Sunday, August 28, 2011

Fiscal Union

In economics, fiscal matters relate to revenues and expenditures, as opposed to monetary matters, which have to do with the relative value of the currency and all that it depends on, such as interest rates and money supply.

In the Euro zone, which comprises of the 17 EU member states that use the Euro as their unit of exchange, the European Central Bank (ECB) has responsibility for monetary matters. It has declared its primary objective in managing monetary policy to be the control of inflation or, to be more precise, inflation expectations. Each individual Euro zone member state is responsible for its own fiscal policy.

If fiscal policy is about revenues and expenditures, then the most important aspect of this has to be decisions about how taxes are raised, which in turn include questions about the activities that should be taxed and at what rates. The other important element of fiscal policy is how money is spent, which means how national budgets are prepared and executed.

At the extreme, full fiscal union would mean that fiscal strategy in the EU would be centralised, just as monetary policy is at present.

For Ireland, under the current bailout agreement with the ECB and the IMF, there is already an element of what might be called fiscal cooperation in place, as both these bodies now have oversight of Irish budgetary provisions. This, however, falls well short of full fiscal union. The most serious block to fiscal union is the determination of the Irish government to hold on to its favourable corporation tax rate of 12.5%, which has been a significant factor in motivating Multi-national Corporations to locate, and in many cases establish their European headquarters, in Ireland. There are well founded fears that fiscal union would result in a rise of the Irish corporation tax rate to a standard, Euro zone wide, percentage. Many other EU states maintain that the relatively low Irish rate confers an unfair advantage in the attraction of Foreign Direct Investment (FDI).

In addition to the above there are many commentators in Ireland who maintain that fiscal union would mean an effective loss of sovereignty for the Irish state. This is surprising, as we have already, and long since, effectively ceded sovereignty by accepting EU directives under legally binding treaties, by convention named after the cities in which they were formulated such as Rome, Maastricht, Nice, Lisbon and even Dublin, in areas of social policy, anti-discrimination measures, consumer legislation and the penal code, to name but some.

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