From Own Resources to Fiscal Union

By Giulia Rossolillo. Original article by The Federalist here.


To understand exactly why creating a fiscal union is so important, and also the difficulties that the integration process encounters whenever attempts are made to move in this direction, it is worth going back to the origins of the current system of financing the EU. Indeed, looking back over the history of this system, and at the various efforts to democratise decision making on own resources and remove the requirement for unanimity among the member states, the limits of the current system become clear. These limits help us to understand what reforms are needed for the Union to be able to act independently of the member states when it comes to finding the resources it needs in order to function.

The difficulty, which this analysis will bring out, of evolving towards a system that is similar to that of the European Carbon and Steel Community (ECSC),[1] and thus different from those used to finance traditional international organisations, is a reflection of the member states’ awareness of how crucial an organisation’s funding mechanism is to its own level of autonomy, and therefore of the strong political significance that such an evolution would have.

From members States’ Contributions to “Own Resources”. 

In accordance with the provisions of art. 200 of the Treaty establishing the European Economic Community (EEC Treaty), the EEC, at the time of its creation, was financed entirely by contributions from the member states, just like other international organisations (with the exception of the ECSC). Unlike what is set out in the founding acts of classical international organisations, however, art. 201 of the Treaty envisaged the possibility, in the future, of switching to a financing system based on own resources, implying financial autonomy of the supranational level vis-à-vis the member states.[2]

This step, however, would be subject to a decision reached through a difficult and laborious procedure. It was in fact envisaged that the Council, acting unanimously, and after consulting the Assembly (European Parliament), should lay down the provisions needed to switch to an own resources system, recommending that they be adopted by the member states, in accordance with their respective constitutional requirements: effectively, this meant there had to be double unanimity, i.e., at European and at national level, and that the procedure was in the hands of government representatives, with the European Parliament having only consultative power.

The intergovernmental nature of this procedure and the European Parliament’s limited role in it can be explained by the following circumstances. The Parliament back then was an institution with very limited powers and was not elected by direct universal suffrage. Its purely consultative role in determining the Union’s resources was therefore merely a consequence of its lack of real weight within the overall structure of the EEC. As for the laborious intergovernmental nature of the decision making, art. 201 of the EEC Treaty envisaged a procedure similar in some respects to a treaty revision procedure, in that it required not only a decision at a supranational level, but also ratification by the member states. In the Treaty of Rome, the situations requiring approval by the member states were deemed – as they are today – exceptional ones, limited to a handful of transitions with the capacity to radically affect the integration process. Transitioning to a financing system based on own resources could in fact be seen as a fundamental change destined to alter both the functioning and the very character of the European Union, and therefore it justified the use of a procedure requiring unanimous approval at two levels.

Once such a transition were complete, however, it would no longer make sense to maintain provision for such a decision-making procedure, which had, after all, been intended by the drafters of the Treaty as a one-off mechanism.[3] In the 1960s, in fact, the Commission twice proposed modifying art. 201 EEC Treaty, suggesting that, once it had been decided to switch to a system of own resources, the subsequent determination of the new resources should be achieved through a simpler procedure, involving a more prominent role for the Parliament and, following the introduction of election of the EP by direct universal suffrage, elimination of the need for national ratifications.[4] Abolition of the latter was also requested by the Parliament itself in a 1969 resolution in which it demanded the power to decide on the Community’s resources.[5]

However, since these proposals were never implemented, they have not been able to undermine the monopoly of the member states in this area. Thus, in 1970[6] the first own resources were introduced with a decision adopted according to the procedure provided for by art. 201 EEC Treaty, and subsequent decisions on own resources have been reached following the same procedure, now set out in art. 311 TFEU.

In particular, the 1970 decision on own resources provided that revenue from the common customs tariff (duties) and from agricultural levies would flow into the Union budget; these two can be considered the ultimate “own” resources, given that they are linked to the competences of the Union and are paid entirely into the common budget. There then followed the introduction of Community VAT, which can be defined as a “weak” own resource since it is not linked to the Union’s competences and is only partially paid into its budget.

