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What’s wrong with majority voting?

Nationalist posturing over a constitution for the European Union has diverted discussion from the fundamental socio-economic issues, argues John Grieve Smith

The future of the European Union depends crucially on improving its economic performance. Continuation of the present high levels of unemployment - touching 9% in the Euro area as a whole - is both intolerable in itself and a threat to political stability. It would be unduly alarmist to compare the present situation directly with that between the Wars, but the recent rise of the far right cannot be unconnected with present economic conditions - for example the youth unemployment rate of 27% in Italy. It is therefore particularly unfortunate that the level of discussion of these issues seems to have sunk to new lows in the context of the proposed new EU Constitution. Instead of asking what do we need to do and what is the best political machinery for achieving it, comment seems almost entirely concerned with whether the Constitution would involve any encroachment on our national sovereignty.

This was exemplified in an article by Gordon Brown in the Telegraph under the caption ‘Flexibility not Federalism’. It is strange to find a British Labour minister attacking other members of the EU for the social partnership aspects of their industrial systems, better consultation and greater job security. These are not only important to the workers concerned, but also (as I know from my past experience with the German steel industry), an important contributory factor to their efficiency. As a recent study by the Work Foundation has demonstrated, two of the attributes of our most successful companies are ‘employee engagement’ and taking heed of their stakeholders. Now that our industrial future depends more than ever on technological innovation and firms taking a longer term view of their investment and manpower policies, the Government’s apparent obsession with ‘flexibility’, and by implication ‘short termism’, is particularly inappropriate. Making it easier to fire people (which is what is meant by “flexibility” in this context) is not the answer to Europe’s unemployment problem.

Reducing unemployment in countries like Germany and France depends primarily on stimulating demand. Any further reduction in the presently low level of interest rates is likely to have little or no effect. The essential need today is to adopt more expansionary budgetary policies, and increase demand either by cutting taxes or increasing expenditure, until unemployment is down to more reasonable levels. The difficulty is that budgets are already in deficit and the ironically named ‘Stability and Growth Pact’ is putting perverse pressure on governments to move in the opposite direction by raising taxes or cutting expenditure, thus accentuating the recession. The longer no expansionary action is taken, the worse the problem will become. Plant closures cannot be reversed and industry will become progressively less able to respond to any picking in demand. As far as countries’ fiscal positions are concerned, they are in a vicious circle. Low levels of output and employment, and hence low tax receipts and higher social security costs, are a major factor behind these continuing deficits. To get out of this situation, finance ministers must be prepared to see a short term increase in deficits as the price of longer term improvement.

Given the high level of intertrading, the countries concerned need to act together. Firms need not only higher demand at home but also in neighbouring markets. This calls for a series of co-ordinated expansionary budgetary policies (as provided for in the existing Treaties and the new Constitution). But this would mean amending the Stability and Growth Pact to permit countries to increase their budget deficits to boost demand. Such an amendment is urgently needed and should not impose any rigid guidelines on the lines of Gordon Brown’s Golden Rule, but rather allow the flexibility needed to fit the differing circumstances of the countries involved.

Another line of attack is the proposed European programme of public investment in infrastructure. This could be tailored to the needs of some of the worst hit regions and, if financed by the European Investment Bank or the European bank for Reconstruction and Development, would not run into difficulties with the Stability and Growth Pact.

In this context it is important to distinguish the need for co-ordinated action when countries are in a similar position, from that for individual action where countries’ situations differ: in this instance such expansionary measures would not be appropriate in the UK where unemployment is relatively low. The fact that countries need room for individual manoeuvre does not, however, mean that there cannot, or should not, be any harmonisation of taxes, as Gordon Brown suggests. In inveighing against harmonisation, and calling so enthusiastically for ‘tax competition’, he and Tony Blair are taking the wrong side of the argument.

We are living in a world where there is a spectrum of taxes, ranging at one end from those that can only be effectively levied on an international basis to those at the other that can be charged at different rates in different localities. With the growth of global capital markets, we are fast reaching the point where taxes on capital transactions, such as stamp duty on share transactions, will have to be levied at internationally agreed rates if they are to be effective. The same would be true of the proposed ‘Tobin Tax’ on foreign exchange transactions. Indeed the London stock exchange is already arguing for the abolition of stamp duty on the grounds that they stand to lose business to markets with lower or no tax. Similarly the mobile rich will increasingly avoid or evade taxes on their income from dividends and interest if countries are not prepared to act together. The Chancellor’s reluctance to co-operate with other EU ministers in tackling this problem for fear of offending the London market was quite remarkable.

Again, when it comes to sales taxes on goods there are limits on the differences between states that are feasible in a common market - as the volume of French wine on cars coming into Dover dramatically illustrates! On the other hand taxes on property and local services such as restaurants or hairdressing can be effectively levied at different rates within one country.

The field where tax competition is most tempting, but also most dangerous, is that of corporate taxation. Low levels of tax may be an effective way of attracting foreign investment, but if everybody competes in this way, we shall end up with companies paying less and less tax and the person in the street having to pay more and more. Indeed it would make it increasingly difficult to finance the levels of public services that most of the electorate expect. One would expect the Institute of Directors to be strongly in favour of tax competition, but not a Labour Government.

Although harmonisation will reduce the ability of finance ministers to vary taxes in individual countries to meet differing demand conditions, there will still be sufficient scope for tax and expenditure changes to cope with differing individual circumstances. Tax harmonisation does not mean there will no longer be any scope for national budgetary policy, but it will limit the instruments available.

In the long run, effective decision-making on tax harmonisation cannot operate solely on a basis of unanimous agreement with every country having a right of veto, particularly when there are over 20 members. There must eventually be some form of majority voting on tax harmonisation and various other economic issues - such as social security benefits. The new Constitution does not, however, provide for any such moves and Gordon Brown’s violent reaction is somewhat premature. The key constitutional question for the future is: at what level should different aspects of economic policy be formulated? (Their actual implementation may be partly or wholly delegated to a lower level, for example the collection of harmonised taxes.)

It is strange that the idea that the UK Government might sometimes be in a minority has raised such a furore - particularly among those (like Telegraph readers) who do not agree with it anyhow! In any democratic structure we all have to accept majority decisions which go against us from time to time. We accept this on a local and national basis already, why not at a European level? Although the present constitutional proposals do not involve any extension of Qualified Majority Voting on economic matters, it would be short sighted chauvinism to rule this out for ever as our economies become more and more closely integrated. But to go further down this route we need to be confident that the basic assumptions of other members in formulating policy will be social democratic - rather than neo-liberal as in the Maastricht Treaty which set the rules for the Euro area. For this reason, I would be happy, for example, to accept majority voting in the field of labour market policy, such as worker consultation and employment rights, but would not be in favour of joining the Euro area under the present regime.