Letter: European tax union is bound to follow from a single currency

Sir: Proposals to unify European tax rates (report, 16 January) should be no surprise. As a matter of economic logic, tax union is an inevitable consequence of monetary union.

Countries outside a monetary union can use exchange rates to offset their ups and downs. For example, bad-weather failure of the fruit crop would cause severe economic hardship throughout Spain. But then the peseta would fall, it would become cheaper for people to visit Spain or buy Spanish goods, and balance would be restored.

A member of a monetary union does not have this option. It may try to revive things by taxing less and spending more, but that takes time to work and just stores up problems for the future. No, its only real hope would be to campaign for large welfare transfers from the union.

Thus when US states suffer - when Florida's fruit crop is ruined by frost, for example - they can do little more than petition for "federal disaster area" status, so that they qualify for federal support. Faced with hardship among the citizens of a member state, the EU authorities could hardly resist such an appeal, with EU taxpayers footing the bill. A coherent stabilisation policy for the union would require a coherent tax policy.

In other words, a single currency implies a single welfare policy and a single tax policy. So these proposals for a single tax regime should not surprise us, and we should expect proposals for a single European welfare policy in due course.

Dr EAMONN BUTLER

Director

Adam Smith Institute

London SW1