Monday, May 7, 2012

Things Get Interesting In Europe

Happy International Workers' Day (in color)

Things are getting interesting in Europe again. In a good way, mostly, I hope. Congratulations to François Hollande, Président de la République. Not so sure who I'd want to congratulate in Greece though. I sympathize with wanting to kick out the bums responsible for the mess they're in, but voting in actual, card-carrying, Hitler-saluting Nazis is unlikely to make things any better.

Since I got my head around this whole Euro crisis, I've felt that the German-led course of austerity and low inflation is a dead end. Austerity never has begat growth. Never will. Structural reforms, addressing corruption, investing in infrastructure—human and physical—do produce growth, but only in the long term. They won't get you out of an acute crisis unless they involve spending lots of money. It's painfully obvious that Greece and the rest of the Balkans at least are sorely in need of structural reforms, but I somehow don't think a huge crisis with a quarter of the labor force unemployed makes them any easier.

There are alternatives to austerity. The obvious one is breaking up the Eurozone and letting the resulting regional currencies float.

I would hate to see this happen, because I believe in the European project. It has turned what used to be the black heart of the world's bloodiest wars and evilest tyrannies into what is, for the most part, a pretty decent, safe, peaceful, and prosperous place to live. It has brought different people together in very concrete ways. I think something vaguely resembling the European Union's model of governance—a voluntary union of diverse polities muddling its way towards tearing down walls between each other—is civilization's best bet for survival, in fact. It's certainly light-years ahead of the jingoisms and fundamentalisms that gave us Hitler and Mussolini, Stalin and Reagan, Mao and Hafez al-Assad. I fear very much that these old demons now stirring in their sleep would be released should the European project fail, even if we don't have the demographics to fight proper wars anymore, at least not with anyone with the capability to fight back.

Another alternative is the one the erstwhile Vladimir Putin proposed when the crisis first broke: "It is no problem. You just print more money."

Only very few of the EU countries are truly broke. Greece is. It really cannot survive on its own within the Eurozone. It will either have to leave, or receive massive aid—not loans, aid—from the rest of the EU. The rest of us aren't doing nearly so badly. The "massively indebted" France has a debt/GDP ratio of about 90%, which is perhaps a bit higher than most of us would like, but far from unsustainable. The vicious circle of austerity is that it throttles the economy, putting people out of work, and therefore actually reduces the amount of money available for governments to do their thing, including service their debts. So it doesn't even do what it's supposed to do, while making everything else worse.

Conversely, if Spain was able to get its unemployment down from its current 20+ per cent to, say, 5%, its budgetary problems would be solved. France's 90% debt-GDP ratio would barely register. The simple Keynesian fact is that to get out of a crisis, you have to spend. It's only when you really can't spend, like Greece today, that you're genuinely screwed.

Massive spending in the countries that can afford it would address a second problem too. Namely, the structural imbalance that has Northern European countries running export surpluses with Southern European ones. This imbalance means that productivity is too low in South Europe relative to North Europe. Or, to state the same fact in a more provocative way, German workers aren't paid enough.

Until now, the demands have been for the Southern European countries to reform themselves through internal devaluation. This is slow and hugely painful, putting millions of people out of work and keeping the economy depressed for year after dreary year. We could accomplish the same result not by paying Southern European workers less, but by paying German workers more. That would result in a boom that would create demand all over Europe. Since wages in Southern Europe would not rise before full employment is reached, it would also resolve the imbalance. We could be back to full employment within a year if we decided to run 5% inflation instead of the measly 1.5% that we're doing now.

So, Mario. You had your shot. Enough austerity. Let's inflate our way out of this hole. Print some money. And make sure it goes to the masses rather than the 1% for a change.


  1. Germany is afraid of hyper-inflation due to historic reasons, that's why they're for an all-out austerity offensive.

    I'm not sure Hollande would be a big improvement on Sarkozy. While he does have some good ideas, the idea of raising taxes to 75% for some people is bad enough for him not to get the presidency. Especially at a time when the UK is dropping its tax rate down to 45%...

