Europe Economy

Europe Warned It Faces Taxation Without Representation


As investors prepare for another trading week, stocks are in risk mode on expectations that euro zone policy makers will do whatever it takes to preserve the euro.

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The problem according to Otmar Issing, a former European Central Bank (ECB) board member from Germany, is that the solutions being put forward to solve the crisis will violate the fundamental democratic principles of no taxation without representation.

“Political union is impossible to achieve within a few years. It cannot be a means of crisis management,” Issing wrote in Monday’s Financial Times.

“Promising later action against requests for more money now does not look like a credible strategy—quite the opposite. This approach would severely undermine the idea of establishing political union,” Issing said.

Following reports that the ECB and the euro zone’s rescue funds will this week sign off on a plan to buy up peripheral sovereign debt, Issing warned such a move threatens long-held democratic principles.

“The implicit transfer of taxpayers’ money would be a violation of the fundamental democratic principle of no taxation without representation. This is true for all forms of debt mutualization. This is hardly the proper way to create a democratic European Union” said Issing.

Another idea being floated to help restore confidence in the euro zone is the formation of a banking union, but Issing said such a move risks undermining European unity.

“A clean-up of banking systems would have to precede the introduction of a European resolution fund and deposit insurance. Otherwise funds collected so far in national schemes would be socialized,” Issing said.

“This would not only undermine efforts by weak—to put it mildly—banks to break with the past, but would create an uproar in countries in which depositors would be effectively expropriated. This is hardly a way to foster identification with Europe,” said Issing who worked at the ECB during the launch of the euro .

Political union is not the answer to the crisis according to Issing, who thinks measures that implicitly pre-empt the establishment of political union are “inconsistent and dangerous.”

“They imply huge financial risks for a few member countries and could not only undermine honest efforts in the direction of political union, but also destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea,” he said.

The only way therefore to save the euro in its current form is to base financial assistance on conditionality and at borrowing rates that force nations to reform, according to Issing.

“Financial assistance must be based on strict conditionality and be given at interest rates that do not undermine the will to reform. As such, monetary union could survive without political union,” he said.

—By CNBC EMEA Head of News, Patrick Allen