A shift in perspective

By Wolfgang Munchau

Financial Times

Published: February 28 2005

Enthusiasm for the European Union's proposed constitution runs highest in Italy, Belgium and the Netherlands, according to a recent poll. All three happen to be members of the eurozone. The least enthusiastic member states are the UK, Cyprus and Sweden. None of them has adopted the euro.

This is no accident. There are two potential reasons for why participation in the euro renders a country pro-constitution. The trivial one is that those who really dislike the euro also dislike the constitution. But since only a minority of Europeans are outright europhobes, this cannot explain such a big trend. The real reason is that joining the eurozone changes a country's perspective and political interests.

Officially, the euro is the currency of the EU. But the UK and Denmark have formal opt-outs. Sweden claims a similar privilege. Of the new member states, it is not clear how many will join the euro zone. At present only 12 of the 25 EU members participate. The membership of the two will remain different for a long time.

It is unsurprising that the long-running debate on corporate tax harmonisation divides members and non-members of the eurozone, the latter being mostly opposed. This is logical. From the perspective of a non-eurozone member, the EU is no more than a highly integrated free-trade area.

But from inside the eurozone, say from the perspective of Belgium, the EU looks different. The most important decisions affecting the Belgian economy are taken by European institutions such as the European Central Bank. In terms of economic policy, Belgium is more like a province than a state.

Guy Verhofstadt, the Belgian prime minister, last week sent a letter to other European heads of state and government, complaining that there is too much nation-state thinking in European economic policy. His letter reflects the difficulties of a prime minister who is losing his grip on economic policy. He is not alone. He proposes that EU countries should reduce their reliance on direct taxes and strengthen their indirect tax base, and do so in close co-ordination.The economic argument is not as silly as some critics believe. Mr Verhofstadt would not find it easy to raise indirect taxes if Belgium's neighbours kept theirs unchanged. Nor would he be able to find agreement within the EU, because tax policy is subject to the national veto.

But he could get a majority among the members of the eurozone, where there is a much greater consensus about the benefits of co-ordinating fiscal policy. The trouble is that some leading eurozone politicians have reduced the question of co-ordination to harmonisation. Intra-eurozone co-ordination, they argue,would make no difference to tax competition from outside the eurozone, for example from Slovakia, which has imposed a flat tax of 19 per cent.But they are wrong to focus so much on this tiny economy at the edge of the EU. Instead, the eurozone needs to solve its collective action problem and regain some control over fiscal policy.

As the Verhofstadt letter indicates, the clamour for policy co-ordination is getting louder. Another influential proponent of policy co-ordination is Jean-Claude Juncker, prime minister of Luxembourg and president of the eurogroup. This grouping of eurozone finance ministers is becoming gradually more important than Ecofin, the gathering of all 25 EU finance ministers. At least one large-country finance minister regularly shuns Ecofin and attends only eurogroup meetings. Expect most of the policy action to shift to the eurogroup in the next few years.

This is not how "variable geometry" was supposed to work: the EU was meant to be an umbrella consisting of happily overlapping sub-groups such as the eurozone and the Schengen passport-free travel zone. But the eurozone is in a different category. Membership of the euro changes a country's politics in relation to non-members. The irrevocable fixing of exchange rates has turned the eurozone into a single economy. This is not true of the EU.

If all 25 EU countries had been members of the eurozone, there would have been more consensus in the debate about the constitution. If the EU ever broke up, the eurozone would be the core that remained.