Fiscal Federalism within the New European Economic Community - Essay Example

?Federalism is a mechanism of government administration. There are many others like imperialism, dictatorship and autonomous administration. Federal approach means that a centralized system will control the states or provinces of the country. The states or provinces will be granted authority and autonomy as guide by the federal government. Federal approach to government enhances the unity amongst the provinces. It provides a way to communicate nationalism more strongly than the autonomous units operating in complete isolation. True union in terms of federal approach can be described by a hypothetical name termed by writers and researchers as United States of Europe (USE). The term is used for defining the concept of a single federation of states. Fiscal federalism means a more centralized economic order within the new European Economic Community. The European Community progress towards an economic and monetary union based on a common currency will create new demands for the design of fiscal policy. With a common currency and thus, a common monetary policy, member states will no longer be able to influence their local economies through exchange rate or monetary policies when state specific economic shocks occur. (Inman & Rubinfeld 1992, p.1-2) The economic situation in one province does not imply a sectarian policy to take any action or decision regarding exchange rate, interest rates and tax basis. The classical concept of federalism refers not only to an indestructible union of indestructible states but is also the method of dividing powers so that the general and regional governments are each, within a sphere, coordinate and independent. A major reason for the existence of relatively centralized fiscal systems in developing and transitional countries is the adoption of planned development strategy. (Ahmad & Brosio 2008, p.225) A respected journalist argues that the expanding European Union is becoming a second, and potentially superior, superpower to the United States, and outlines what the new Union will mean to world trade, politics, and power (Reid, 2005). Fiscal federalism involves the handling of fiscal and monetary policy tools by a centralized body. It prevents regional financial inequalities by providing a balanced level of support to all the sectors. It is also criticized in terms of sharing prosperity and crisis. If one of the sectors is making huge revenues and they are effortlessly shared by others because of being members of a union is unjustified. Therefore detailed policy orientations are to be prepared for managing such systems is highly essential. Members of the European Community signed a treaty in 1992 and it is called Treaty of Maastricht. It is more commonly known as treaty of Europe. This same treaty was the origin of a common currency in Europe called euro. Once the treaty was signed many amendments were made as the need for more detailed orientations rises. The 1992, French Referendum on the Maastricht Treaty, The Treaty on European Union was signed at the Dutch town of Maastricht by the foreign ministers of the twelve European Community members on February 7, 1992 (LeDuch 2003, p.83). The Maastricht Treaty established three so-called pillars of EU: the first being the pillar of Community; the second pillar relating to foreign and security policy; and the third pillar on justice and home affairs (Obokata 2006, p.87). Exploring the politics of European integration, Michael Baun argues that the end of the Cold War and German unification have created a new set of geopolitical realities in Europe (Baun 1996, p.2). European Union is an example of free trade unions like Mercosur, NAFTA, SAFTA and others. It is different to the extent that it has reduced national boundaries to a large extent as compared to other free trade zones. Member countries have wide range of agreements in terms of business, transportation, import and export, tourism, agriculture and so on. The strongest part is the common currency i.e. euro being operational in all member countries. The Treaty of Lisbon or Lisbon Treaty (initially known as the Reform Treaty) is an international agreement that amends the two treaties which comprise the constitutional basis of European Union (EU). The Lisbon Treaty was signed by the EU member states on 13 December 2007, and entered into force on 1 December 2009. It amends the Treaty on European Union (TEU; also known as the Maastricht Treaty) and the Treaty establishing the European Community (TEC; also known as the Treaty of Rome). In this process, the Rome Treaty was renamed to the Treaty on the Functioning of the European Union (TFEU). The provisions for permanent structured cooperation in the Lisbon Treaty promise to enhance European defense capabilities and expenditure. If the Treaty can deliver such long overdue improvements, which can be called on for EU and NATO missions, they can only be welcome. Improving military capabilities throughout Europe is in the interest not only of EU but also of NATO. European nations have so far shown little appetite in investing sufficiently in defense (Great Britain: Parliament: House of Commons: European Scrutiny Committee, 2008, p.288). Thus, the main purpose of such treaties and amendments is to strengthen the European countries and the region by making mutual efforts and agreements. The Lisbon Treaty has special provisions which support greater participation of European nations in the activities and projects. Furthermore, it favors a specific platform where each nation can express their opinion and point of view (Great Britain: Parliament: House of Commons: European Scrutiny Committee, 2008). Through Lisbon treaty significant changes are made in the previous agreements were made like Council of Ministers voting system changed from unanimity to double majority voting, European Parliament becomes more strong by participation in legislature, creation of a President of the European Council and a Representative of the Union for Foreign Affairs and Security Policy. In addition to that Charter of Fundamental Rights gains the legal existence. During the period of 1986-1992 the EU adopts nearly 280 separate items of legislation pricing open hitherto-closed national markets to complete