ABSTRACT: An analysis of the financial consequences of enlarging the Community brings home the urgent need for further reform of Community institutions in order to overcome the democratic deficit which persists after the decisions taken at Maastricht. The attribution of autonomous authority to levy taxes played an important role in the development of parliamentary democracies.

(THE PARTY new - n. 6 - march 1992)

A matter at the top of today's agenda is that of enlarging the European union to include not just EFTA countries but also Eastern European nations and, in prospect, some of the republics that were formerly a part of the Soviet Union.

Two contrasting attitudes have been expressed on this matter. There are those who, like Douglas Hurd, the British foreign minister, see enlargement as a perfect opportunity to dilute the community into a vast free trade area, thereby definitively heading off the risk of a federal union. Others, particular people involved in federalist organizations (but also in some of his statements the president of the executive commission, Jacques Delors) stress the positive aspects of enlargement in that it would guarantee a positive outlet for the process of democratic evolution underway in Eastern Europe, as well as presenting an opportunity to strengthen the Community and establish a Union of a federal nature.

Aid to countries outside the Community

This leads us to examine proposals for financing the Community budget contained in the so-called "Delors2 package", an attempt to translate the indications provided by the Maastricht political union treaty into financial terms.

According to the Delors proposal, extra aid to countries outside the Community should stand at 3.5 billion ECUs. This is a considerable sum, but in actual fact it does not seem adequate, in as much as it does not reflect the financial resources required to support development in Eastern Europe and the former Soviet Union.

It must be borne in mind that the collapse of Communist regimes has already had a major impact on Community foreign aid policy. While aid from the Community and member states to developing countries accounts for 11% of the total (2.5 billion ECUs in 1989, out of a total of 23 billion ECUs, equivalent to 0.52% of European GDP, compared to expenditure of 0.16% for the United States and 0.37% for Japan), as far as Eastern European countries are concerned excluding the Soviet Union between June 1989 and June 1991 the Community provided 63% out of a total of 30.5 billion ECUs, in other words 19.2 billion ECUs. It is now a question of assessing the Community's financial commitment over the next few years, remembering that aid will also be required for the purpose of supporting development in republics that were formerly part of the Soviet Union.

The Marshall Plan example

There are various ways of coming up with an estimate, but perhaps the best method is to start with the historic example of the Marshall Plan. Over a four-year period, the United States paid out the equivalent of 1% of GDP, or 2% of the GDP of the European countries who benefitted from the aid, in the form of non-repayable loans. If we apply these two criteria to the present situation and assume that the Community and its member states provide roughly half of the necessary financial resources, the total amount of European aid for Eastern Europe and the former Soviet Union stands somewhere around 130 billion ECUs. If this figure is split between the Community and member states in the same ratio as current aid, then the Community budget will have to soak up around 100 billion ECUs. If the aid programme is spread over ten years, this means that each year the Community budget will have to allot around 10 billion ECUs at 1991 prices (equivalent to 0.2% of GDP). So, even a prudent estimate, with aid spread over a l

ong time-scale, is far greater than the amount contained in the Delors proposal.

Community taxation power

We may draw two important conclusions from the brief analysis above.

In the first place, it is right and necessary that the Community show an unambiguous commitment to enlarging itself in order to guarantee the democratic evolution of Eastern European and the former Soviet Union, and to avert the risk of a break up of the international order, a possible consequence of the ever-stronger nationalistic trends that are already making themselves felt in this part of Europe. But there is an economic price to be paid, and this must be stressed right from the start, so that in later stages there is no phenomenon of rejection similar to that which is currently visible in Germany.

There is also a second factor to consider, one which more directly concerns Community institutional evolution. The contents of the "Delors2 package" has already provoked strong negative reactions, for the fact that member states will have to pay more into the Community budget. This is a comprehensible reaction, in that although the political cost of the tax burden will be borne by member states, the positive effects of the expenditure will be attributed to the Community. The only way out of this apparent dilemma is to equip the Community with taxation power, on the basis of the principles of correct fiscal federalism, with the two branches holding budget responsibility, the Council and the European parliament, associated in the decision-making process. In this manner, political and social forces will have the opportunity of intervening in the process of defining Community fiscal policy, and increases in expenditure could only be decided upon should the Community be able to gather sufficient consensus either

for the reduction of other items of expenditure or an increase in the tax burden.

Enlargement and the spread of democracy

In conclusion, an analysis of the financial consequences of enlarging the Community leads us straight back to the pressing need for further reform of Community institutions in order to overcome the democratic deficit which persists even after the decisions taken at Maastricht.

Turning the American revolution watchword round, we may conclude that the European parliament should follow the principle: "No representation without taxation". Indeed, the attribution of the power to collect taxes has played an important role in the evolution of all parliamentary democracies.

So, we must continue together with our struggle to enlarge the Community and make it more democratic in the knowledge that both of these goals must be achieved simultaneously and as soon as possible so that all of Europe may become a pole of stability and development within the framework of the new international order currently being defined.

Alberto Majocchi, professor of finance at the University of Pavia.