of the pension scheme a pure financial product, this dismantling should be possible

It requires the stripping off of all “non-core” elements, which could lead to a sound restructuring of the financial product

Net liabilities would have to be evaluated and swapped between levels of government on the basis of present value

Any decent investment banker could do this exercise

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+Structured pension funding

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+The complements to the “core”

Defining the Common Pool for accommodating asymmetrical demographic risks could be politically controversial since it implies inter-country transfers

However these transfers can be established on the basis of objective, non-manipulable criteria and data

The Growth Fund would supplement the resources of pensioners from taxes on the “social dividend”

Its objective is to combat old-age poverty in a structurally changing world economy

What is “social dividend” in a knowledge-based economy?

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+

Social Europe

“Floor Income”

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+The dilemma of social aid

Any social aid programme faces the problem of how to treat additional earned income or earned pensions

Typically such income is “accounted for” against the social aid (i.e. “taxed”), either partially or in full

This entails stern incentive problems and needs costly targeting

The alternative should be a unconditional tax-free “floor income” financed from the social dividend

All earned incomes or pensions would be added in full to this floor income – without any subtractions

Floor income + earned income would however form the tax base for comprehensive income taxation

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+The application of the social

dividend

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+A new anti-poverty strategy

Assuming the “social dividend” could be tapped through

“digital taxes” to be levied at the EU level, the proceed could

be allocated

In the form of a EU floor income to all pensioners through the

Growth Fund

This floor income is rationed by the amount of digital taxes

collected, and is limited in scope (pensioners only)

It is hence different from the open ended “basic income”

concept

In the longer term the floor income concept could be extended to

other socially vulnerable groups

Anti-poverty programmes of the EU would count against national

anti-poverty programmes, i.e. alleviate national budgets

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+The pyramidal structure of poverty

incomes

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+

Finance

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EU

+Sharing of the VAT base

Base sharing of the VAT is probably the most discussed option

for a EU own resource

It was messed up from the beginning by constructing a “VAT-

based” grant, which works with “weighted averages” of national

VAT bases rather than a harmonised uniform tax base under EU

legislation

National tax sovereignty is strongly hedged and defended,

so EU fiscal powers are better looked for in areas where there is

no corresponding national tax

Nevertheless the administration of cross-border VAT should

become a EU responsibility to avoid abuses and boost revenue

+Corporate income tax

Undoubtedly a uniform European corporation tax would do away with unhealthy, unproductive inter-state tax competition

There were several attempts to bring the issue to the attention of national policy makers, but all failed

However the national corporate income tax is a moribund

Because of effective transfer-pricing strategies that have become more difficult to monitor in a knowledge economy (license fees)

Because of “thin-capitalisation” strategies embedded in a thicket of corporate subsidiaries in a globalising world economy

Like for VAT, I consider it futile to pursue the road toward a uniform European tax on corporate income

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+The “Apple Deal”

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+Corporate cash-flow tax*)

No country operates such a tax, whose tax base could be derived from the national corporate income tax by

eliminating all tax exemptions, concessions, incentives, subsidies, fringe benefits, etc., including the various forms of depreciation rules by disallowing amortisation altogether

disallowing the deductibility of interest payments as business expenses, but

accepting the full expensing of investment expenditures

A non-discriminatory tax treatment of asset formation and its financing is achieved under a cash-flow tax

The tax would have a number of decisive additional advantages as summarised in my book

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*) See: European Economy, No. 53, Stable Money—Sound Finances (1993)

+“Digital taxation”

“Digital taxation” is not yet in place, but is likely to become highly relevant in the near future

“Digital taxes” could turn out to be the key instruments for tapping the dividend generated by the digital economy

I can imagine two types of digital taxes

Based on the financial value transacted (financial transaction tax)

Based on the quantity of information transacted

Digital taxes do not only tax value generating information flows of a knowledge-based economy; they are also levied digitally within the process of information exchange (low compliance, administrative and collection costs)

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+

A Participatory

Architecture for EU

Institutions

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+Institutional architecture for

democracy in Europe

There is need to strengthen participatory processes at the supranational level – which would also lead to greater bonding by EU citizens

I would welcome the introduction of a Union referendum

I also argue in favour of a Union Presidency, where the president is elected directly by citizens according to some rule

The Commission would become the “executive arm” of the president

The Presidency would include a Security Commission to check decision making in defence and security issues

The Security Commission represents the Leagues, and decides by majority vote, with France possessing veto power on nuclear issues

The Union Congress, would consist of two chambers: the European Parliament and the European Senate

+Organogram of EU institutions

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+

Thank you for your attention

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