- Pool all sovereign debt into a central fund. At the end of 2010, this amount totaled €7,822,443 million. Source.
- This central fund will be run by a supranational entity under the control of the European Union, much like the ECB.
- A Eurozone-wide financial services tax is introduced. This would be based upon either a Tobin Tax or a Market Capitalisation Tax. The purpose of this tax would be to pay off the sovereign debt that has been pooled into the central fund.
- Because nation governments have shown that they cannot be trusted to maintain the fiscal agreements of the Maastricht Treaty, a Eurozone-wide supranational entity - let's call it the European Revenue Service, or ERS - is set up to a) determine a nation's tax rates, and b) take over the tax collection duties of member nations. This will necessitate the ceding of tax setting and tax collecting by all levels of Eurozone government.
The central fund and the financial services tax.
The pooling of debt into a single fund and then paying it off by a Tobin tax or Market Capitalisation tax takes care of the current mess. Individual Euro governments will no longer be responsible for the debt that they have accrued up until this point. It's a way of both "cleaning the slate and starting again" while still setting up structures to ensure that the debt gets paid off (and not defaulted upon). Moreover, the tax that is instituted is aimed squarely at the financial industry (who helped set up the current crisis) rather than upon ordinary wage earners. A central Eurozone-wide fund is better than a series of national funds simply because the central fund (preferably backed by the ECB) would be given clear parameters and not be subject to the whims of individual nations.
The short-term goal of the fund is to provide market confidence in the payback of sovereign debt.
The long-term goal of the central fund is to pool together and eventually retire all levels of Eurozone sovereign debt by way of a financial services tax.
The European Revenue Service.
The setting up of the ERS is certainly a controversial proposal - but it is a proposal that will ensure that this crisis never occur again. Ceding the sovereign authority to set and collect taxes may sound frightening to those who do not support an ever-closer union, or who think the EU should no longer exist. Yet it is essential for the future of the EU - since it will prevent the blowing out of sovereign debt again.
Under this system, each member country has the power to spend as much they usually do - the ERS will not be responsible for spending decisions. What each nation will no longer have is the ability to set tax rates or tax law or have the ability to collect taxes - these things will be left to the ERS. The ERS will then set tax rates and tax laws for each member nation of the Eurozone to match the amount of spending they indulge in. Scandinavian nations, like Finland or Sweden, will continue to have big spending governments, which means that the ERS will set up high tax rates in those nations. Nations who have smaller governments in proportion to the economy will have lower tax rates. If a country decides to expand government spending, then the ERS will naturally increase the taxes in that nation over the long term; similarly, if a nation decides to cut spending, then the ERS will lower taxes over time. If a nation wants to "run a surplus" in order to create a sovereign wealth fund, then they will simply file this investment under spending, and the ERS will set taxes accordingly.
The ERS will also be the supranational tax collection agency, ensuring that the same quality of operations exists across the entire Eurozone.
The ERS will also have the authority to change tax rates in individual nations, or across the entire Eurozone, in response to certain economic conditions such as recessions or expansions. This would be done in conjunction with the ECB. Keynesian stimuli enacted by member nations will also be conducted in conjunction with ERS policy.
Individual nations can "reduce taxes" on certain industries if they wish through subsidies, which would have a net effect upon the taxes on that industry.
The short-term goal of the ERS would be to set tax rates in member countries, collect them and distribute them to these member countries.
The long term goal of the fund is to ensure that all nations maintain zero net sovereign debt over the course of the business cycle.
The fund and the ERS will only operate within the Eurozone. Members of the EU who are not members of the Eurozone will not be subject to these entities (eg UK, Denmark). However, once an EU country joins the Eurozone, these policies will affect them: their sovereign debt will be transferred to the central pool and their tax system will be run by the ERS. The idea that sovereign debt may be paid off on entry to the Eurozone gives potential member nations a huge incentive to join.
As for the importance of government bonds in the European Financial industry, the ECB would be able to issue enough bonds to cover this need. Just because debt is being/has been retired does not mean that government bonds need to disappear as well.