Tuesday, February 18, 2014

More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts

Cutting state taxes to attract entrepreneurs is likely futile at best and self-defeating at worst, a new survey of founders of some of the country’s fastest-growing companies suggests.  The study, which is consistent with other research, should be required reading for state policymakers — especially those in Michigan, Missouri, Nebraska, Ohio, Oklahoma, South Carolina, and Wisconsin who are pushing for large income tax cuts.
The 150 executives surveyed by Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did; taxes weren’t a significant factor.  This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.  (Hat tip to urbanologist Richard Florida for calling attention to the study.)
As I wrote last year on why studies show state income tax cuts aren’t an effective way to boost small-business job creation, “Nascent entrepreneurs are not particularly mobile.  Rather, they tend to create their businesses where they are, where they are familiar with local market conditions and have ties to local sources of finance, key employees, and other essential business inputs.”
I also argued that state tax cuts could be counterproductive, impairing states’ ability to provide high-quality services that make a state a place where highly skilled people want to live.
The new survey provides further evidence for these arguments.  It found that:
  • “The most common reason cited by entrepreneurs for launching their business in a given city was that it was where they lived at the time.  The entrepreneurs who cited this reason usually mentioned their personal connections to their city or specific quality of life factors, such as access to nature or local cultural attractions.”
  • “31% of founders cited access to talent as a factor in their decision on where to launch their company. . . .  A number of founders also highlighted the link between the ability to attract talented employees and a city’s quality of life.”
  • “Only 5% of entrepreneurs cited low tax rates as a factor in deciding where to launch their company” and only 2% mentioned “business-friendly regulations” and other government policies.  The report’s authors concluded, “We believe that the lack of discussion of these factors indicates that marginal differences in these areas at the state or municipal level have little influence on great entrepreneurs’ decision-making processes.”
Kansas, North Carolina, and Ohio have cut personal income taxes significantly in the last two years, and in each case the governor argued that it would give a big boost to creating or attracting new firms.  This new study provides more compelling evidence that that’s the wrong approach.  Let’s hope other states don’t start down the same dead-end path.
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Big Issue for Insurance Marketplaces Is Enrollees’ Health, Not Age

Despite what you may have heard, the share of enrollees in the new insurance marketplaces who are young isn’t the most critical factor in determining whether the marketplaces’ risk pool will be well balanced and whether their premiums may have to increase next year.  Instead, the health status of enrollees is far more important.  That’s the conclusion of a recent Commonwealth Fund-organized gathering of insurers, actuaries, researchers, and federal officials.
The misplaced idea that success hinges on whether enough young people sign up — since young people are generally healthier and thus less costly to cover — has gained undeserved traction in recent months.  And the release of the latest federal data on marketplace enrollment, including a breakdown by age, will likely bring renewed attention to the number of young enrollees.  But, as a Commonwealth report summarizing the meeting concludes, “there is no single right percentage for young adult participation.”
We made the same point a few weeks ago, explaining that the health status of enrollees at all ages is far more important in producing a balanced risk pool and ensuring that the marketplaces will have stable and affordable premiums over time.  Also important is how well each insurer predicted who would sign up for coverage this year.  If an insurer’s enrollees cost far more than it anticipated in setting its 2014 premiums, it might raise premiums in 2015 to better reflect its expected costs.
The Commonwealth Fund report also highlights some factors that could limit any losses that insurers may experience this year, which in turn could tamp down any 2015 premium increases.
For example, health reform’s risk corridors (along with its other risk-mitigation programs) limit insurers’ potential losses as the law’s major reforms take effect in the individual market and the new marketplaces become fully established.  And two health reform requirements — that insurers justify premium increases of 10 percent or more and spend a set percentage of their premiums on medical care rather than administration and profits — are expected to help hold down any rate increases in 2015.
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In Case You Missed It…

This week on Off the Charts, we focused on the federal budget and taxes, health care, state budgets and taxes, and safety net programs.
  • On the federal budget and taxes, Paul Van de Water explained that proposed budget process changes before the House Budget Committee would be counterproductive.  Joel Friedman argued that House-approved changes to military pensions would violate a key principle of the Murray-Ryan budget deal — that policymakers should not raise defense spending by cutting domestic programs.  And we explained why a “clean” bill to raise the debt limit is a welcome change from Republicans’ recent — and costly — strategy of holding the debt limit hostage.
  • On health care, Edwin Park explained why delaying health reform’s employer responsibility requirement is no reason to delay the individual mandate.  He alsowarned against believing the hype regarding forthcoming payment rates for Medicare Advantage plans.  Jesse Cross-Call explained that states’ failure to adopt health reform’s Medicaid expansion has a severe human cost.  Sarah Lueck explained that the big concern for the new insurance marketplaces is enrollees’ health, not age.
  • On state budgets and taxes, Erica Williams explained that a recent push by several states to expand earned income tax credits is great news for low- and moderate-income working families.  Michael Mazerov highlighted new evidence that cutting state taxes is a poor way to attract entrepreneurs.  We interviewedVincent Palacios about our major new report that ranks states on their use of common-sense budget tools.
  • On safety net programs, Zoë Neuberger argued that Agriculture Secretary Tom Vilsack should reject Congress’s recent call to add white potatoes to the WIC program.
In other news, we issued a paper on how altering accounting for federal credit programs would artificially inflate their costs.  We also updated our chart book on the legacy of the great recession.
A variety of news outlets featured CBPP’s work and experts recently.  Here are some highlights:
CBPP’s Chart of the Week:

2009 Recovery Act Kept Millions out of Poverty

The Washington Post points out that the 2009 Recovery Act, signed five years ago yesterday, accomplished much more than its critics acknowledge.  When it comes to using the safety net to keep people out of poverty, for example, the Recovery Act was probably the most effective piece of legislation since the 1935 Social Security Act, as our2011 analysis explained.
Six Recovery Act provisions — three new or expanded tax credits, two expansions of unemployment insurance, and a SNAP (food stamp) benefit expansion — kept 6.9 million Americans out of poverty in 2010.  This estimate uses an alternative poverty measure based on National Academy of Sciences recommendations (a forerunner to the Supplemental Poverty Measure that the federal government now regularly reports) that considers the effect of government benefit programs and tax credits as well as cash income.
As the graph shows:
  • Expansions in the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) kept 1.6 million people out of poverty.
  • The Making Work Pay tax credit, which expired at the end of 2010, kept another 1.5 million people out of poverty.
  • Expansions in unemployment insurance benefits kept 3.4 million people out of poverty.
  • Expansions in SNAP benefits kept 1 million people out of poverty.
These figures total more than 6.9 million in part because some people were kept above the poverty line by more than one program.  The 6.9 million total, though, counts each person only once.
And, as the graph shows, existing (pre-2009) policies to promote family income also kept millions of Americans out of poverty in 2010.
Moreover, these are just the initial effects of government assistance on recipient households.  They don’t show the ripple effect across the economy as government assistance allowed struggling consumers to continue to buy goods and services, despite the crippling recession, contributing to economic growth.
To be sure, these figures don’t mean that government assistance staved off all, or even most, recession-related hardship.  But they show that government assistance kept millions of Americans above the poverty line during the worst economic downturn since the Great Depression.  That’s no small accomplishment.
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Why Health Reform Provides Subsidies in All States