the single market. There were 12 sets of national regulations derived from 12 nations which were members of union at that time. Every business plan has to process those regulations before marketing a product throughout the Union. They were replaced by one common European rule, which vastly reduces the complications, paper work, time and costs. In addition to that, in many areas the members of union were comfortable in giving each others’ laws and technical standards and regulations the same validity and status as their own (the ‘mutual recognition’ principle). European Union became a single and coordinated market in1993 and a combined European zone became a concrete reality. The establishment of unified market had many advantages in terms of cost reductions, open borders and regulations, increased productivity giving rise to increased employment which ultimately leads to increased prosperity. The Commission presents and regularly updates and modify the Internal Market strategy, which sets out a strategic vision and framework for improving the functioning of the Single and unified Market (Web 1). The single European act of 1986 which has been the mainspring of European activity, has, directly or indirectly, implications that are monetary, social, environmental, regional, technological and, last but by no means the least, political and international (Swann 2002, p.9). A distinction is needed to be made between ‘European social policy’ and EU ‘social policy’. A commission Green Paper in 1993 took the term European social policy (ESP) to mean ‘the full range of policies in the social sphere including labor market policies’ (Commission, 1993). This definition encompasses social welfare policies as well as policies affecting employment. However EU social policy (EUSP) is still largely centered on employment policies and working conditions (Jones 2001, p.250). Social dumping can be defined as any action taken to gain economic gain by taking undue advantage of a social situation and more specifically exploitation of areas having low wage rates. In case of European countries some countries are backward in terms of wage rate. This inequality drives industries from capital intensiveness to labor intensiveness, thus changing the market composition. The trade unions have often complained about social dumping by employers. Surprisingly, given the sensitivity of issue, no official definition of social dumping has ever been provided by European institutions, including, the European commission, particularly since the notion of social dumping inspired the founders of European Economic Community, based on the idea that competition among the member states would be distorted unless harmonization of social standards and working conditions was achieved within the community promote improved working conditions and an improved standard of living for workers so as to make possible their harmonization while improvement is being maintained (Vaughan-Whitehead 2003, p.323). In short, the East European welfare states have come under great political, economic and social pressure, and as their future has become more uncertain, new solutions are needed without any delay. Globalization has now become an important issue with regards to the economic, social and political sphere (Cerami 2006, p.217). Simultaneously, social tourism (increased flows of labor to the richer regions of the European Union, with more generous social policies) was expected to occur. As for social dumping, on the integrated European market of the early 1990’s countries with low level of social protection, and hence lower labor costs, had a comparative advantage. The effects of social dumping –based on lower level of social costs- could still be compensated for by adjustments in exchange rates of participating countries and by differing rates of inflation (Vugt & Peet 2000, p.11). Both the free market and market interventions are practiced in the countries of European Union. Some countries of Europe are declared to be transitional economies which mean that they are moving from completely regulated markets to free markets where market forces i.e. demand and supply are powerful regulators. When an economy is shifting its status to a free market from a centrally planned economy then it is called transition or transitional economy. Thus, the economy is changing its existing form then it is in transition phase. Transitional economy is characterized by the liberalization of economy where market forces i.e. demand and supply set the prices rather than a centrally administered organization governed by government or some other central institution. Trade barriers are reduced encouraging international trade and government owned institutions are privatized. The mechanism of free market has been applied in China, the former Soviet Union and Communist bloc countries of Europe, and many third world countries and is found to be useful in handling an expanding global orientation of businesses and Government-owned organizations. Characteristics of the transition process are named as changing and creating of institutions, particularly private organizations and companies; changes in the role and responsibility of the state including the change in the scope of its power, thereby, the establishment of different governmental institutions and the promotion of private-owned enterprises and companies, markets and independent accounting and financial institution. As the world faced a global financial crisis and many stock exchanges and world’s strongest banks collapse, the European citizens have become more apprehensive about free markets and people will become reluctant in relying on only market forces. This condition will ultimately pressurize government to increase its intervention in regulating the national business rather than leaving it completely on the market forces. It is said that European economy will recover from the existing crisis in a short time period but this crisis situation will be manipulated by the politicians in a way that they will try to convince public that state intervention in all matters is a necessary remedy for economic stability of EU. The crisis is financial in nature as described by the writers and researchers but the implications are so diverse that the whole issue has become