Finally, in 1988, following the same procedure, the so-called fourth resource, consisting of a percentage of the member states’ GNP, was introduced. It constituted a residual resource, meaning that it was used to cover the part of the Union’s expenditure not covered by the other three resources. Despite this, as a result of the decrease in traditional own resources and the increase in the Union’s competences, the “fourth resource” now accounts for more than 70 per cent of the Union budget.[7]

The Three Limits of the Current System for Financing the European Union.

From the picture outlined above, it is clear that the system for financing the European Union corresponds neither to the characteristics of the ECSC financing system, nor to the Founding Fathers’ idea reflected in art. 201 of the EEC Treaty. It is also clear that it presents three crucial limits, namely: the type of own resources, now largely accounted for by a single resource identical in all respects to state contributions; its lack of democracy, given that the EP is still merely consulted; and the fact that the Union remains dependent on the member states also with regard to the procedure for taking decisions on own resources.

These are aspects that are closely linked to each other, and should therefore be addressed together. Addressing only some of them, as those who focus solely on the need to replace the fourth resource with different resources seem to want to do, can only result in a reform that would either fail to affect the Union’s capacity for self-determination, or actually worsen the current situation.

First of all, it is inconceivable to think that the issue of the EP’s limited involvement in decisions on own resources and that of eliminating ratification of own resources decisions by the national parliaments can be dealt with separately. And this is true whether we are wanting to eliminate national ratifications, but not increase the role of the European Parliament, or whether we are instead wanting to attribute to the European Parliament the power of co-decision with the Council in matters of financing of the Union, but without eliminating the member states’ ratification of the decisions.

In fact, eliminating national ratifications without at the same time strengthening the role of the EP by making it a co-decision maker, together with the Council, on matters of financing the Union, would be tantamount to creating a democratic legitimacy vacuum in an area – taxation – that is one of the very pillars of sovereignty. In such a situation, in fact, the citizens’ representatives would have no say on the Union’s revenue either at national level, because the national parliaments would be excluded from the decision on own resources, or at European level, given that the European Parliament, still only consulted, would have no power to influence the determination of these resources. Conversely, giving the European Parliament the power to decide on own resources together with the Council without eliminating national ratifications would render this change ineffective from the point of view of the Union’s acquisition of independence, since the individual member states would retain their power to veto decisions on European-level funding.

As for the link between national ratifications and the type of EU own resources, it should be pointed out that the democratic legitimation of a decision on the Union’s resources is closely dependent on the type of resources in question. When the EEC was financed by member states’ contributions, it was in fact perfectly legitimate that the decision on the organisation’s revenues, since it involved the finances of the states themselves, should be approved by their parliaments,[8] and therefore that the democratic legitimation of the decision should occur at national level.

If, on the other hand, the EU were no longer financed by state contributions, and granted the power to independently procure the resources necessary for the exercise of its competences, which would mean equipping it with autonomous powers of taxation over both citizens and businesses, then the democratic legitimation would instead have to come from the representative body of European citizens/taxpayers as a whole. Under the current art. 311 TFEU, decisions on own resources have to be approved by the member states according to their respective constitutional rules, and this is precisely because, contrary to the will of the Founding Fathers, the EU’s current financing system includes not only own resources in the strict sense, but predominantly resources that are in all respects equivalent to state contributions.

Articles of Confederation and European Union. 

Having established the need to address the above-mentioned limits (type of resources, democratic legitimation, EU’s decision-making autonomy) in order to be able to arrive at a true fiscal union, and grant the EU independence from the member states within its own sphere of action, we now need to consider what might bring this step closer, and what the consequences would be for the structure of the Union as a whole.

In this regard, some interesting pointers can be drawn from the American experience, and in particular from the construction of a federal fiscal power during the transition from Articles of Confederation to federation.[9]

This reflection can take as its starting point the fact that, in terms of central level funding, the situation of the American states under the Articles of Confederation was very similar to that of the European Union today. The American Confederation was in fact directly financed through contributions paid by its member states, and therefore had no scope to act independently of them.