Two CBPP board members — Henry Aaron and Robert Reischauer — and I are among the 48 economists who filed a brief in federal court yesterday explaining why health reform authorizes the provision of premium subsidies, an essential part of health reform, in allstates.
Some opponents of health reform have filed a lawsuit claiming that the premium tax credits to help low- and moderate-income people buy coverage through the new health insurance exchanges are only available in states that have set up their own exchanges, not in states with a federally operated exchange.  But, as Judith Solomon has explained, this argument rests on a distorted reading of the health reform law.
Last month the U.S. District Court for the District of Columbia soundly rejected the plaintiffs’ claim.  The case is on appeal to the U.S. Court of Appeals for the D.C. Circuit, which is where we filed our brief.
The economists’ letter explains that health reform is premised on three interrelated reforms: requiring insurers to offer coverage to all eligible applicants irrespective of health status, an individual mandate to buy insurance, and premium subsidies for participants in all exchanges.  “Economic analysis confirms what Congress understood: the [Affordable Care Act] cannot function without premium subsidies,” we write.
Other signers of the friend-of-the-court brief include Nobel laureates Peter Diamond and Eric Maskin, former Congressional Budget Office Director Alice Rivlin, and former Treasury Secretary Lawrence Summers.

The Cruel Political Paradox of Deficit Reduction

I was chatting the other day with a fellow budget wonk who noted the cruel paradox of fiscal politics: When the economy is bad, deficits rise and the public support for reducing them grows. Yet a poor economy is the worst possible time to raise taxes and cut spending. By contrast, a period of strong growth is the best time to tackle the deficit. But when the economy is healthy, deficits normally fall and so does the political motivation for pols to do anything about them.
And as the Congressional Budget Office’s fiscal outlook released today shows, deficits are dropping like the proverbial stone. As the economy improves and the growth in health costs slows, the deficit is likely to continue to decline, at least for the next few years. CBO figures deficits will fall to just 2.9 percent of GDP in 2016, their lowest level since 2007. That’s far below their 9.8 percent peak in the depths of the Great Recession in 2009.
Despite this good news, we are hardly out of the fiscal woods. The national debt will continue to rise, and CBO warns that annual deficits will return to troublesome levels of around 4 percent of GDP by the early 2020s. But those predictions are unlikely to drive policy since they are both uncertain and far beyond the short-term vision of either the public or most pols.
You can see the turn in public opinion in a new poll by the Pew Research Center. The share of those who see deficit reduction as a top priority fell from 72 percent in January, 2013 to 63 percent in last month.  Eight in ten of those surveyed think strengthening the economy should be the nation’s top priority now.
Sagging interest in the deficit is no surprise. But it makes it very hard for lawmakers to make tough choices at the time the economy gives them the flexibility to do so.
You can see this in the evolving fiscal policy debate. My friend and I talked a couple of days after President Obama delivered his State of the Union Address. This was a speech where the president—who once spoke boldly about the need for a grand fiscal bargain—effectively ignored long-run budget issues.
And it isn’t just Obama. Congressional Republicans seem to have lost their stomach for fiscal combat as well. Stories circulating this morning suggest the House GOP wants to use the coming need to increase the nation’s debt limit to demand approval of an oil pipeline or repeal provisions of the Affordable Care Act that limit risk for health insurance companies. Whatever you think of these issues, insurance company risk corridors are a long way from a grand bargain.
Some of this has to do with Washington’s seemingly endless fiscal deadlock. Republicans simply will not consider any deficit reduction plan that includes new revenues. And Democrats won’t discuss changes in Medicare, Medicaid, and Social Security spending until taxes are on the table.
Thus it isn’t surprising that battle-weary pols have agreed to disagree—at least until the next election. Republicans may also be feeling less heat on fiscal issues as the clout of the anti-government tea party seems to be waning—another phenomenon driven in part by an improving economy.
But that begs the question: How do lawmakers tackle deficits when they should—at a time when the economy is strong and the flow of red ink slows to a relative trickle?
The answer may have emerged in the heated budget debates of 2011-2012 when some policymakers proposed combining a short-term fiscal stimulus with long-term deficit reduction. The idea died, another victim of the deep mistrust that has infected policy debates in the Capital. But it may ultimately be the solution to this troubling political paradox.

Questions About Expanding the Childless EITC

As the idea of expanding the “childless EITC” gathers steam, it’s time to start thinking about what the next generation of worker credits should look like. Today’s EITC lifts millions of families out of poverty each year by providing a wage subsidy that encourages work. But it largely skips over childless adults. Politicians from President Obama to Senator Marco Rubio (R-FL) are looking at ways to include workers without kids in the EITC or an EITC-like program.
Today, the maximum childless EITC benefit is just $496, less than a tenth of the $5,460 available to families with two children. And what’s more, if you don’t have children, you have to be very low-income to qualify for any benefit at all. Families with two children can receive the EITC until their earnings reach $43,756 ($49,186 if married). But families without children get nothing once they earn $14,590 ($20,020 if married).
There’s no doubt that a significant expansion of the childless EITC could reduce poverty and differences in the tax treatment of families with and without children. (And many workers who do not report children on their tax returns actually do have children, though they may not live with them.)
But before legislators double down on the EITC for childless families, they must get a handle on some yet-to-be answered questions.
First, should we retain the current age limits for the childless EITC? Although a parent at any age who lives with their child can receive the EITC if they meet the other eligibility rules, folks without children must be between the ages of 25 and 64. This excludes most students and all seniors.
Under current law, you cannot receive the childless EITC yourself if you qualify someone else for the credit. Full-time students are often qualifying children, while part-time students are not.  Retaining this rule means full-time students cannot get a childless EITC but getting rid of it means we might be subsidizing a lot of students from upper-middle income families.
One solution would be to lower the age limit to 18 (rather than eliminate it entirely) but keep the qualifying child rule. This could provide a subsidy to part-time student workers as well as young, independent workers without also encouraging them to drop out of high school in favor of work.
At the other end of the age spectrum, should low-income elderly workers benefit from the EITC? Older workers with low enough earnings to qualify for the EITC are at great financial risk during retirement.
The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.
If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.
Steve Holt and I provide a model for reducing marriage penalties by focusing on individual worker earnings, rather than family earnings. This could equalize incentives between primary and secondary earners to work, a move that could help married couples move into the middle class. We propose limiting the worker credits to families with low and moderate joint income, in order to minimize the chances that a low-income worker in a high-income couple would receive the new credit.
Expanding the childless EITC is the right call for policy makers interested in reducing poverty. But policymakers need to answer some tough questions if they are going to get the new policy right.

