That's because politicians/diplomats are negotiating free-trade as if it was a prisoner's dilemma. But you can lower tariffs unilateral.
And there are people who regard fiscal competition (or other regulatory competition) as a good thing.
Could you please explain your argument about inflation? Couldn't each country decide on its own inflation, without harmonization nor a common currency?
Let's say we have 10 countries, with an identical GDP of 100 billion, and 10% flat tax rate. Let's say they agree on what's the minimum decent level of public services (health care, education, roads, wars abroad, prisons, car makers and bank bailouts...), and it cost just these 10% GDP raised by taxes.
On day 1, everything goes smooth: everyone needs 10 billions, has 10 billions, spends them. Now, a country decide to lower its tax rate to 5%. Taxable activities move massively to this country, their GDP soars to 300 billions: they've now 15 billions of income tax, that's great for them; but other countries have only got 9.4 billion left, they're below their bare minimum income. They'll have to choose between suppressing some public services, and protect themselves against the dumping countries (i.e. make it artificially impractical for companies of the dumping country to do business in the rest of the union).
Now, if the dumping country is much smaller than the others, it can do some dumping without hurting other, bigger countries too much with the drain. That's why dumping countries are usually small ones: the smaller the country, the more we let it get away with.
The dumping mechanisms encourage to lower taxes, at the expense of reduced public services. In some countries, limiting public services is ideologically considered a Good Thing (and for some reason, people don't realize that wars and prisons are public services). But limited public services are correlated with higher stress, and higher crime rates. That's not the lifestyle most Europeans want: so we have to protect our taxes. Don't forget that there is already a strong control feedback on taxes: voters don't enjoy paying them, so most taxes that can be suppressed or lowered under acceptable conditions are cut ASAP.
> Could you please explain your argument about inflation?
> Couldn't each country decide on its own inflation, without harmonization nor a common currency?
Without a common currency you can handle your own inflation.
But if there are many different moneys in a market, and they fluctuate relative to each other, it's much more difficult to make business. Moreover, when countries have independent monetary policies, they eventually indulge into protectionism (although they try to disguise it into something else). Therefore there's no more common market, with the corresponding economies of scale.
Before the Euro, european countries already had a "monetary snake" system which limited money fluctuation and ability to indulge into protectionism, to favor business inside Europe.
Finally, being known as unable to raise inflation has a positive effect: since lenders are confident that Euro can't be significantly devalued, they consider the loan as less risky, and therefore accept lower interest rates. Look at Greece: people are afraid that the country might go bankrupt, so they only lend at high interest rates, putting Greece into further trouble. Know, imagine that Greece was able to devalue its currency through inflation: lenders would anticipate massive inflation, and protect themselves with outrageous interest rates. The alternative for Greece would be to borrow into a stronger, foreign money, but then if their economy tanks, the debt would explode with soaring exchange rates, and the whole country would default. Given this high risk of default, interest rates would soar even if labelled in a strong currency.
Being tied to a strong currency, with some rules which keep it strong, forces you to drive your economy responsibly. Unfortunately for Greece, the Euro rules weren't strong and enforceable enough to prevent their politicians from acting irresponsibly. Know they're going to pay...
> Besides, free trade is a fairy tale: [...]
That's because politicians/diplomats are negotiating free-trade as if it was a prisoner's dilemma. But you can lower tariffs unilateral.
And there are people who regard fiscal competition (or other regulatory competition) as a good thing.
Could you please explain your argument about inflation? Couldn't each country decide on its own inflation, without harmonization nor a common currency?