The American War of Independence, of course, arose as a result of Britain’s attempt to raise taxes in its American colonies as a way to pay the debts of the Seven Years’ War, and the colonies’ refusal to pay these taxes, unless they were represented in the British Parliament. However, once they had gained their independence and given rise to a confederal form of organisation, regulated by the Articles of Confederation and founded on the principle that “each state retains its sovereignty, freedom and independence” (Article II), the former colonies were themselves forced to impose taxes, moreover very high ones, to cover the debts incurred to finance the War of Independence. In fact, according to art. VIII of the Articles of Confederation,[10] the contributions needed to finance the Confederation were decided by the Congress, whose decisions were applied to the member states: it was therefore the latter that had to feed the confederal budget, and therefore find the necessary resources by imposing taxes on their own citizens.

The fact that the excessive burden of these taxes had triggered a reaction, even riots, among the citizens in some states, explains why the states themselves began to refuse to pay their contributions to the Confederation, creating huge difficulties for it and effectively preventing it from functioning.

To deal with this situation, Congress proposed imposing a common tariff of 5 per cent on imports, to directly finance the confederal budget. This, however, would necessitate a modification of the Articles of Confederation which, like the current Treaties establishing the EU, could only be modified with the unanimous consent of the member states. Rhode Island opposed the idea. Two years later, the same proposal, adapted to overcome Rhode Island’s objections, was presented again, but this time it was the State of New York that opposed it, thereby ending the prospect of a common tax on imports.

Albeit in a different historical context, the situation just illustrated recalls the difficulties that emerge in the European Union whenever it has to address the issue of its financing, still subject to the threat of a veto by any single member state.

In the case of the American Confederation, it was precisely the unsustainability of this situation that prompted the move towards federal taxation and, a few years after a war of independence triggered by taxes imposed by the British, to the decision to create a federal government endowed with fiscal power.

The Elements Pushing Towards Fiscal Union in the American Experience.

It is interesting to refer to the creation of the United States of America not just because of the similarity between the structure of the American Confederation and the current structure of the European Union, but also because it allows us to identify, in the American experience, elements that led to the creation of a fiscal union, and thus to the transition to the federal solution — elements that might, in turn, help us to see where the push in this direction might come from within the European integration process.

The first point to note is that in the American experience, debt was the starting point of the process that culminated in the assignment of fiscal power at central government level. There are two reasons for this: first, the federal government had taken on the debt of the states (which had completely lost the confidence of their creditors and were therefore unable to find resources), and thus freed them from a considerable burden;[11] second, the federal government, to be able to do this, had had to find resources quickly, and had done so by incurring debt, in this case backed by federal taxes. Essentially, starting from the need to deal with state and confederal debts made it easier to eventually assign fiscal power to the federal government; moreover, the existence of the federal fiscal power made the federal bonds more attractive, in the sense that these were bonds guaranteed by a system of government – the new American federation – capable of independently finding the resources necessary to repay them.[12]

In this respect, the path taken by the European Union with NextGenerationEU confirms that starting from the debt problem is easier than tackling the issue of taxation directly. In the European Union, however, this first step has not yet been followed by the attribution of fiscal power to the European Union, despite the clearly pressing need to find resources to repay its debt.[13]

The second interesting element to emerge from the American experience concerns the indissoluble link between fiscal power and the exercise of competences by the level of government to which this power is assigned. Fiscal competence is in fact the prerequisite for the exercise of any other competence, and so the decision to become part of a fiscal union opens up the possibility of benefiting from the advantages deriving from membership of an organisation capable of exercising its functions effectively. Thus, the fledgling US federal government’s proposed import tax might at first glance have been expected to be opposed by coastal states, such as the State of New York, since these states were the only ones that benefitted from import taxes levied at state level. However, the coastal states, being geographically more exposed to enemy invasions, regarded the federal tax, which would have made it possible to fund a common army, as an advantage capable of compensating for their loss of revenue from import taxes.