Individual Income Taxes May Soon Generate Half of All Federal Tax Revenue

Over the next decade, the individual income tax will be the fastest growing source of federal revenue, according to new estimates by the Congressional Budget Office. In fact, the individual income tax will pretty much be the only revenue source likely to increase significantly over the next decade.  As a result, it will generate more than half of all federal revenue for the first time since the turn of the 21st century.
Overall, CBO figures total federal revenues will grow from their recent recession-battered low of 14.6 percent of Gross Domestic Product in 2009 and 2010 to about 18.4 percent in 2024. CBO projects revenues this year will rebound to 17.5 percent of GDP.  Over the decade, revenues will average about 18.1 of GDP, which is pretty close to the historic post-WW II average.
But the really interesting story is in the composition of revenues. Nearly all the projected increase in taxes will come from the individual income tax: CBO projects the levy will rise from 8.0 percent of GDP this year to 9.4 percent by 2024.
As a result, CBO figures that a decade from now, the individual income tax will account for nearly 52 percent of all federal revenue. The last (and only) time the individual tax generated half of all federal revenues was in 2001, just before the dot.com bubble burst and Congress passed the first of the huge George W. Bush-era tax cuts.
Moreover, the federal government has rarely collected as much as 9.4 percent of the total economy in individual income tax. According to the Office of Management & Budget, this happened only in 1944, 1981 (just before President Reagan’s tax cuts), and during the stock market boom in 1998-2001.
While individual taxes are expected to increase, other major sources of revenue will barely change as a share of the economy. For instance, the payroll taxes that fund Social Security and Medicare will remain flat through the next decade, CBO figures. They represented 5.7 percent of GDP last year, 6.0 percent this year, and are projected to fall to 5.8 percent in 2016 and stay at that level.
The corporate income tax will rise as a share of GDP for the next few years and then drift down. On average it will hover at about 2.0 of GDP for the next decade. And it will average only about 11 percent of all federal revenue through the period. That’s a significant increase from the depths of the recession when corporate taxes collapsed to barely 6 percent of total revenues. But it is a far smaller share than in the 1960s, when it averaged one-fifth.
What will drive these changes?  It is the proverbial long story. But CBO identifies a few culprits.
CBO explains much of the rise in individual income taxes by expected increases in real incomes produced by a recovering economy, including higher wages, salaries, capital gains, and income to owners of pass-through firms, who report their taxes on their individual returns. CBO also expects a significant increase in distributions from retirement accounts for at least the next few years, driven in part by higher asset values.
Two other reasons: Higher tax rates for upper-income households (including the surtax in the Affordable Care Act) and the phenomenon known as real bracket creep. Tax brackets are adjusted for inflation but not economic growth. For at least the next few years, CBO figures incomes will grow faster than those inflation-adjusted brackets.
On the corporate side, CBO projects a bump in tax revenues through 2017, but a fall-off after that. A key reason is that CBO assumes that dozens of business tax breaks (the so-called extenders) will disappear (they technically expired at the end of 2013). If they are extended, as is likely, corporate tax revenues are likely to fall below CBO’s forecast.
I suspect these projections will be something of a Rorschach test for lawmakers. Anti-tax conservatives will see them as a reason to cut individual taxes. Progressives will use them to oppose cuts in corporate tax rates and justify increases in the Social Security payroll tax cap. But whatever you want to read into them, these projections are pretty interesting.


Incoming Senate Finance Chair Wyden Outlines His Tax Agenda

Senator Ron Wyden (D-OR), about to become the new chairman of the Senate Finance Committee, said Friday that he aims to eventually rewrite what he described as a “dysfunctional, rotting mess of a carcass that we call the tax code.” But in an acknowledgement of the challenges of tax reform, Wyden said he wants to quickly extend dozens of expiring tax provisions for another year as a “bridge” to reform and he even embraced some new tax subsidies.
Wyden will replace Sen. Max Baucus (D-MT), who the Senate confirmed Thursday as the new U.S. Ambassador to China.  Speaking in Los Angeles to a conference sponsored jointly by the USC Gould School of Law and the Tax Policy Center, Wyden framed his tax agenda around several key issues:
  • Narrow the gap between taxation of investment income and ordinary income.
  • Significantly increase the standard deduction.
  • Simplify and enhance the refundable Child Tax Credit and Earned Income Tax Credit.
  • Revise savings incentives by creating a new investment account for all Americans at birth, shift savings subsidies from high-income taxpayers to low- and moderate-income households, and consolidate and simplify the current tangle of existing tax-preferred savings incentives.
  • Enhance job training.
  • Restore Build America Bonds—a short-lived idea that partially replaced tax-exempt state and local bonds with direct federal subsidies. He’d also seek ways to encourage business to funnel overseas earnings into domestic infrastructure investment.
Wyden’s ambitious agenda incorporates most elements of his own 2010 tax reform plan though it goes beyond that proposal. And it includes some internal contradictions that he’ll eventually have to resolve.
On one hand, he says he wants to eliminate or scale back many of the tax expenditures that have made the Tax Code the dysfunctional rotting carcass he so memorably described. On the other, he’d add new subsides. For instance, his talk on Friday included a shout-out to Senator Bob Menendez (D-NJ) who introduced a bill called  Better Education and Skills Training (BEST) for America’s Workforce Act that would create $1 billion in new tax credits for firms that help train the long-term unemployed.
On principle, there is nothing wrong with replacing inefficient subsidies with better ones. But Wyden will find it extremely difficult to add some of his personal favorites while he’s slashing those of his colleagues.
Back in 2010, Wyden sponsored his own reform bill with now-retired GOP senator Judd Gregg (R-NH). He’s since gotten a new Republican cosponsor, Dan Coats of Indiana. The bill, called the Bipartisan Tax Fairness and Simplification Act, remains Wyden’s model for reform, though he made it clear that he’s willing to revise the proposal significantly to attract broader support. For a TPC analysis of Wyden original bill, click here.
That bill would create three individual income tax rates—15, 25, and 35 percent, significantly increase the standard deduction, repeal the Alternative Minimum Tax, and turn the preferential capital gains rate into an exclusion.
It would retain most big tax preferences such as those for home mortgage interest, state and local taxes, and employer-sponsored health insurance. But it would get rid of some smaller ones and turn the exclusion for municipal bond income into a refundable credit. It would set a single corporate rate of 24 percent and end some business preferences.
The TPC/USC conference was on income inequality and Wyden framed his tax agenda as part of a broader effort to address that issue. He said he sees proposed tax changes such as boosting capital gains taxes and expanding the EITC as part of an agenda that also includes raising the minimum wage.
That makes Wyden sound like a standard progressive Democrat. But his record is much more complex. For instance, Wyden has bucked his own party’s leadership by reaching across the aisle to lawmakers such as House Budget Committee Chairman Paul Ryan (R-WI) on Medicare reform.
Wyden likes big ideas, but he is also a pragmatist. His challenge as the new chair of the Finance Committee will be to mix the ambitious with the realistic. That’s what Bob Packwood, the last Finance Committee chair from Oregon, did when he helped pass the Tax Reform Act of 1986.

