What Europe Needs to Do to Tackle the Triple Crises of Tax, Finance & Climate
Our new paper for the European Parliament highlights how old approaches to international governance are increasingly out of date in the day and age of increasing globalization. We now live in a world that is highly interconnected, is full of externalities and is increasingly fast paced. (Available for download in our publications section)
The ever faster and larger cross-border flows of commerce, people, and information technologies has reduced the idiosyncratic risks by allowing us access to an increasing array of options for example for investments or suppliers. At the same time, the higher degree of interconnectedness that this has brought about means that the risk of system wide failure – the dominoes all falling together - has increased significantly as demonstrated by the recent world wide collapse in cross border finance and trade.
Existing international governance structures to pursue shared global goals and manage externalities were designed at a time when systemic risk, externalities and the pace of change was much slower. These institutions and their approach to global governance now look increasingly out of touch. There is an urgent need to plug this governance gap that grows by the day.
As the most integrated region in the world, the European Union should take the lead in both tackling the emergent challenges head on, and developing a model for new governance that can be replicated at the global level. This would be beneficial for
The expanding size of cross border flows of people, information, technology, finance and trade has meant that the world is now more interconnected and interdependent than ever before. This has brought undisputed economic gains to an ever expanding set of individuals and countries. It has also, at the same time brought new vulnerabilities in the form of significant increases in tax flight, international financial instability and the cross border flow of pathogens to name a few.
Moreover, the economic expansion was based substantially on fossil fuel based technologies and an exponential rise in the exploitation of natural resources. The rapid and accelerating accumulation of man made Green House Gases (GHGs) driven by fossil fuel consumption and deforestation is one manifestation of humanity’s expanding footprint on the environment. Global warming is already underway and if allowed to run unchecked could trigger sudden catastrophic climate change.
While previous crises were mostly local or regional in character, the most serious problems confronting us now are global in scope. We are faced with a very pressing fiscal, financial and environmental ‘triple’ crisis. The systemic nature of the challenges involved necessitates an international, preferably global approach. But as a first step we must act at the level of the European Union. This makes sense since the EU is the most integrated region in the world with the most advanced supranational governance structures.
To this end, this paper discusses a series of specific short to medium term steps that
Greater externalities, faster contagion and increased systemic risk
We now live in a complex world where progress or setbacks in one part of the world get propagated through the interconnections and interdependencies between various parts.
Policy decisions, previously made in purely local contexts, increasingly have a footprint across country borders, an increase in externalities. The operation of ‘tax havens’ in the
The world has also witnessed a major increase in the pace of life across all fields- travel, communication, manufacturing and finance. This exposes us to ever faster contagion, where risks and opportunities are propagated across borders at an ever faster pace. The news of the failure of Lehman Brothers had a near instantaneous impact on European financial markets.
Technological development and globalization have substantially increased the size and impact of cross border activities. Whereas previously, increase in CO2 emissions from outside the EU would only have impacted EU climate only gradually, the rate at which large, fast growing countries such as
This increase in externalities, size of impact and the possibility of fast contagion has exposed us to a new form of risk where problems arising in one part of the world, get amplified and transmitted through the interconnections and interdependencies and bring about systemic meltdown. A small shock in an obscure section of the
A growing governance gap
This new complex world offers great opportunities and new challenges. Our capacity to reap the opportunities and face the challenges depends more and more on our ability to act together across national borders. This applies regionally as well as globally.
Existing global institutions, many of them created decades ago, are ill-equipped to harvest these opportunities or tackle the emergent risks. They are not equipped to handle complex, fast moving systemic risks and innovations. The governance mindset, that underpins present day approach to international policy, is ‘well past its use by date’.
The financial crisis has been a wake up call for world leaders, demonstrating the yawning governance deficit that has emerged in recent decades. Deep structural changes as well as new approaches to governance and policy making are urgently needed. While any changes of this scale will take time and need to overcome entrenched interests, we cannot afford to stand still.
The European Union should play a leading role
With its multilateral character and flexible institutional tools, the European Union is particularly well placed to play a leading role in responding to these new developments. This is possible at two levels.
First, the EU with its model of pooled sovereignty, single market and multilateral institutional structures is better placed to tackle the emergent complexities and 21st century challenges than any other set of states or region in the world. Systemic risks posed by climate change and international financial crises need systemic responses which the EU should be able to provide at least within the single market.
Second, the EU in its response to these risks provides a template to the rest of the world as to handling these systemic risks at the appropriate level – globally. If the EU succeeds, it will be in a position to provide both moral and intellectual leadership to the rest of the world. If the EU fails even within our integrated sphere, then there is little hope that global governance would evolve to match global challenges.