Harvard Law School
Jean Monnet Chair
Professor J.H.H. Weiler

Harvard Jean Monnet Working Paper (Symposium)

This paper is a part of contributions to the Jean Monnet Working Paper 
No.7/00, Symposium: Responses to Joschka Fischer

Agustín José Menéndez

Another View of the Democratic Deficit ovvero No Taxation without Representation

Harvard Law School    Cambridge, MA 02138

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Without permission of the author.

© Agustín José Menéndez 2000
Harvard Law School
Cambridge, MA 02138 
USA

Another View of the Democratic Deficit ovvero No Taxation without Representation
Agustín José Menéndez, Arena

	For a while it seemed that European integration was on the peaceful track of routine. The agreement reached at the Amsterdam summit in 1996 was sufficient to postpone big thinking. It is true that a certain sense of constitutional crisis was in the air during the last months of Jacques Santer’s presidency of the Commission, but no major theoretical debate surrounded its demise and the election of Mr Prodi as a new, reformed head of the college of commissioners. However, the last two months have brought back big ideas to the European public. A wave of speeches and statements of key politicians has fostered a wide debate on where Europe should be heading in the coming years. The three boldest ones might have been Joschka Fisher’s at Humboldt University, Jacques Chirac’s before the German Parliament and Carlo Azeglio Ciampi’s at the occasion of receiving an honorary degree from Lipsia University.
	This might mark a new stage in the debate, but to a certain extent it was bound to happen, once we take into account the following two processes. On the one had, the Union is committed to enlarge its membership. A number of candidate members have started negotiations, and some more are on the waiting list. This has encouraged fundamental thinking on the Union institutional structure. It is widely agreed that it is not possible simply to adapt the existing one to a constituency of twenty-five or thirty members. On the other hand, the number of issues dealt with at the European level is on the increase, no matter subsidiarity. This is the direct result of the new pillars added at Maastricht, but it is also the consequence of the superior problem-solving capacities of a supra-national institution. The problem here is that Europeanisation of policies tends to take place in a blurred way, increasing exponentially the degree of complexity of the institutional structure.
	It is in such a context that we can make full sense of the three aforementioned discourses. The finalité of the Union comes quite naturally when one has to consider fundamental reform. The three interventions can be seen as an attempt to provide the political vision that should underlie detailed plans of reform. References to a European constitution, to enhanced cooperation and federalism might look too vague, but should be considered more as fundamental principles settled at the beginning of the debate. At any rate, it seems not too risky to guess that Pandora’s box lies open and will not easily close again. If only because of the timing of the ad-hoc convention conveyed to draft a Charter of Fundamental Rights for the Union. It has already produced a final text and will release its final report on September. No matter the need for such an exercise, it is quite clear that the standing and status of rights is a major constitutional issue. It does not take much imagination to see this as a potential first step towards a constitutional moment for the Union.
	In this note, focus is on Fischer’s speech. His arguments are the most challenging. He does not only have a certaine idée de l'Europe, but a quite detailed blueprint of how representation and decision-making processes should be changed. His is a committed federal proposal, and one might even say that it has a Habermasian flavour. My intention is to provide some normative arguments for what seems to me the implicit premise of Fischer’s speech. That is, that there is no necessary tension between European integration and democracy (which does not entail that there is necessarily harmony). I basically do two things. First, I try to analyse what the democratic deficit is really about. Instead of invoking it rhetorically, we should analyse it with the help of a sound conception of democracy. If we do so, we see that not only Europe, but also nation-states and unregulated markets have to deal with serious democratic deficits. Second, I try to show that the processes of European integration verify this abstract normative argument. I consider more closely one concrete policy area, namely personal taxation. It seems to me that there is enough evidence to conclude that Member States have paid a high price to keep their formal sovereignty on this matter. They seem to have lost most of their factual sovereignty. This should be enough to conclude that Fischer’s basic insight is right. We can have more of Europe, more of nation-states and more of democracy, provided we use our institutional imagination.