    This is like saying: "We don't want your money, so go to the UK to spend it"

    I agree that austerity would be dangerous in the long run, but those debts will go past the 100% of GDP if they keep on rising at levels above 5% of GDP every year. You need to cut that back.

    The best way of doing so is through structural reforms, but since no one wants to go through that process, the other way is to reduce spending and increase taxation. Of course, that's not the right way, but people don't understand economics enough to be able to say anything about it in most cases.

  2. I'm actually more in Melenchon's 99% marginal tax rate for 1M€+ earners camp. We really need to tax the rich more. I just got paid some dividends on stocks I own, taxed at a round 0%. That's just plain wrong, when you consider who lives on dividends and who lives on salaries.

    One big structural problem we're having in all advanced economies is the growth of income differentials. We need to bring the back to where they were between the 1950's and 1980's, which means much stronger tax progression. This both for reasons of social justice and stability.

    1. Ah! I wouldn't want to live in your country. I'd run away. I understand that the progressive tax rate is used to redistribute the wealth to give less fortunate people (i.e. poor) have a chance at similar things in life. There should be a limit though. At some point, there is no use in working if not doing anything will give you a good life anyway.

      Poverty nowadays in Europe is living in a social house with 3 rooms, a TV, playstation,...

      That's not "real" poverty.
      If you start taxing people more than half of what they earn they WILL move away. There is no point for someone with ambition to stay in a country where more than half his money is taken away.

      On the other hand, I think all income should be taxed, once a threshold is reached, at the progressive level. No loop holes... (in theory, I'm for a flat, tax rate, but I know that's not fair for the majority of the people)
      The progressive level in my opinion should not go past 50%.

      I decided on taking a job in the UK instead of Belgium because in Belgium I'd end up with less than in the UK, even though the gross was higher.

      What's the point of working just as hard for less money?

      I don't get any dividends, still a student for now, but I think capital gains should be taxed as part of your income. If you get a salary of 20K then 10K in dividends, that should mean your income is 30K taxable, not 20K. That's just bullshit. Selling of shares, options too. Even interest from bonds or anything should be added.

      In Belgium the effective tax rate for an employee is over 60% once they earn more than €40K, you end up with about 24K, while the person who earns 20K ends up with 15K ish. So even though your salary has increased over time or you got a different type of job, which should normally pay you double, you end up earning just 750 more a month.

      Source :
      It's in Dutch, but you can probably understand it if you understand German or you can use Google Translate.

      Belgium is a country with state of the art hospitals, social net, schools,...
      The problem is that even with these rates, it's unsustainable. It just costs too much. Belgium is in trouble.

      Long ramble...

    2. You know, David, that's what lots of rich people say. That they'll run away. But in fact they don't. Not in any significant numbers. This has been researched. Nor do they end up working less. You may be one of the few who actually follows through on that threat.

      Rich people are really good at looking after their own interests. That's how come they became rich in the first place, and managed to stay that way. I'm not the least bit concerned about how they'll manage if/when tax progression gets jacked up significantly, capital gains get taxed as income, and tax havens are closed down. If it works out, some of them may not be as obscenely rich as before—I hope—but I can't see how much practical difference it makes if you "only" make, say, 1 M€ a year instead of 3 M€ a year. What's more, I am very far from convinced that the contributions to society of the people earning more than, say, 1M€ a year is in any way proportional to what they earn.

      Belgium is certainly in trouble, but not because of tax progression.

    3. I wouldn't say I'm rich though. I'm certainly above average (average graduate salary for engineering is £25000 in the UK) as a graduate, since the average household income in the UK is approximately £40K. (all of this is gross income)

      I agree that rich people are (usually) good at looking after their own interests, the point is that the way most rich people see things in terms of gain.
      Living in a country like Belgium has many pros:
      - Good schools
      - Good healthcare
      - Very safe
      - Very stable (even when there is no government)
      - ...

