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Is The EU Heading For Fiscal Convergence?

August 2011 - EU & Competition. Legal Developments by Hassans.

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With member states fundamentally rethinking the functioning of the European Union, one thing seems certain to emerge from the Eurozone crisis: that proponents of a fiscal union (that countries' budget policies should largely be governed by the EU) have gained significant ground on those that would advocate the continuation of fiscal sovereignty.

Amid economic instability and bailouts, behind the scenes in Brussels the European Central Bank and European Union leaders have been handed significant power in their unpopular struggle to control nations' budgets.

With Ireland, Portugal and Greece having received substantial sums from European Union countries, the European Central Bank is holding considerable influence, particularly in respect of crippled Greece. To continue to receive support, each country must bow to the demands of the Central Bank in meeting austerity goals, and Italy and Spain may soon join these ranks.

What the Eurozone has experienced during the crisis is a fundamental shift in power away from member states to EU bodies, the cementing of which could unwittingly be ushered in, including by opponents of tax convergence such as Ireland, in exchange for lower debt financing costs.

Concern has been raised that the European Central Bank may end up with greater powers to enforce the Maastricht Criterion, which sets the maximum debt-to-GDP for EU countries at 60%, and should another crisis occur, or if further bailouts are necessary, countries' fiscal policy could be at the discretion of the ECB. Of greater concern is that reforms taking place alongside the ongoing review of the European Financial Stability Facility could allow groups of countries to veto 'undesirable' policy decisions by heavily indebted member states.

The increased power of European officials over countries' fiscal sovereignty was recently noted by Cyprus's largest bank, which warned of the ramifications that receiving ECB support could have on Cyprus's economy and reputation as a international financial centre, with the bank urging the introduction of rapid austerity measures.

Proposals for EU-level bonds have been noted by some observers as the stealthy introduction of a European Finance Ministry, and have raised fresh concern about EU tax harmonization at a time when high tax members of the European Union are pushing the Union's agenda of a Common Consolidated Corporate Tax Base, and when a unified carbon emission trading scheme is already incoming.

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