Fischer’s argument

Fischer makes a plea for a federal conception of Europe. The general premise is that Europe has already transcended the international or intergovernmental stage of integration, and it increasingly resembles a federation. The Rubicon of European integration was passed with Monetary Integration (one can guess he refers to the famous the third stage, in which the Euro replaced national currencies). This quite neofunctionalist idea seems to be shared by many publicists in France. It is worth quoting Fischer’s statement: “A tension has emerged between the communitarisation of economy and currency on the one hand and the lack of political and democratic structures on the other”. 
This reality of an increasing integrated Europe is yet to be translated into adequate mechanisms of citizen’s representation and of decision-making. This décalage makes it necessary to move forward to explicit political integration, that is, to a European federation. The slow process of integration, based on the idea that one small step now will allow several small steps later on, is no longer useful. Gradual integration without worrying a picture of the polity that is being forged (the so-called Monnet method) is just at the root of present troubles. This implies at the very least two things. Firstly, direct mechanisms of representation of citizens. It requires the familiar transformation of the European Parliament into something more similar to a full-blown legislative organ, and the less usual claim that the head of the European executive should be elected directly by the people. Secondly, a complete overhaul of the decision-making process. We need a new (and proper) Constitution, with full-blooded legislative and executive powers. He puts forward new models for the Parliament (which should consist of two chambers, one for direct citizens’ representation, the other for regional representation) and for the Commission (which should be transformed into a real executive, with its head receiving a direct mandate from the people).

Reactions to Fischer’s discourse

	Fischer seems to have intended his discourse to foster debate. He was cautious not to offend the sensibilities of anybody. He insisted that this was not an official piece, so he took his ministerial hat off. He softened his language with several discharge notices. However, his invocation of the European F-word (for federation) has been more effective in awakening fears of a European Leviathan than at offering a clear picture of the decision-making structure he favours. 
	It is too soon to offer a detailed analysis of criticisms. But it is not too risky to guess that frontal attacks would be based on the argument that a Federal Europe, with mechanisms for the direct political representation of citizens and renovated breadth and scope for federal decision-making processes, is unlikely to reduce the legitimacy deficit of the European Union. That is so because it is the pooling of competencies by a supranational institution that is perceived to be the problem. That is argued to be what is actually perverting national democracies. Under such premises, a European federation (somehow by definition) cannot be sufficiently democratic.
This is, of course, the language of Euroscepticism, a short name for anything opposing further political integration. This usually comes in two main variants. Firstly, we find those who conceive the Union as mainly an economic affair. Integration would be mainly about deregulating cross-border economic activities. The key words here are competition and mutual recognition of standards. This can be based on a general political stance (neoliberalism, ordoliberalism) or on a particular view about the distribution of competencies between the Union and the member states (this seems to be the case of third way social democrats like Tony Blair). Secondly, we come across those who deny that a federal Union can be a working polity, to the extent that it cannot provide a basic resource for stability, namely, the loyalty of citizens. The argument goes that politics requires a sort of prepolitical solidarity, and that is based on common culture. Because the later is absent within Europe, the Union should be a mere association of states, based on the intergovernmental model of international organisations. The key words here are loyalty, solidarity and demos. The Union as a federation would be a recipe for tyranny.
Even if we are still waiting direct responses to Fischer’s speech, one cannot fail to notice that it has had an immediate impact in the discourse of national and supranational officials. It is interesting to see how the basic premise of the Green politician’s argument is directly rebutted, namely, that monetary integration needs to be complemented by further political integration. This has been left painfully clear in two statements within weeks of the Berlin’s speech by Gordon Brown, the UK Chancellor of the Exchequer, and the flamboyant Fritz Bolkestein, commissioner in charge of the internal market and tax portfolio. It is worth noticing that both of them advanced a view of the Union based on economic competition, and strongly disregarded any further integration towards some supra-static form. This makes clear that we are within a debate for the soul of European integration.

