On the EU reflection paper about globalisation

The internal aspects need more ambition

2017-05-11

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On May 10, 2017 the European Commission published its reflection paper on harnessing globalisation.¹ It is the second such document in a series (the first one being about the EU’s social dimension).² The idea is to provide all the information and data that will inform the decisions on Europe’s future priorities. The EU is at a crossroads. All sides seem to agree that the status quo is unsustainable. Disagreements are about the Union’s outlook. Either Europe will proceed with deepening its integration to some degree, or it will have to somehow be refashioned so that national governments regain certain competences. Once this election year reaches its close, the EU is expected to proceed with a range of reforms. The December 2017 European Council will likely provide the impetus for the next five years or so.³

The reflection paper about globalisation is a fine piece of work. Solid data, good analysis. Any criticism we may level against it is on the political front. It barely mentions key issues of the internal dimension of globalisation, such as the euro area’s fiscal framework, the Union’s approach vis-à-vis corporate taxation, and the pressing need to harden cyber security.

The euro is an instance of globalisation

If we define globalisation as the phenomenon by which nation states become ever more inter-connected and inter-dependent, and where political action requires inter-state cooperation to be effective, then the euro area must be treated as a regionalised form of globalisation.

Nations have been opened up to a larger market—the EU single market—and have forgone considerable powers on macroeconomic policy. Monetary affairs are entrusted with the European Central Bank,⁴ fiscal measures are subject to close supranational coordination within the context of the European Semester (economic governance of the Economic and Monetary Union), while financial regulations and prudential oversight are also being formulated at the European level. Meanwhile, governments are facing robust constraints when it comes to corporate taxation, given the ease with which a company can relocate within the EU market. In short, integration and the euro specifically has made its Member States ever more reliant on each other, effectively rendering traditionally-understood national sovereignty obsolete.

Every euro country is exposed to its peers. That has its positives and negatives. The immediate upside is increased economies of scale as well as new opportunities for innovation and investment. The main downside is that the euro architecture lacks essential mechanisms and democratic institutions for properly ironing out any asymmetries that occur along the economic cycle. Just as with globalisation in general, not every country, not every industry or sector, benefits equally. The euro crisis has exposed the built-in propensity of the system to exacerbate economic shocks and amplify inequalities within and between countries. Without an outright supranational fiscal capacity, a European Treasury as a counter-party institution to the ECB, the only method to arrest an economic slowdown is ‘internal devaluation’ (austerity). However, that comes at the cost of social welfare and an overall degradation of public goods. It is unsustainable over the long run.

The euro is in desperate need of a central fiscal policy that will guarantee automatic fiscal transfers (such as unemployment benefits). It also requires the appropriate institutional arrangements for the democratic legitimacy of economic governance, which currently leaves much to be desired. Enhanced legitimacy combined with supranational macroeconomic policy can make fiscal discipline at the national level much more benign, both in economic and social terms.

It is lamentable that the Commission’s reflection paper does not tackle these issues. We do, nonetheless, withhold ultimate judgement in expectation of the next paper (end of May 2017) which is about EMU reform. Still, the specifics of reforming the euro do not change the fact that the effects we are witnessing can be understood in light of an analysis of globalisation, in the sense of interconnectedness.

Tax havens are not that far from home

The reflection paper recognises the pernicious effects of tax havens and all the unscrupulous practices that lead to tax base erosion. What it does not elaborate on is the intra-EU dimension of this phenomenon. The case where Apple Inc. is called by the Commission itself to pay several billions in due taxes in Ireland highlights a fundamental weakness of the EU single market: the absence of a common corporate tax base and concomitant provisions for a tax rate floor and ceiling.

Now we can argue over legalistic definitions, such as what constitutes a “tax haven” or merely a “favourable jurisdiction”, but that would distract us from the actuality of things: in the current state of affairs, large multi-nationals have all the flexibility to exploit loopholes between national tax regimes. It is why behemoths such as Apple or Google pay virtually no tax.

Globalisation has greatly eased the conditions for the movement of capital. That is more so within the context of the European integration process. Yet, tax policy has largely remained trapped in the political thinking of the 19th century, as a quasi-sacrosanct expression of national sovereignty. This has to change. Europe must find ways to align the free movement of capital with the social need of fairly distributing resources and burdens.

