Accounting Essays

Accounting Essays: The Economic and Monetary Union (EMU)

The Economic and Monetary Union (EMU) has been planned for several years and the European Union governments in 1992 as part of the Maastricht Treaty agreed to establish a single European currency.

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EMU does not, however, simply refer to a change in the denomination of the UK currency. It also involves the transfer of British economic powers to the control of Central European Bank (CEB).

Interest rates will be set by this new ECB for all participating countries, irrespective of the specific monetary needs of the individual countries, with the Bank of England becoming nothing more than a subsidiary of the ECB, by merely administrating its decisions.

The sovereignty of British parliamentary democracy will become increasingly powerless, even those economic policies that remain in UK control, will also be subjected to detailed supervision by the CEB.

Individual governments can still employ fiscal measures, hence, taxation and government spending to help control their economies. But some observers argue that such measures still need to be co-ordinated with other EU member countries.

This can result in a future transfer of fiscal policy decision as well as monetary to the European Union governing body.

Given such transfer of national powers it is not surprising to see that UK has chosen not to participate and keep its parliamentary sovereignty and governments remain the principal decision makers in regards to taxation, both direct (Income tax) and indirect (Value added taxation).

The ideal of 'tax harmonisation' within the EMU is still at an early stage. This is designed to bring into line all member states tax rates and policies.

The need for this integration is based on two grounds, firstly, from a neo-liberal point of view, national differences in tax regimes and rates represent inefficient and trade distorting barriers to competition.

The second argument for tax harmonisation is that there must be European control of tax and fiscal policy in order to offset the ECB's control of interest rates and setting of monetary policy.

Recent opinion polls have shown that there is very little support for European tax harmonisation. The current rates of VAT, corporation tax and excise duties within member states vary significantly as a result.

Source: Data from OECD Revenue Statistics, 1965-2001, p.74. Bale, T., 2005

The varying rates of taxation within EU member states are a remaining mean of encouraging capital (having lost control over monetary policies), among other things, to relocate to where taxes are lowest. To ensure that there country remains an attractive place for foreign direct investment.

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