What to do with Fischer’s discourse? A new look at the Democratic Deficit

	My point is the following. On the one hand, no democrat can be happy with the present shape of the Union political system. The democratic deficit, notwithstanding Scharpf, is a serious concern. There are serious legitimacy problems to be faced. On the other hand, and as things stand, the implicit premise of Fischer (moving towards a European federation will increase legitimacy) seems to me plausible. The contradictory character of these two statements will immediately shock the reader. How is it possible to increase legitimacy by strengthening an institutional structure that presents many democratic flows? The key to this puzzle is that we need to distinguish different kinds of democratic deficit at stake here. The paradox dissolves once we give second thoughts to the conception and dimensions of democracy.
	I claim in the next section that political legitimacy is not to be equated with a concrete method of aggregating preferences, but with a complex conception of democracy. This has at least four dimensions: procedure, substance, implementation and scope. The democratic deficit of European institutions is related to the first three dimensions, while the democratic deficit of non-Europe is related to the fourth, namely to scope. The Union is needed because it makes decisions that are democratic in terms of scope. Going back to the traditional nation-state is no solution to the deficit. At the same time, we can gain a clear picture of what is wrong at the European level, and consequently, we can put forward proposals to reduce the real dimensions of the democratic deficit. That seems to be what Fischer is about, as a matter of fact.

The Democratic Deficit Unbound

	Politics is basically about deciding common action norms. Once we recognise that we are not alone in the world, and that our actions have severe consequences upon others, we realise the existence of what have been called the circumstances of politics. The only way to claim our own autonomy while respecting that of others is by means of agreeing on sets of norms to deal with conflicts and, hopefully, to co-ordinate behaviour in ways that will improve the lot of all of us. Democracy is the yardstick that allows us to determine whether political decisions are legitimate, and consequently, to assess whether there is a good case for us complying with them even if we eventually do not agree with their content. That is essential for the regular functioning of political communities. But what does democracy entail? It has become quite intuitive to associate it with majority rule, but if we had second thoughts we would depart from such conclusion quite quickly. Respect for fundamental rights and a fair application of the laws is also clearly associated with our concept of democracy, and this involves appeal to substantive values (respect for the life of the person, for its autonomy and dignity) and criteria governing the actual implementation of the laws, either by courts or by public administration. It is in this sense that we can claim that democracy is basically about procedure (about how we decide which laws should govern us), but that it is also about substance and guaranteed implementation. 
	If this is granted, then, a democratic polity is one in which citizens freely decide about common norms, which give institutional expression to a set of democratic values, and which are implemented in ways that ensure their respect. Democratic politics is the epitome of freedom. However, freedom is one thing and unbounded free will is another. We are free to argue and vote for a given set of common norms, but we are not free either to decide whether we have certain issues on the agenda or to decide which individuals will be also part of the community. The circumstances of politics (the commonality of interest in avoiding conflict and defining schemes of cooperation) are the ones that define the constituency. If that is so, this adds a fourth dimension to democracy, namely, scope. The political constituency called to decide a certain affair should be the one of those affected in a relevant way by the outcome of the decision. This works both ways. In the same way that it will be undemocratic for the national Parliament to decide the amount to be devoted to gardening by a given city council, it will be undemocratic for the local city council to set the rates of the income tax nationally.
	All this has relevant implications for the European integration process. Different processes have led us to an increasing sharing of interests across European countries. One could argue that the process of market integration following the Rome Treaty of 1956 is itself to be blamed for this, but it is also the case that this was perceived to be the reaction to previous developments taking place much earlier. Be it how it might be, we have reached a point in which we share so many interests, and we share already a good deal of common actions norms, as the thick repertoires of Community law prove. This creates a good prima facie case for arguing that the only way to deal democratically with a good number of issues is at the European level (some issues might even require us moving to the global level). Against the arguments of Eurosceptics, it is democracy itself (its scope dimension) which calls for supranationalism. 
As it was said at the beginning, but it is probably worth repeating now, this does not mean that the European Union is a perfectly legitimate polity and that we should bow to any argument for deeper integration. European institutions are still inadequate in what concerns the other three dimensions of democracy. Political participation is weak, the acquis communitaire needs to be expanded in order to give a more balanced protection to basic fundamental rights, and access to Courts is imbalanced in favour of certain interests. My reasoning only makes clear that the way out of the democratic deficit is neither deep deregulation nor a return to the “classical” nation-state. In both cases we will end up with a serious democratic deficit, due to the mismatch between the level at which decisions should be adopted and the one at which they are actually adopted. And we will probably end up with far from efficient arrangements. The experience with rigid neoliberal macroeconomic policies must have taught us the extent to which the market depends on fundamentals that it cannot provide by itself. And a good deal of the pressures to Europeanise certain fields or policies derives from the incapacity of nation states to deal with global problems unilaterally (although they might try to adapt and do their best, and some do clearly better than others).

A closer look to taxation?