The link between taxation and the exercise of all other competences now needs to be clearly highlighted in the debate on the construction of a European fiscal union, too. It is in fact an element that can could help to firm up consensus around the need to create a European fiscal capacity, even in those states traditionally hostile to limiting their sovereignty in this sector. Only through this step will it be possible to guarantee the European Union’s ability to act effectively in all those areas in which the action of individual member states is no longer an adequate solution. Thus, countries such as Poland or the Baltic states, concerned by the absence of a European defence in the face of the threat from Russia, should be reminded that the transfer of fiscal power to the Union would carry the possibility of financing a European defence capable of protecting the member states most exposed to external threats.  

Finally, the indissoluble link between the creation of a supranational fiscal power and the creation of a new institutional structure must be underlined. In the United States, in fact, the transfer of fiscal power to the federation raised the issue of the exercise of this power and how this should be controlled; this was addressed through the creation of a bicameral structure and a system of checks and balances that went on to shape the federal state. In the European Union, addressing the issue of fiscal union and supranational taxation would inevitably highlight the need for a governing body responsible for deciding fiscal policy directions on the basis of political assessments. This role should fall to the Commission, which should have a political function rather than its current purely technical one, and be appointed according to a mechanism that ensures it is the expression of the majority formed within the EP. Therefore, assigning Europe fiscal power would inevitably help to lay the foundations for the creation of a democratically legitimised European government.

[1] Under art. 49 of the ECSC Treaty, the High Authority could impose levies on the production of coal and steel, and could also contract loans. These levies were assessed “according to their average value [and their rate could] not exceed one percent unless previously authorised by a two-thirds majority of the Council”. On funding of the ECSC, see A. Rossignol, Les finances de la C.E.C.A. et le développement financier des institutions européennes, Revue du droit public et de la science politique en France et à l’étranger, 70 (1954), pp. 986 ff..; P. Mioche, Les cinquante années de l’Europe du charbon et de l’acier, Luxembourg, Commission européenne, Office des publications, 2004, p. 71; A. De Feo, Histoire des pouvoirs budgétaires et de la politique de l’Union européenne, Partie I: la Communauté européenne du charbon et de l’acier 1952-2002, Archives historiques du Parlement européen, Centre Robert Schuman d’études avancées, Série sur l’histoire de l’Union européenne, March 2015; A. Zatti, Le finanze della CECA: spunti e riflessioni per il futuro della UE, in G. Rossolillo (ed.), L’integrazione europea prima dei trattati di Roma, Soveria Mannelli, Rubettino editore, 2019, pp. 57 ff..

[2] Art. 201 TEC: “The Commission shall examine the conditions under which the financial contributions of member states provided for in Article 200 could be replaced by the Community’s own resources, in particular by revenue accruing from the common customs tariff when it has been finally introduced. To this end, the Commission shall submit proposals to the Council. After consulting the Assembly [European Parliament] on these proposals the Council may, acting unanimously, lay down the appropriate provisions, which it shall recommend to the member states for adoption in accordance with their respective constitutional requirements.”

[3] In this sense, see: A. Boissenin, Le financement de l’Union européenne: moteur d’une intégration politique? Contribution à l’étude du système budgétaire européen, Paris, INSP, 2019, p. 160.

[4] Under the terms of the Commission’s proposal, should the European Parliament approve the proposal by a two-thirds majority, the Council would then be able to act on it by a qualified majority, rather than unanimity. Cf. Projet de traité portant modification des articles 201 et 203 du traité instituant la Communauté économique européenne, in Parlement Européen, Les ressources propres aux Communautés européennes et les pouvoirs budgétaires du Parlement européen, Luxembourg, 1970, pp. 81 ff..

[5] European Parliament resolution of 10 December 1969 containing its opinion on the proposals from the Commission of the European Communities to the Council relating to the establishment of Community own resources and increasing the budgetary powers of the European Parliament.