Why is the U.S. Olympic Committee Tax Exempt?

Every two years, I sit in front of my TV watching the Olympics. Like clockwork, in the midst of some competition I can’t understand, my mind wanders to tax wonkdom and I ask myself: Why is the U.S. Olympic Committee a tax exempt organization?
The law says tax exempt status is granted to groups that “foster national or international amateur sports competition.” But do the hyper-marketed modern games even remotely fit the ideal of amateur sports? Sure, some athletes who represent the U.S. are amateurs but a great many others are highly paid professionals or marketing magnets. Snowboarder Shaun White–who won no medals– makes a reported $8 million-a-year in endorsements.
And then there is USOC itself. By almost any standard, it is a commercial enterprise. It exists primarily to help organize a bi-annual made-for-TV entertainment extravaganza.  Yes, it provides some support for athletes (though surprisingly little). But its real business is marketing itself and playing its part in a two-week orgy of athletic commercialization.
USOC’s total revenue for 2012 (the last publicly available data) was $353 million. Of that, $263 million, or nearly 75 percent, was generated by broadcast rights, trademark income, and licensing agreements, according to its financial statement. About $46 million came from (mostly corporate) contributions.
How did the committee spend that money in 2012? Its total expenses were $249 million. Nearly $21 million went to fundraising, $17 million to sales and marketing,  $3 million to public relations, and $14 million to administrative and general expenses.
Of what was left, about $74 million went to “member support,” or to fund individual National Governing Bodies such as the US Ski & Snowboard Association, USA Track & Field, US Speedskating and the like.
How much went to direct support for athletes? It’s hard to tell but according to one estimate, it was less than 6 percent of total USOC spending. Top ranked athletes get monthly stipends ranging from $400 to $2,000. Others get nothing. Athletes have access to Olympic training centers though most have to pay to use and stay at them and therefor don’t. A watchdog group called the U.S. Athletic Trust has a nice explanation here, though it reported on USOC expenses from 2009-2011.
About $24 million went to support U.S. Paralympics, and $4 million to sports science and sports medicine.
And USOC paid its senior staff handsomely. A dozen of its top executives made $250,000 or more in 2012, and its CEO, Scott Blackmun, received $965,000. After all that, it still had nearly $100 million in surplus revenue.
To be fair, USOC isn’t the only sports behemoth to enjoy tax-exempt status. The National Football League, the National Hockey League, the Professional  Golfers Association, and other big-bucks professional sports leagues are also tax-exempt–though under a different code subsection than USOC.  Last year, Sen. Tom Coburn (R-OK) introduced a bill to take away the tax-exemption for the pro outfits. It has gone nowhere.
USOC is somehow different, perhaps because it so successfully clings to the myth of the amateur athlete who competes for the love of sport, and not the big bucks.
But reading through its financials, USOC sure looks like a business. Yes, it probably does foster enough international amateur competition to satisfy the law, but I’m still left with the question I had as I tried to figure out what the heck slopestyle is: Why does the government grant tax-exempt status to businesses like USOC?