	This rather abstract normative argument can be rendered more concrete by considering specific policy areas. In this section, I propose to review the process of Europeanisation of taxes. Taxation is continuously said to be a core competence of nation-states. The third stage of Monetary Union has augmented the stakes. It is now frequent to hear that tax policy is the last trench of nation-states, deprived as they are of monetary pulls and levers. It is rather curious that Joschka Fischer does not even consider the issue. Although there is a direct reference to the Europeanisation of monetary policy, he makes no reference whatsoever to public finance in the speech. My claim is that the present state of play in the Europeanisation of tax matters makes it clear that Fischer’s basic intuition is right. Namely, that furthering political integration within the European Union is not against democracy, but it could allow us to improve democracy. 
This is so because member states have less room of political manoeuvre in relation to those taxes that have not been Europeanised than in regards those for which a common normative framework has been established.
A first flaw of the usual rhetoric about taxation is that it neglects that some taxes are already europeanised. The usual argument that taxes have not been harmonised at the European level is more accurately reformulated as the premise that there has been no positive harmonisation of personal taxes, what are usually referred as direct taxes. That is true of customs duties, and to a good extent also applies to the value added tax and to excise duties (although to a lesser extent). Thus, the actual failure of the European political process is correctly circumscribed to personal taxes. Despite the fact that ambitious plans for comprehensive tax harmonisation have been in the agenda since the very beginning of the Communities (the need of some harmonisation of corporate taxation was already discussed in the very early stages of the Coal and Steel Community), not much has been achieved on taxes burdening capital or corporate income. Bu this does not mean that national sovereignty has been preserved intact in this area. The relevant thing is that the formal preservation of national sovereignty has come hand in hand with the progressive erosion of the de facto sovereignty of the nation-states. This is to be explained by two parallel process, namely the de-regulation of cross-border capital flows (quickly implemented after the demise of the Breton Woods international financial architecture) and the implementation of the merely negative aspects of the free movement of capitals within the Community. It does not take much ingenuity to see that, under such circumstances, all states have tended to reduce the tax burden over capital income and shift it to labour income. So, it is not too adventurous to argue that this reflects a loss of factual sovereignty. Nation-states have an increasing narrow margin of manoeuvre in the design of their tax systems. Most of the discussion surrounding major tax reforms taking place since the eighties have focused on the consequences that the reform would have for the international competitiveness position of the country in question. If one needs further evidence, one can consider the evolution of some technical aspects of the corporate tax, directly related to cross-border activities. It is difficult to argue that there is much democratic support for the reforms of the tax treatment of capital gains or of the taxation of savings, which tend to go barely noticed by the public despite their major distributive effects. Tax reforms of such elements of the tax mix are normally undertaken under the argument that “whether you like it or not, there is no alternative”. 
It is paradoxical to see that the same nation-states have much more room for political decision concerning taxes that have been europeanised. That is the case with the Value Added Tax, for example. A bunch of European directives constitute the basic normative framework for national laws defining the value-added tax. Member states have to design their taxes according to the tax base definition established at the European level. However, this allows them to have room to fix the basic rates of the VAT, and they can also apply preferential rates to certain products or activities. This ensures a smooth working of the referred tax, and allows sufficient room to make politically significant and transparent decisions. Reducing or increasing the basic VAT rate some points is a politically relevant decision, and different governments have opted for different solutions, in line with the national political preferences.
	This all boils down to evidence that democracy is also a matter of scope. To the extent that the interests of the citizens of many different states are at stake, it is clear that national decision-making is bound to be either undemocratic or plainly ineffective, and thus, against the actual preferences of citizens. This renders clear that for a common action norm in this respect, we will need to have resort to the supranational level. But this is, in a way, part of the traditional liberal motto, No taxation without representation. It does not only require extending voting rights within the polity, but also deciding things in institutional frameworks where all those affected can be represented. In personal tax matters, this implies a common normative framework decided at the European level. Only in such a way member states could regain actual political sovereignty. Of course, that does not make such level of governance immediately democratic. That will depend on procedure, substance and implementation.

So, what can be learnt from Fischer?

