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Europe Needs Lower Taxes, Not More Spending

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Europe Needs Lower Taxes, Not More Spending

June 28, 2018

French President Emmanuel Macron and German Chancellor Angela Merkel issued the Meseberg Declaration last week in preparation for Friday’s Euro summit. In their joint statement, the leaders laid out a series of proposals to pass during the summit. However, despite the political influence of the Franco-German alliance over the European Union, not all the proposals were welcomed by other member states.

The most controversial proposal was the creation of a Eurozone budget to “promote competitiveness, convergence, and stabilization in the Euro area.” The budget reportedly includes a “digital tax” on large technology companies of 3 percent of their revenues. Despite good intentions, if enacted, a Eurozone budget would not achieve any of its goals but would only worsen economic conditions.

A Eurozone budget is not a new idea. For years many European leaders have supported a fiscal union. However, the main challenge for such a budget is its funding, especially when the European Union already has a budget that covers all member states. According to the joint Franco-German statement, the budget would also be funded by “national contributions,” which are neither popular nor favor economic growth.

The push for “convergence” translates into transferring resources from richer Northern regions to poorer Southern regions, an idea that Northern Europeans and leaders within Merkel’s own political party do not support. Furthermore, transfers to less fiscally-responsible Eurozone states would only support their misguided economic policies while punishing those that achieved balanced budgets and competitive economies.

In addition, implementing a digital tax to fund a Eurozone budget would discourage innovation. This tax has the potential to worsen relations with the United States, since it would fall disproportionately on American multinationals such as Google, Facebook, and Amazon.

The proposed budget comes at a time when average Eurozone government spending is at a record-high 47 percent of Gross Domestic Product. Asking Eurozone states to spend more towards another Pan-European project would depress economic growth by increasing their debt and tax burden even more. Already, most European countries have top tax rates in the 45 percent to 50 percent range, as well as value-added taxes on consumption of 20 percent to 25 percent. They do not need more taxation.

Fortunately, many richer and Eurosceptic governments in the Eurozone have rejected this proposal. The Netherlands is leading a group of 12 Northern countries that reject more spending and subsidies to fiscally-irresponsible neighbors. As Dutch Prime Minister Mark Rutte declared “The EU needs to under-promise and over-deliver,” adding that stabilization would follow “if the 19 Eurozone countries were to put their own budgets and national debts in order.” On the other hand, Italy, which recently elected a Eurosceptic government, represents the concerns of countries with high levels of debt. Italy’s government is vehemently opposed to sending more resources to Brussels and would only agree to a Eurozone budget if there were no conditionalities to make reforms.

Instead of addressing the legitimate concerns of Eurozone members, the French finance minister Bruno Le Maire declared the Franco-German agreement to be more important than ever. He blames U.S. President Donald Trump for a weakened Europe—even though the stronger U.S. economy under Trump is raising European exports.

Although the Eurozone economy is slowing, economic growth is highly disparate among its members. European countries with low taxes and balanced budgets such as Hungary, Ireland, and the Baltic countries are growing considerably faster than the rest. Those with irresponsible fiscal policy and oppressive taxes such as Portugal, Italy, and Greece are lagging behind.

Fiscally-responsible and business-friendly Eurozone member states would be wise in following the lead of the Netherlands in rejecting yet another redundant spending program. If Europe wants competitiveness and higher economic growth, it should follow the lead of successful countries with lower spending and taxation.

Daniel Di Martino is a contributor to Economics 21. Follow him on Twitter @DanielDiMartino

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