France and Germany must both change economic strategy

This op-ed was published in French by Le Monde and in German by Handelsblatt.
The euro was first and foremost a Franco-German project, not only politically but also economically. Thanks to its stability culture, Germany had a strong currency. At times, when the dollar was weak, the D-mark was even too strong, penalizing German exporters in favor of their European competitors. Germany was therefore keen to have France and other EU countries peg their currencies to the D-mark. For its part, France was keen to also have a strong currency (a ‘franc fort’), but it lacked the necessary stability culture. The way to import it was to peg the franc to the D-mark, but politically it was difficult for France to surrender its monetary sovereignty to the Bundesbank. Monetary union was the way to give both countries what they wanted by transferring monetary sovereignty to a European central bank and give it a price stability mandate. And so the euro was born.
Unfortunately right before the creation of the euro, Germany suffered an unexpected shock. Reunification led to massive public expenditures and deficits, to which the Bundesbank reacted by tightening monetary policy to maintain price stability. Thus, when Germany joined the euro its currency was strongly overvalued. The early years of the euro were painful for the ‘sick man of Europe’: unemployment, which had traditionally been low (and always lower than in France), rose steadily, reaching a post-war high of more than 11 per cent (2 points higher than in France) in 2005; public deficits remained persistently above the 3 per cent limit between 2001 and 2005; and public debt reached a record of 68 per cent in 2005.
How did Germany turn the situation around? The short answer is structural adjustment and help from the peripheral euro area countries. The Hartz reforms significantly reduced labor costs and restored German competitiveness. At the same time expansion in the peripheral countries, fuelled partly by German capital flows in search of investment opportunities, helped absorb German output when domestic conditions were subdued. As a result, the German current account balance, which had been negative every year since reunification, turned positive in 2002 and reached more than 5 per cent in 2005, a level where it remained thereafter. Export-led growth transformed Germany into the ‘healthy woman of Europe’, which today enjoys near full employment and balanced budgets. Yet not all is well. The current situation of internal balance but external surplus suggests that Germany’s competitiveness adjustment has gone too far and is especially detrimental to the peripheral euro countries whose turn it is now to restore their competitiveness. Unfortunately adjustment is difficult in a situation where demand is depressed not only at home but also in the rest of the euro area.
Germany alone however cannot rescue the peripheral countries. France, the area’s second largest member, must also do its part. But the country is itself in difficult situation. At the start of the euro, France and Germany had identical unemployment rates, per capita incomes (in purchasing value) and debt-to-GDP ratios. Today the unemployment rate in France is two times higher than in Germany, its per capita income is 15 per cent lower but its debt-to-GDP is 15 per cent higher. Such divergence between the two countries is bad for France and for its capacity to work with Germany to repair the euro project.
Why have France and Germany diverged so much? The simple answer is that they have adopted different economic strategies. Germany has become an extremely open economy, with exports (goods and services) now accounting for more than 50 per cent of GDP, a figure even higher than in small open economies like Sweden or Switzerland. Its economic policy is dominated by its large manufacturing where employers and workers collaborate closely to foster export competitiveness. One way to ensure that the manufacturing sector remains competitive is to squeeze costs in the non-traded sector, where wages have been kept relatively low. By contrast, France has remained a relatively closed economy, with exports now accounting for barely 27 per cent of GDP, a figure even lower than in Italy. Here economic policy is dominated by the interests of public workers and large private firms closely linked to the state, which implies large public expenditure. One way such expenditures (currently equal to 57 per cent of GDP in France compared to only 45 in Germany) largely in favor of the non-traded sector is to tax the traded sector. No wonder the country is losing export competitiveness.
France and Germany must both change their economic strategy. Germany must reduce its over-reliance on exports and expand both its non-traded (service) activities and its internal demand. France must reduce its over-reliance on publically-financed internal demand and tax less its economy, especially in the traded sector. A more balanced economic strategy in the two countries is crucial to help the peripheral countries solve their own predicaments and ensure the sustainability of the euro area.

Pour une Communauté politique de l’euro

his text is also available as a blog post 'For a Euro Community' in English and as a pdf in French andGerman.
The Eiffel Group: Agnès Bénassy-Quéré - Yves Bertoncini - Jean-Louis Bianco - Laurence Boone - Bertrand Dumont - Sylvie Goulard - André Loesekrug-Pietri - Rostane Mehdi- Etienne Pflimlin - Denis Simonneau - Carole Ulmer - Shahin Vallee.

Nous voulons susciter une prise de conscience en France mais aussi lancer un appel qui aille bien au-‐delà. Convaincus que Français et Allemands conservent une responsabilité particulière, nous partageons l’essentiel du diagnostic et des propositions du groupe Glienicker allemand.

Wir wollen das Bewusstsein in Frankreich erhöhen, aber auch einen Appell formulieren, der weit darüber hinausgeht. In der Überzeugung, dass Franzosen und Deutsche eine besondere Verantwortung tragen, teilen wir im Kern die Diagnose und Vorschläge der deutschen Glienicker Gruppe.

We want to raise awareness in France but also to launch an appeal which goes much further. We are convinced that France and Germany retain a particular responsibility in Europe, thus we share most ofthe diagnoses and proposals made by the German Glienicker group.

For a Euro Community

This text is available in German and French. Read also the Glienicker proposal 'Towards a Euro Union' - signed by eleven German economists, political scientists and jurists.
The Eiffel Group: Agnès Bénassy-Quéré - Yves Bertoncini - Jean-Louis Bianco - Laurence Boone - Bertrand Dumont - Sylvie Goulard - André Loesekrug-Pietri - Rostane Mehdi- Etienne Pflimlin - Denis Simonneau - Carole Ulmer - Shahin Vallee. Foreword
Everyone expected that Economic and Monetary Union would bring prosperity and improve the living conditions and employment possibilities of Europe's citizens, prior to political rapprochement.
Its design flaws, and management errors, have produced the opposite. Europe's citizens have grave doubts. We however are convinced that we must not give up. The initial goals of European integration - to ensure well-being and peace - are as relevant as ever. To turn our backs on Europe would today be anachronistic, and tomorrow suicidal. Without building up expectations which can never be achieved, which has previously so often led to disappointment, a new step forward needs to be taken. Europe must find solutions to its concrete problems such as rising inequalities and unemployment, while also contributing to the preservation of the planet. It is essential that Europe does more to ensure that the values it defends are respected and which, far more than questions linked to the Single Market and European procedures, are likely to bring Europeans together. It must lead once again.
This is why we are suggesting a strategic choice: to construct a political Community which is democratic and based around the euro, while remembering that monetary union was conceived as the bedrock of a much greater project, which intended to unite men and not as an end in itself. Our group is pluralist because the urgency of the situation, just as the violence of the attacks against Europe, needs all Europeans to come together, while respecting each other.
We want to raise awareness in France but also to launch an appeal which goes much further. We are convinced that France and Germany retain a particular responsibility in Europe, thus we share most of the diagnoses and proposals made by the German Glienicker group.

For a Euro Community

Where does France want to go, both within Europe and on a global level? What is the future, in a ten or twenty year timeframe, of the Euro and of the European Union? These legitimate questions have often been left unanswered.
Most governments and political parties have maintained a management approach which has allowed them to "muddle through" up to this point. The radical parties advocate withdrawal to the national level and exiting the eurozone as a miracle cure. In order to launch a new dynamic system, adapted to the world of 2014, it is essential to learn from the crisis and collective errors committed and to propose a balanced vision.