more than a financial crunch. In Germany the general public has become very reluctant in adopting free market system and they have become suspicious about its impacts and implications. As the general public perception has been changed the role of state will also be affected as their participation in economy as an active agent will increase. “For instance, Uk firms currently spend about ?1.5 billion a year buying and selling foreign currencies to do business in the EU. When the European Monetary Unit (EMU) was introduced the problem was solved. During the first half of the 1980s high inflation countries where prices increases rapidly, such as France and Italy were forced to adopt policies which reduced their inflation rates to something approximating the German inflation rates which were set as standards for maintaining a reasonable inflation rate. Without using this tactic the currency of both these countries would have to face devaluation from time to time. Thus the inflation rates fixed by the central bank of Germany set a standard to be followed by the other members of EU. The secret of Germany being an example for others lie in the fact that its central bank was independent of German government. On the other hand the countries where the central bank is regulated by the Government were unable to maintain stable and reasonable inflation rate. For example, the countries where central bank is not independent the government can change the monetary policy by increasing interest rates and the bank has to follow the governmental orders. In this way sometimes political parties involved in Government use this power in a way that benefits their position rather than using it in boosting the economy. But the countries where central bank is independent of government it has the authority to deal with governmental pressures. It can take its own decisions which it considers as in the best interest of whole economy rather than benefiting the political parties to get votes. This is because German inflation rates in the early 1990s rose to over 4% as Germany struggled with the consequences of unification and united Europe. Later on in 1993, countries like France which followed the German model of independent central bank became successful in controlling their inflation rates and Germany itself faced problems in maintaining its inflation rates at stable levels. The UK has followed the same model by providing more power and autonomy to the central bank by publishing reports of monthly meetings between the Chancellor of the Exchequer and the Governor of the Bank of England. (Web 2) If the expectation of inflation is low among economic agents, there is little need to push up wages. It is only under the condition of insecurity about the inflation target of the government that economic actors have an incentive to increase wages and, with them, prices, and thereby reinforces inflationary pressures. Their fear about losses in real wages and real returns will be reduced and they can settle for lower increases than they would otherwise have done. (Hassel 2006, p.47) True vision about creation of European Union is to facilitate trade between member countries while ensuring complete protection of their national sovereignty. The concept is that human prosperity is not an independent phenomenon forms the baseline of this agreement. Societies and markets produce deep impacts on each other therefore if a nation has to prosper it has to think about the welfare of connecting societies. Free trade areas are the manipulation of this basic idea and if they are not capable of creating such alliances then they are useless. European Union had faced many challenges and it still has to prove its benefits but it is the right path towards global integration, coordination and collective support. Therefore one cannot say that it would be an insane idea to work collectively while preserving nationalism and sovereignty. Work Cited Ahmad, E.& Brosio, G. 2008, ‘Handbook of Fiscal Federalism’, Edward Elgar Publishing, pp.225 Baun, M. 1996, ‘An imperfect union: the Maastricht Treaty and the new politics of European integration’, Westview Press, pp.2 Cerami, A. 2006, ‘Social policy in Central and Eastern Europe: the emergence of a new European welfare regime’, LIT Verlag Munster, pp.217 Great Britain: Parliament: House of Commons: European Scrutiny Committee, 2008, ‘The future of NATO and European defence: ninth report of session’, pp.288 Great Britain: Parliament: House of Commons: European Scrutiny Committee, 2008, ‘Subsidiarity, National Parliaments and the Lisbon Treaty: Thirty-third Report of Session 2007-08; Report, Together with Formal Minutes, Oral and Written Evidence’, The Stationery Office Hassel, A. 2006, ‘Wage setting, social pacts and the euro: a new role for the state’, Amsterdam University Press, pp.47 Inman, R. & Rubinfeld, D. 1992, ‘Fiscal federalism in Europe; lessons from United States experience’, European Economic Review, pp.1-2 Jones,R. 2001, ‘The politics and economics of the European Union: an introductory text’, Edward Elgar Publishing, pp.250 LeDuch, L.2003, ‘the politics of direct democracy: referendums in global perspective’, University of Toronto Press, pp.83 Obokata, T.2006, ‘Trafficking of human beings from a human rights perspective: towards a holistic approach’, Martinus Nijhoff Publishers, pp.87 Reid, T.2005, ‘The United States of Europe: the new superpower and the end of American Supremacy’, Penguin Books Swann, D. 2002, ‘The Single European Market and Beyond: A Study of the Wider Implications of the Single European Act’, Routledge, pp.9 Top german economist pleas for free market Available from: < http://www.ft.com/cms/s/0/bf0d9bb4-a0e5-11dd-82fd-000077b07658.html#axzz1JN990jWs>. [13 April 2011] Vaughan-Whitehead, D.2003, ‘EU enlargement versus social Europe?: the uncertain future of the European social model’, Edward Elgar Publishing, pp.323  Vugt, J.P.A& Peet, J.2000, ‘Social security and solidarity in the European Union: facts, evaluations, and perspectives’, Springer, pp.11 Web 1 Historical Review. Available from< http://ec.europa.eu/internal_market/top_layer/index_2_en.htm> [13 April 2011] Web 2 Advantages and Disadvantages Available from: < http://library.thinkquest.org/19110/english/advantag/index.html> [13 April 2011] Read More