Academic journal article Contemporary Readings in Law and Social Justice

Assigning Better Tax Governance within the EU through the Actions to Overcome the Debt Crisis and Enhance the Economic Convergence

Academic journal article Contemporary Readings in Law and Social Justice

Assigning Better Tax Governance within the EU through the Actions to Overcome the Debt Crisis and Enhance the Economic Convergence

Article excerpt

ABSTRACT. Leading European analysts have expressed skepticism on the effectiveness of long-term of the Franco-German plan to resolve the debt crisis. It is argued if the recent agreement reached regarding the union tax - even by its rejection by the United Kingdom - is a firm policy option of the Member States - especially to those in the euro area - to maintain the single currency. In other words, under the pretext of a stronger fiscal union it would provide the vital coverage for the European Central Bank to intervene more vigorously in supporting certain states which, once entered into the area of default, would invalidate the European construction of the euro area. We aim through this approach, to analyze broadly, to what extent the new tax reform - in fact difficult to implement - can save the monetary union.

Keywords: fiscal pact, economic convergence, internal market, monetary union, sovereign debt, debt crisis, credit event, stability fund

1. Introduction

Recently, the European Council agreed on a new fiscal pact. Except for Great Britain, the Member States have committed to a new strong European fiscal rules implemented in the national law, aiming to strengthen the rules regarding the procedure of the excessive deficit providing them a more automatically character.

With regard to short-term actions, the Council aims to strengthen EU financial resources to deal the current economic crisis. The Member States from the euro area and other Member States will seek to provide additional resources to the International Monetary Fund up to 200 billion. The leverage effect of European Financial Stability Fund will be conducted speedily.

It was also agreed on accelerating the entry into force of the rescue fund represented by the European Stability Mechanism. It should take effect in July 2012.

The main aim of the agreement is to bind Eurozone countries into tighter fiscal rules, including the need to keep their budget deficits below 3% of gross domestic product (GDP) and their debt levels below 60% of GDP.1

There is also a stipulation that countries should aim to keep their primary deficits - which exclude the cost of debt financing - below 0.5% of GDP over the economic cycle, an objective that has been called "the golden rule."

Participating countries that fail to meet the targets can be taken to the EU's highest court, the European Court of Justice - an effort to enforce stricter and more automatic sanctions on those that breach rules that have all too often been violated in the past, including by France and Germany.

2. The real banking crisis

Since 2008, the EU plans to rescue the euro area have transformed a traditional banking crisis into a sovereign crisis. European Central Bank (ECB) has managed to keep the Eurozone banking system to normal parameters so far, but the constant threat regarding the withdrawal of the banking depositors makes its future very certain. A bank operates on deposits which forces the banks to liquidate the assets to raise cash.

Greek banks have seen deposit outflows of around 8% thus far in 201 1, with an acceleration of outflows in May and June. Moody's recently warned that such flows could cause a "severe cash shortage if they rapidly increased beyond 35% of deposits."2 Last week's euro109 billion bail-out suggests that may have already happened.

Just as with Ireland, the ECB has kept the Greek banks afloat, funding them almost euro100 billion in 2010 and an additional euro103 billion thus far in 2011. The recent bail-out will buy Greece time, but deposit outflows could still derail the ECB's efforts to save the Greek banking system if they continue unchecked.3

Italy's debt of 1800 billion in nominal debt is more than Greece, Spain, Portugal and Ireland combined. Italy and Spain are too big to fail and too big to be saved, so that the future of the euro area will be seriously compromised if the Italian and Spanish depositors withdraw their money from deposits. …

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