How to exist in a changing world
Ensuring that Europe's voice is heard is not a question of prestige, nor an idealist whim. It is how to ensure that in the future the priorities which are important to Europe's citizens, such as equality between men and women, access to education and social security for all, the preservation of the environment, are protected.
Looked at from Beijing or Riyadh, or even from Washington, what Europeans have in common is infinitely superior to what separates them. Beyond common interests, which are more or less convergent depending on the mood of the moment, we share a patrimony of incredible richness. As for common values, created as a result of the historic events and dramas of the twentieth century - such as peace, human rights, democracy - their fragility should encourage us to take even greater care. The decisions of the European Court of Human Rights illustrate to what extent there is still a lot to be done, even in Europe, in order to guarantee that pluralism is protected, to improve the quality of our prisons, or to curb the authoritarian drift of certain Member States.
The world order that has been in place for several centuries is drawing to a close. In 20 to 30 years there will not be a single European country in the G8, which brings together the most powerful world economies. France or Germany will represent less than 1% of the global population. At Nelson Mandela's funeral not a single European leader was invited to speak. In contrast, when looked at as a whole then we have the means to carry some weight: the eurozone has 350 million inhabitants, meaning its population is similar to that of the United States and its GDP is larger than China's, in spite of spectacular Chinese growth recently. The commercial power of Europe is currently unmatched. Europe has potential in the fields of industry, agriculture and services which must be harnessed.
However, unity requires greater efforts.The European Union's "common foreign and security policy" remains far below expectations. Even at the International Monetary Fund, called in to help with the emergency situations which arose in multiple European countries, the eurozone is not represented as a single entity. Vis-à-vis China, other emerging countries or the United States, the decisions of Europe's capitals to continue to go it alone is a decidedly short-term vision.
A permanent exit from the economic and financial crisis
We must not be fooled by the current lull on the financial markets. In multiple countries the policies undertaken have certainly borne beneficial fruits; the interdependence of countries sharing the same currency is now better sensed. Remarkable efforts have been undertaken in the fields of discipline and reforms, but they have been poorly calibrated and the burden has not been shared equally, as has clearly been illustrated in Greece. Overall fiscal policy has been too restrictive, and insufficiently differentiated.
Public and private over-indebtedness risk choking economies, while the suffering of Europe's citizens feeds political radicalisation. This analysis must not lead to consolidation efforts being abandoned but rather, in the interest of those countries with excessive debt, to them being completed.
A major risk today is that Japanese-style deflation leads to stagnation and the sacrifice of a whole generation. The European Central Bank was very active at the beginning of the crisis (2007-2010), and still has further means to react in order to avert this risk but it has to overcome multiple, contradictory concerns linked to differences in monetary culture and the heterogeneity of the different Member States.
Europe needs to be better integrated into global growth, and in order to achieve this, to once again find a creative, scientific and entrepreneurial dynamic. The crisis is not simply "a difficult moment". It is our production (notably industrial) and organisation models which are challenged by new technologies, global interdependence and an ageing European population.
Each Member State, and particularly France, must tackle their individual problems, but Europe must also do more. Common solutions are starting to be put in place in order to monitor and clean up the banking sector, without requiring money from tax payers. These solutions need to be implemented seriously so that banks are once again in a position to finance companies and households, at reasonable rates, throughout the EU.
Overcoming the democratic deadlock
The extent of the difficulties also now gives a political dimension to the crisis. Even if no election has led to a rejection of the euro, the countries which have asked for assistance, such as Greece, Portugal or Ireland, feel the burden of an ill-defined authority, made up of Heads of State and European governments, finance ministers (Eurogroup), the European Central Bank and the European Commission, as well as the International Monetary Fund. The responsibilities are diluted in a politico-technocratic magma, deprived of legitimacy, which the "troïka" has come to represent. Certain countries' destinies have been the subject of a vote in the Bundestag and decisions of the Constitutional Court in Karlsruhe. The general feeling is, as underlined by the Italian Prime Minister Mario Monti in 2012, of a risk of "creditocracy" whose perception exceeds reality given that Italy has not received any assistance and is contributing to financing the rescue efforts.
All Member States have had to accept mutual surveillance being strengthened, which is essential for restoring collective credibility. The level of intrusion which has been reached, notably in programme countries, is however fuelling a dangerous resentment between "The North" (essentially Germany) and "The South". The euro has become the source of divisions.
A section of public opinion has been lost. Some make people believe that austerity is imposed on the southern countries by "Europe" when it is these countries which have largely put their own futures in danger by creating too much public debt (as for example in Greece) or too much private debt (as in Spain or in Ireland). The "virtuous" countries forget that they often supplied the &"costly" countries with a large proportion of the goods which were bought on credit, and they also supplied them with equity and which meant that they ended up highly indebted. Thus it is both the North and the South, national governments and European institutions, which are responsible for the current situation. As for the markets, who were supposed to hold people to account, they turned a blind eye for a long time.
Hence the temptation to "throw everything overboard" by abandoning the euro. This hypothesis is nothing but an illusion. Because of the interrelatedness of actions, no one is able to calculate a precise estimate of this cost, but it would be terribly expensive. Devaluation would mathematically increase the cost of the debt, denominated in euros, often held by foreigners; countries would be required to default, and it would lead to bankruptcies in the financial sector. It would also increase the price of imported products, oil and gas for starters. Companies would once again be subject to exchange rate risks for exports, which would be bad for growth and employment. Households would lose part of their savings, Europeans their reputation.
A calm analysis, on the contrary, points towards continuing and accelerating the reconstruction of the Economic and Monetary Union. Limiting reform to a reinforcement of the rules accompanied by mutual surveillance is insufficient. If one compares the management of the crisis by the Europeans and by the Americans the advantages of a more legitimate political organisation, and for this reason, more reactive and efficient, are clear.
A particular responsibility for France
A fault line threatens to separate the North and South of Europe. Because France belongs to both sides and because it, along with Germany, wanted the creation of the euro, France has a particular role to play. As long as it respects three conditions then France could play a decisive role.
The first is that it must abandon some of the illusions which it has been harbouring for a long time; thanks to Jean Monnet and Robert Schuman, France was behind the creation of the European Coal and Steel Community but she has also been responsible for giving European integration its most brutal beatings: in1954 with the rejection of the European Defence Community, in 2005 with the refusal of the Constitutional Treaty. Concerning Europe, France has been hesitant for decades. When German politicians2, on two occasions, suggested a closer political union, based around a solid core, before the establishment of the single currency, the French authorities of all political leanings rejected these suggestions without even discussing them.
The second condition is that France finally broaches the question of its place in an open, competitive and highly integrated world. The French dream of a "powerful Europe" but this will never be "a power leverage" at their exclusive service. If France undertakes, more than its other European partners, its responsibilities in the field of security and defence, as it has recently once again illustrated in Africa, its economic performances over the last ten years spoil its credibility. The status of being a permanent member of the Security Council, the nuclear strike force which appears to guarantee autonomy, could reveal itself to be illusory if our means are reduced.
European issues are far too often reduced to slogans which, like "Social Europe" or "Europe which protects", tend to close the French in on themselves, increasing their anxieties. Our European partners are more successful at combining an open approach to the world and the legitimate desire to defend their social model. The best protection is found in the quality of education and training, as well as in the creativity of companies.
Finally, France must once again become a force with positive suggestions. For many years France has been in a defensive position, with many things unsaid and many taboos. With the creation of the euro, France had already accepted to share its sovereignty. The idea that a "Europe of Nations" could still, in 2014, offer a useful outlook, is not helpful for progress. There is no reason to fear a discussion on the best forms of political organisation, nor to reject outright all forms of federalism, even if up until now France has never experienced it.
These diverse fears and misunderstandings greatly fuel the feeling of unease which is currently noticeable in France. However, with a methodical approach, influence can be recovered. The battle which the current French government has undertaken on posted workers gives a recent, positive example of what a government which has clearly defined its position, and defends it, can achieve in the EU in its current state.The low level of interest in the European Parliament, for most French political parties, is a depressing counter example.
Thus Europe is at a crossroads. The shortfalls of the European Union, such as its intrusions into the affairs of Member States who continue to believe themselves completely sovereign, generate increasing frustrations. In order to get out of this impasse we recommend a new step towards democracy and integration.