The European Treaties require amendments on this front. The Union should be conferred the necessary competences so that it can establish a level playing field in the area of taxation. Yet even without Treaty change there is much the EU can do. The Commission can intensify its scrutiny over large corporations on grounds of competition policy (which is an EU competence), while Member States could agree on a pact for harmonising their tax jurisdictions, at least for businesses that are most exposed to cross-border trade. Whatever the specifics, the reflection paper ought to bring these issues to the forefront.

Cyber security and Internet regulation

There is precious little on cyber governance. We are fast approaching the day when the Internet of Things will be ubiquitous. This concerns devices that require access to the Internet in order to perform their function. From security cameras, to web-empowered appliances, to anything that can form part of a ‘smart’ house, the Internet is no longer limited to human communications. The major problem with this tendency to make everything the extension of an app is that it greatly expands the surface for potential cyber attacks.

These devices are subject to very little regulation. There are no standards concerning the integrity of the software they use. Is the source code open for independent security auditing? Are there provisions governing the patching of security vulnerabilities, whether it is timely, automatic, and the like?

The answer to these and relevant concerns boils down to the simplistic belief that the market will regulate itself. The core error in that line of reasoning is that it assumes every business that produces a ‘smart’ kitchen utensil to have the same incentives and resources as an Internet giant. The manufacturer of a connected device may not care about the underlying integrity of its base software ten years into the future, or it may not have the capacity to address security weaknesses effectively. A failure to act will result in devices that have the potential to operate as vectors of malicious activity.

The Internet of Things has to be thoroughly regulated. Laws of this sort do not merely concern the World Wide Web (which is governed by the corporatist W3C). They have direct application on manufactured goods which, in our case, enter—or circulate within—the European market. The European consumer does not want their ‘smart’ fridge either to be spying on them or become part of a botnet for launching cyber attacks (usually Distributed Denials of Service).

If there is one domain of human experience where globalisation is readily apparent, it is the Internet. There needs to be much greater awareness of the challenges it poses. The Commission must actively foster a debate on the matter and seek out the relevant expertise for hardening Europe’s cyber security. That will also ensure that Internet-dependent consumer goods are fully in line with EU data protection standards.

Globalisation cannot be reversed

The belief that a nation can exercise its sovereign will in a way that insulates it from the world is out of sync with the times. Financial markets across the globe are largely dependent and responsive to each other. The Internet is ubiquitous and continues to expand into new domains of public and private life. Climate change affects us all whether we like it or not. Concerted action between nations is a must.⁵

European integration can be treated as a regional variant of globalisation. It has the same effect of increasing the international exposure of national lifeworlds. It also makes EU Member States ever more inter-connected and inter-dependent. Old institutions need to be updated while new ones must be set in place in order to cope with the rising challenges.

The Commission’s reflection paper is an excellent starting point for an informed discussion on globalisation. Where it is found wanting is in its lack of political ambition to push the agenda on EMU reform, EU-level taxation, and supranational cyber security and governance. It is understandable that the Commission does not want to take a step too far, given the competences it now enjoys. Nonetheless, the utility of these reflection papers is that there are exactly that: an impetus for further thinking. There is no real reason why the Commission cannot contemplate measures that would require a host of changes to be realised. That is the added value of reflecting on the modalities of policy outside the rigid constraints of law-making.

1. European Commission Reflection paper on harnessing globalisation. Published on May 10, 2017. [^]

2. For analysis and opinion on the first reflection paper, see my article Thoughts on the European Pillar of Social Rights. Published on April 29, 2017. [^]

3. The Commission’s work is based on the White Paper for the EU’s future which was published in early March 2017. For my thoughts about that, see Thoughts on the White Paper about the future of Europe. Published on March 9, 2017. [^]

4. For a review of the ECB’s role, see my article ECB independence: concept, scope, and implications. Published on April 2, 2017. [^]

5. For a theoretical take on such themes as sovereignty and globalisation, refer to my book Essays on Sovereignty. Published on November 14, 2016. [^]