      So they accept that money is going to the government and they use everything they can to avoid taxes (legal evasion), such as putting personal cars on the company and such.
      They use capital gains to offset high income taxes and so on.

      If all these loopholes are closed and taxes go up to 75%, I really can't believe they would stay in France.

      The research you are talking about probably doesn't cover much of the part where all the loopholes exist so that higher taxes don't effectively mean higher taxes. That might be a big reason why rich people don't leave.

      Also, I wouldn't go and move to Congo or Zimbabwe where I believe taxes are much much lower. The why should be obvious...

      However, if I can move to a country where the QoL is similar then it only makes sense to move.

      There are always other factors too, such as family, patriotism, friends, social network,...
      People tend to be afraid of the unknown or like to stick to what they know as well.

      We can take your example if you want though as well.
      Practical difference between €1M and €3M.
      Let's take similar types of families in similar environments too (countries and cities I mean).
      So a family of 5, 2 parents and 3 kids.

      Person earning 3M is earning 250K a month. Someone earning this much would send all 3 kids to the best private schools, which I believe can cost up to 40K a year. So that's 120K gone for the year -> 10k/month. You live in a house that costs 80K/month at least. You go on three holidays a year which would average to 25K/month (more than 5 stars, flying private jet, best restaurants...). You spend 50K on investments (stocks, options, bonds) You put 50K in the bank. Your food, going out, 20K. Buy a few new cars every year for you and your wife 50K. Well, you're out of money already. He can save less or invest less though. But you see my point is that they can spend a lot.

      If you earn 1M, that's less than 100K a month.
      Kids can still go to private schools, no problem, but those expensive private jet holidays will have to be in first class instead and no 2K/night/room anymore. Only 1 new luxury car a year. Savings can't be that high either and house can't be more than 30K/month...

      Basically, there are always reasons to move higher.

      I have my own income point where I know I'll be very happy at. It's not in that range by the way :D
      (I want to be able to give the same things to my kids as I got)

      But I don't think that taxes of 99% will solve anything... I think it will make people not want to work, just like people escaped the Soviet Union in the 80s... There just won't be a point.

      Also, I know Belgium is not in trouble because of tax progression, my point was that it wasn't helping much.

      I think the socialist idea is great and like I said, it makes sense to give everyone as much opportunity as you can, but what's the point if the opportunity at the start of life just mean that there will be almost no opportunity later on in life ?

    4. What I mean is:
      Let's give everyone free healthcare, free schooling, free secondary education, free tertiary education, let's even help everyone to a job.
      Then what ? Everyone will be earning the same, even if I would have decided to work more, let's say 10 hours a day instead of 7 hours a day, I would barely get half an hour of extra pay out of it. What's the point ?
      What would be the point of starting my own business if I would have to work twice as hard to keep it running and I won't be able to reap any rewards, since I would be taxed at 3 times the rate of other people?

      At some point, work has to get more weight than just opportunity. People in general are not equal in terms of what they want or what they would do to achieve something.

      A is a student in Lundt, he does okay, passes everything. B is an exceptional student in Lundt, he is in the top 1%. They both got to Lundt uni, because they both got the same opportunities, but B is just exceptional. they both join a firm and A again is ok, does his job and then goes home. B is exceptional, stays longer hours and his work is more professional and of higher quality.
      Should A be promoted and be given a raise to give them the same opportunities again ?
      I think not.
      I think B should be paid more, given a promotion and at this point A is behind. Otherwise you'll tend to have mediocre people leading good people and making bad decisions.

      However, if B is not actually paid more, his enthusiasm might diminish after a while, because he IS working longer and better than A and not getting anything for it.
      He might as well just put in 4 hours a day and do his tasks with average quality. He's faster than A anyway, so that should be fine.
      The firm would lose out on a potential star, who could have made the business run better and more efficiently and turned B into just another cog of the machine.