Our proposal

Reignite political ambition
We propose a Euro Community, open for other European countries to join, and with a positive global outlook, not because the euro would be an end point in itself, but rather because it expresses a common destiny. The actions agreed upon in the name of the single currency, in the crisis, only make sense by putting them in the framework of a positive political vision, facing towards the future, worthy of our shared European identity.
The first mission must be to consolidate the single currency, because a return to prosperity and employment is conditional on this. The requirement for "competitiveness" all too often means lower wages or welfare benefits or a race to the bottom. This approach does not create a desirable future, hence the idea of a Euro Community which goes beyond the current scope of the eurozone.
Without calling the mutual commitment for solid public finances into question, nor the reform efforts achieved during the crisis, the Community will be endowed with new instruments intended to absorb fluctuations in the economic situation and to support the most vulnerable people. This could be achieved, with European level responsibilities, concerning the allocation of unemployment allowances or even policies which encourage mobility, being accompanied by the partial harmonisation of labour markets. Solidarity would not be conceivable without greater responsibility, and a joint effort is necessary if we want to stabilise and make sustainable Economic and Monetary Union in the eyes of Europe's citizens.
The fight against inequalities and exclusion and the enhancement of human capital through education, training and innovation must be placed at the heart of the Euro Community's ambitions: over recent years the excessive priority given to the concept of "subsidiarity" has put the existence of recognised rights for all European citizens on a back burner. Human dignity, along with preserving the environment and quality of life are the first to have been overshadowed.
At the same time, this Community will undertake policies which focus on the long-term, in the domains where policies are more efficient at a community level than at the level of each participating Member State. Far from being an exhaustive list, areas could include investment in energy transition and major infrastructures such as digital, transport and energy networks, or research, notably in order to help industrial production, but also in order to ensure an agricultural model capable of feeding a densely populated planet where the availability of resources is reducing.
Law and justice are values in themselves; but they are also frameworks which are particularly important for the development of economic activity and growth: legal certainty, simple rules, an efficient cross-border legal system and the fight against corruption are the objectives which the Euro Community will make their own.
The Euro Community must also play a role on the global stage because such a commercial and economic power would not be able to ignore the future of the planet. For us, the question of knowing whether thelevel of "eurozone" is pertinent is secondary in our responsibilities. On the one hand opposite the United States and China, but also in its immediate environment, so as not to abandon questions such as civil liberties, security and migration, this Community intends to pursue external representation, first of all economic representation but also diplomatic or even defence representation. The pace and the form need to be discussed but we should not forget that the Schuman declaration of 1950 opens with the ambition of preserving "world peace" and references the development of Africa, a continent with even greater strategic importance today.
Democratic guarantees
The Euro Community must offer democratic guarantees in line with the highest standards in the member countries. German pride in the construction of exemplary democracy and rule of law since 1949 is legitimate. Following on from the distressing history of the 20th century this is progress not simply for Germany but for the whole continent. However, the German authorities must understand that the control of European decisions by the institutions of a singular Member State is difficult for others to accept. Without a doubt the Germans would not accept this themselves from another Member State. The current situation, where the German federal bodies (Bundestag, Court in Karlsruhe) hold the fate of the euro in their hands is not good for Germany, placed in a position of hegemony, nor for Germany's partners, reduced to complying.
An executive of the Euro Community, which is small and distinct from national bodies, should be established; this government will be chosen as the result of an election of an assembly by Europeans of the participating countries, voting on the same day, according to the same modalities. This point is of the utmost importance; we cannot call an authority which has been appointed and not "elected" through a pan- European election, which is open and allows a clear choice between political positions, a "government" (be that an economic government or another).
The assembly will be responsible for constantly controlling the executive, and, if necessary, expressing a loss of confidence in it. In order to avoid duplications and to illustrate the openness of the Community vis-à-vis the EU, the Community parliamentary assembly can be made up of Members of Parliament who also sit in the European Parliament (of the EU with 28 Member States).4
This executive will, on the one hand, be charged with carrying out the policies for which it is responsible, with an independent budget, financed by own resources (please see below). Within its competences it will have a discretionary power, framed by fixed common rules and under the control of the parliamentary assembly and the Court of Justice. On the other hand it will be responsible for ensuring that the national governments respect their joint commitments.
The Member States will maintain their own responsibilities, for deciding their policies according to clearly defined competencies, thus putting an end to the ill-defined option of "subsidiarity", a pretext for the renationalisation of policies.
The national parliaments will continue to control national governments, in line with national constitutions and provisions in this sense can be reinforced in many countries, including France. The conditions concerning the creation and the financing of the European Stability Mechanism have meant that in the immediate context national parliaments are responsible for controlling national budgetary commitments allocated to it.
It is logical that structures which are financed by national funds are controlled by national members of parliament. On the other hand, in the long-run, the principal must be imposed that a European decision requires European control, and a national decision national control. It is essential to avoid giving democratic control to structures which dilute the responsibilities, as the "budgetary pact"5 foresees for example, by associating in a very vague, so as not to say allusive, manner the European and national parliaments. Citizens rightly demand to be able to understand who is responsible for what.
It is also important to note that citizens are also asking for new forms of decision making, which are more interactive, more "participatory". The question is not simply how to ensure representative democracy, by asking questions on the division of power between Brussels and the Member States, European Parliament and national parliaments. It must be completed with stronger links between citizens, companies, the media, local or regional authorities, which are cross-border. The Euro Community must be one which is alive and which involves all societies in their entirety.
Finally, one of the serious shortcomings of the current Economic and Monetary Union is that no sanctions are foreseen for States who breach their obligations. In a state of law, it is important that a judge can decide in the case of disputes. Our preference would be, also in this case, not to duplicate institutions and to entrust this role to the Court of Justice of the EU, which would organise itself in a special way to judge issues concerning the Euro Community.
A Community budget
The Euro Community must have an independent budget in order to finance the policies which have been outlined further up in this document. Its autonomy in relation to the EU budget is justified because it is primarily conceived in order to resolve issues which are specifically linked to the existence and the functioning of the euro: to stabilise the Economic and Monetary Union through a common unemployment insurance for example. Beyond that it will also allocate resources to improve training, increase worker mobility or to& put in place energy, industry and service infrastructures which will be beneficial to the Community.
It is imperative that this budget is financed through own resources, in order to avoid inappropriate and counterproductive debates about a "fair return", which we have experienced in the EU. Amongst the resources which can be envisaged we can mention corporation tax or environmental taxes (carbon tax). The creation of a Community budget will be the occasion to move forward with a certain degree of tax harmonisation (harmonisation of tax bases, even if this means leaving Member States with a certain flexibility concerning the rates, within a range).
This budget would also enable savings at the national level, by streamlining expenditure. This is particularly true in the area of defence. The question of the capacity of collective indebtedness should also be broached, at least in the long-term, while underlining the fact that this is not a question of mutualising existing Member State debt, but, if necessary, the ability to borrow together in order to finance joint projects.
There is an open question to which this group does not claim to have the definitive answer. In such a completed Euro Community, the prospect of sovereign default would once again be a possible option because it would not destabilise the whole structure and it would not affect the most vulnerable. Eventually, a Member State default could be reintroduced, in order to ensure that national leaders and the markets behave responsibly. The Community would thus be even less intrusive because the division of responsibilities would be clear, each would take full responsibility for their risk. This is one of the advantages of federalism which, in general, is absent from the French debate: federated entities are better protected against intrusions from the federal level. The paradoxical outcome of the current situation is that the eurozone practices on the sly what could be called a "federalism of exception", interfering with national decisions without this situation having been fully foreseen, and to an even lesser extent explained and legitimated.
The link between the Community and the EU
Our wish is to enable the Community and the European Union with 28 Member States to cohabit, as harmoniously as possible, as the raison d'être of the EU has of course not disappeared. It is in the interest of all European countries that the eurozone permanently stabilises, just as it is in the interest of the latter that the Single Market is consolidated for all 28 Member States, and that the common institutions, first and foremost the European Commission, are strengthened.
All Member States who wish to join the Euro Community, and accept the rules and obligations which go with it, are welcome (even if it would be beneficial to take the issue of wage disparity much more seriously in the future). On the other hand, Member States who make the sovereign decision to not share the currency must bear all the consequences without complaining about alleged discrimination. In this regard, the time has come to clarify some issues, and to give to the eurozone what belongs to the eurozone, and to the EU what belongs to the EU. Rescue mechanisms financed exclusively by countries which are members have been created in the crisis (European Stability Mechanism, tomorrow maybe a bank resolution fund). Control of these mechanisms is the responsibility of the contributing countries, and them alone. Additionally it is absolutely legitimate that the Member States of the eurozone equip themselves with further common tools or joint policies because they need to compensate the fact that they have given up certain instruments, such as exchange rate policy.
It is likely that the outlook in a few years will be quite different to the one we have today. Out of the 28 Member States of the EU, only two (the United Kingdom and Denmark) have a derogation concerning the single currency; all the others have committed to adopt the euro, notably Poland which is an important Member State. Additionally, if the negotiations concerning a free trade agreement with the United States are successful then the Single Market could be significantly altered. Finally it is difficult to know what will come of David Cameron's promise to hold a referendum on his country's membership to a "reformed" EU. What is essential is to move forward with the spirit of cooperation.
The most open circle, that concerning the Single Market, could maybe welcome countries whose adhesion is problematical, because of their size (Turkey, Ukraine) or their delayed development (Moldova, Albania).