[6] 70/243/ECSC, EEC, Euratom: Council Decision of 21 April 1970 on the replacement of financial contributions from member states by the Communities’ own resources, in OJ L 94, 28.4.1970, pp. 19-22.

[7] Given that this last resource does not differ in any way from the state contributions that financed the EEC prior to 1970, the expression “own resources” has now lost its original meaning as an instrument aimed at guaranteeing an autonomous financing capacity at European level. On this point, see A. Boissenin, Le financement de l’Union européenne: moteur d’une intégration politique ?op. cit., p. 46. On the substantive meaning of the expression “own resources”, see C.D. Ehlermann, The financing of the Community: the distinction between financial contributions and own resources, Common Market Law Review, 19 (1982), pp. 517 ff.; G. Isaac, La notion de ressources propres, in G. Isaac (sous la direction de) Les ressources financières de la Communauté européenne, Paris, Economica, 1986, pp. 70 ff.; G. Rossolillo, Autonomia finanziaria e integrazione differenziata, Il Diritto dell’Unione europea, 4 (2013), pp. 793 ff..

[8] A. Boissenin, Le financement de l’Union européenne: moteur d’une intégration politique ?op. cit., p. 160; A. Iliopolou-Penot, L’instrument pour la relance NextGenerationEU: “where there is a political will, there is a legal way?”, Revue trimestrielle de droit européen, 57 (2021), pp. 527 ff., specifically p. 530.

[9] On the transition from the Articles of Confederation to the federal form, see for all J.J. Ellis, The Quartet, Orchestrating the Second American Revolution 1783-1789, New York, Alfred A. Knopf, 2016. On the similarity between creating a federal fiscal power in the USA and the EU’s situation, see T. Wozniakowski, Fiscal Unions. Economic Integration in Europe and the United States, Oxford, Oxford University Press, 2022.

[10] “All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion of the value of all land within each State, granted or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the Unite States in Congress assembles, shall from time to time direct or appoint. The taxes for paying the proportion shall be laid and levied by the authority and direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled.”

[11] On this point, see J.S. Steele Gordon, Hamilton’s Blessing. The Extraordinary Life and Times of Our National Debt, New York, Walker & Company, 1998, pp. 27 ff.. Hamilton’s suggestion that the federation take on the states’ debt was rejected by Congress five times before he finally managed to get it approved. One of the reasons that drove Hamilton to insist on the extinction of state debts and the creation of a federal debt was his awareness of the link between ownership of federal debt securities and loyalty to the federation: “The debts, of course were largely held by the prosperous men of business, commerce and agriculture – the oligarchs, in other words. These men’s loyalties lay mainly with their respective states and the cozy local societies in which they had grown up. Although they had largely supported the creation of the new Union, Hamilton had every reason to suppose that their support would quickly fade away if their self-interest dictated it. Hamilton, therefore, was anxious to make it in the self-interest of these men to continue their support of the Union. If they had a large share of their assets held in federal bonds, they would have powerful incentives for wishing the Union well.” (J.S. Steele Gordon, Hamilton’s Blessing…op. cit., p. 29).

[12] On this point, see J.S. Steele Gordon, Hamilton’s Blessing…op. cit., pp. 31 ff.. As noted by T. Wozniakowski, Fiscal Unions. Economic Integration in Europe and the United Statesop. cit., p. 12, a decade after the creation of the American federation, the federal government of the United States managed to obtain 600 times more revenue from the common customs tariff than the states had previously obtained separately. The same would happen in the European Union, if a supranational fiscal power were created: “for instance, if a digital tax were introduced at EU level, tech companies would not be able to take advantage of the tax competition between the member states and so would not be able to evade such tax by shifting their tax residence to a state with a low tax on the income that they generate. Member states would benefit from the fact that the EU would be fiscally independent – their share of transfers to the EU would diminish as a result, which could potentially lead to lower rates of domestic taxes” (note 48).

[13] On the prospect of new own resources, see C. Sciancalepore, Le risorse proprie nella finanza pubblica europea, Bari, Cacucci, 2021.