      Even more rambling :D

  3. >So, Mario. You had your shot. Enough austerity. Let's inflate our way out of this hole. >Print some money. And make sure it goes to the masses rather than the 1% for a change.

    Yep. That means 2 Marios from my point of view... We are going to be "safe" in a miserable way.

  4. > Austerity never has begat growth. Never will.

    Yes, definitely.
    But there is another question hiding behind, probably rooting the whole problem : is growth sustainable on the long term?
    Isn't it a way to wash our hands from the mess, only to transmit it worsened for next generations?

    Or should we impulse strutural changes, not to make the state spend less (obviously a bad idea, unless you think social aid has no point) but to make it earn more, despite low or no growth? (to David Ender : therein lies a good deal of François Hollande's victory)

    As you said, that could only be impulsed by Europe - a single land doesn't has enough leverage to make it work nowadays (and moreover, I also am a deep believer in Europe - the fact I don't work today is to commemorate the end of European atrocities of WWII, and being a french married to a german with two bilingual and binational kids helps also to feel like that ;) ).

  5. Re growth, that's worth a whole 'nuther blog post.

    In a nutshell, there's a very common misunderstanding about what growth means in the economic sense, which is not surprising because it's really a pretty bad expression. 'Growth' encompasses all economic activity.

    The problem is that it's often confused with (1) material goods only and (2) resource use. So it's totally obvious that we need to reduce our use of natural resources by a pretty significant amount. That means a combination of (a) consuming fewer material goods (b) preferring renewable resources (e.g. sunlight) to non-renewable or slowly-renewable ones (e.g. minerals) (c) recycling far more, and (d) producing our energy sustainably (see (b)). Interestingly, all of these activities—recycling, producing sustainable energy etc.—produce economic growth.

    So as long as humans keep innovating, it's entirely feasible to have a growing economy that is also sustainable. We do need to change what we produce and how we produce it, but that is not incompatible with growth. Growth will only become impossible once innovation and technological change flattens out, and I can't see any signs of that happening any time soon.

  6. My neighbour pointed out an interesting thing some time ago. His brother is the CEO of a multinational that makes cardboard boxes. Some plants are in France. The multinational wanted to do some restructuring, that was opposed by the unions. That was it, end of the game. The multinational rolled belly up because if they pack up and move production elsewhere the French government will aggressively harras them should they ever want to use France as a market in the future (how this would be done I do not know, but it damn well works because the company is not moving). Bottom line, losing a lucrative market is worse than a marginal lower pay for CEO and shareholders.

    Let's just say, if you stop paying taxes in European country X you just lose your passport after a set amount of time (6 months to a year, to make the threat compelling). Or maybe you just get a punishing high tax rater if you ever return. Are you going to pack up and leave for Mali never to return? No, because even at a higher tax rate many places in Europe are still pretty much better than anywhere else in the world to live in. You can make moving a painful option. European governments need to grow some balls when it come to taxing people -- and I mean it in the sense of taxing the rich more despite them squealing like pigs.

    1. Och aye. Governments do have teeth if they want to use them. There is a feel in the air of the tide turning, I think. At least the Washington Consensus is no longer unassailable; questioning it will no longer automatically get you branded a lunatic hippie. Our rusty democracies still have some life in them, too, and there is a genuine diversity of views out there. The machinery for change is there. It's just a bit rusty. A few good kicks ought to get it moving again.

    2. Well, when the UK government lowered the 50% tax to 45% because rich people needed to have 'more money to invest and create jobs' my darling wife, who has extensive experience in working in the commercial world, pointed out that rich people do not invest their private wealths to create startups and shore up companies, they invest their companies' money, or raise funds from investors for that. Private wealth is invested in houses, cars, mutual funds and whatnot. It is not used to create jobs (aside from the jobs of butler and gardener).

      How many journalists challenged the weeping rich on the issue? A big fat 0. As Ms Palin would say, unfriggin'believable!