	As stated, I have made two points in order to defend Fischer’s vision. First, that any fruitful analysis of the democratic deficit should start by analysing the concept of democracy itself. By doing so, we realise that European integration can help increasing legitimacy on the scope dimension of democracy. That does not hide the fact that there are other dimensions of democracy in which much needs to be done. The Union as a polity still needs to find better ways of increasing political participation, it has an insufficient commitment towards certain substantive values and it provides insufficient access to judicial protection to individuals. But this cannot be solved by a move towards a non-Europe or a free-trade area conception of the Union. Second, that a careful analysis of the process (or lack of) of tax harmonisation confirms the previous analysis. The mixed record of tax harmonisation shows that the lack of a supranational framework for personal taxes has led to a considerable narrowing of the tax policy options open to national political processes. The only way of rescuing national sovereignty is by means of increasing supranational arrangements.
	It seems to me that this provides a bit more solid ground for the general insight of Fischer. Under such a light, one should construct him as making a modest plea for constitution making. 
After all, he is openly arguing for a federal Europe. The problem with federalism is that it means very different things to different people, and it is not always the case that everybody is eager to learn what others mean by it. According to classical constitutional thinking, what is at stake here is where sovereignty rests, or what is the same, who has the last word, the power of last resort (this tends to be called by lawyers the competence-competence). States can establish different frameworks of cooperation. In a confederation, states retain their original sovereignty, while delegating a limited number of powers to the new central power, which is a mere creature of the states. In a federation, sovereignty moves to the centre, and states have their powers enshrined and limited in the federal constitution. Eurosceptics share very much this view; consequently, they see Fischer’s plea for a federation of states as a recipe for depriving member states of sovereignty. However, one could doubt that this way of conceptualising sovereignty makes any longer sense. For one, Neil MacCormick has shown how the present structure of European law cannot be explained with such conceptual tools. The Union makes it clear that we have go beyond sovereignty. The relationship between European and national law cannot be said to be one based on the unconditional supremacy of any of the systems over the other. We have a plurality of overlapping legal systems, and a pluralistic relationship between them. The last word does not belong to the European or the national legal system, but to the dialogue that exists between the two. Under such understanding, federalism is not a formula to determine where the power of last resort rests, but to describe the kind of foundations of the Union. Structures of international law are exclusively based on the commonality of interests and the functional need of finding common action norms. They resemble a modus vivendi, in which parties tolerate each other. A Federal Europe is based on something else. Common action norms deal with areas in which we need to solve conflicts and achieve cooperation, but they are also inspired by common values. The right model is that of the overlapping consensus, of a normative consensus on which the whole integration process seems to be founded. 
Such conception of federalism makes it clear why Fischer has felt in need of reopening the debate on the finalité of the Union. We could interpret him as saying that citizens should realise the Union is already based in an overlapping consensus that transcends a mere modus vivendi. In this sense, and to use Ackerman’s terminology once again, Europe is not facing a radical new constitutional beginning in which it has to redefine its identity. It is just entering a constitutional moment, in which important reforms will be adopted. 
This implies, among other things, reconsidering the division of competencies between the Union and member states, but this is not necessarily a recipe for a super-state (actually, it could be just the opposite). However, it seems to me that Fischer might be too optimistic. It is not realistic to expect that we could make a one-page list to sort all things out. Anybody familiar with policy processes at the European and at the national level within federations knows that things are far more complex. On what concerns tax matters, the efforts to establish an Anti-Fraud office (surprisingly baptised as OLAF in the Euro-jargon) show that different schemes of cooperation are needed, no matter who is mainly responsible for doing what. But nothing prevents making things as clear as possible, even if complexity is to be accepted as the price for sophisticated governance.

Conclusion

	That means that we are just at the beginning of the real debate. The European Union is already a full-blown polity with a constitution. There are good democratic reasons for that to be so. If we are really committed to democracy, we should endorse the move from a messy and undefined constitution towards a drafted charter that has benefited from extended deliberation. This will allow us to start tackling the real democratic deficit at the European level. We need to have a clear set of procedures, substantive values and criteria for implementation. But this requires moving forward, not backwards, in the process of European integration. Fischer’s vision is thus basically correct. We can have both more of Europe and more of nation-states, but only if we dare becoming the pouvoir constituant.

Agustín José Menéndez is senior researcher at ARENA, the program of Advanced Research on the Europeanisation of the Nation State of the Norwegian Research Council.