We are convinced, as the German Glienicker Group is, that an "optimal Europe", developed with great intellectual rigour, has a greater chance of convincing public opinion than a "minimal Europe" which is always frustrating.
This is also what experience has taught us. For approximately two decades governments have chosen to present Europe as a necessary evil whose "damage" they try to limit, and not as a "new frontier", to be conquered collectively. Many pro-Europeans voted no in 2005, out of disappointment. Citizens need direction, just as investors and the markets do. What pushes us to refrain from using the term "eurozone", and to instead use euro "Community", is that the former in no way reflects the political scope of the project. If the direction is clear and twinned with a clear and respected calendar, then that would already be progress. There is no point in missing out steps.
Given the magnitude of reluctance, the project must be carefully prepared, within the confines of the current Treaties, straight away. The first priority should be to improve the economic and social situation which is causing increased tensions in the Member States and between them. The question of debt must also be broached, as the modernisation of the 28 economies must be accelerated.
Ultimately, the creation of a Euro Community will require a new Treaty whose ratification modalities must be decided in advance: it is possible, under international law, to foresee that ratification does not need to be unanimous (in order to avoid the possibility that a tiny majority of the population can take the whole Community hostage) and to prevent Member States who refuse to advance from blocking others. In a democracy it must remain possible to say no but the consequences of such a rejection must be borne by the country who expressed it, not by its willing partners.
Furthermore, the tacit consent of Europe's citizens for European integration has ceased. Thus the transition to the Community, just as the subsequent accession of new members, requires a formal democratic procedure, involving all the Europeans involved. Europe's citizens are weary of adhesion decisions which surreptitiously alter, unbeknown to them, the boundaries of their "shared destiny". This is also one of the reasons why the Constitutional Treaty was rejected in 2005.
If it proves necessary then dual negotiations must be undertaken: those concerning a Treaty for countries who wish to be part of the Euro Community and those for all 28 Member States in order to reform the EU. Two pitfalls must be avoided: any exclusion of countries who wish to progress in good faith, and blackmail by those who wish to prevent others from advancing, without nevertheless accepting the constraints of the euro themselves.
We are absolutely convinced that a new momentum can and must be given, and a new milestone reached. The time is now. Citizens who wish to support the project must urgently react together, surpassing questions of national borders and sensitivities.