Fiscal Optimisation and the Crisis of EU Democracies

 April 6, 2013

After more than four years of misguided austerity policies, the sharp economic downturn is about to claim its latest victims – Europe’s democracies.

During the sovereign debt crisis, politicians in office – regardless of party ideology – have been forced to resort to hugely unpopular budget cuts and to increase taxes for the middle and working classes. These pro-cyclical policies have generated massive unemployment, leading to street protests, with no change in sight however. Nowadays, major economies like France have stopped growing altogether, whereas Italy, the European Union’s third largest economy, faces its second year of negative growth.

More importantly, the political fall-out could bring about a second implosion of democracies in Europe. Disillusioned with traditional political parties on the left or on the right, European voters in search of solutions are turning to extremist and populist parties, when they bother to vote at all. Thus in Belgium, for instance, the polity has failed to form a government for more than a year; the recent Italian parliamentary elections have ended up in deadlock; and even in France – where the socialists won a clear majority in 2012 at local, regional as well as national level – the popularity of the government is below 30 percent. In Spain, the ruling conservative party can hardly muster more than 25 percent of voting intentions, with the socialist opposition faring worse than that. The same is true for EU members like Bulgaria and Portugal, countries nevertheless hailed as “successful” pupils of the troika.

The breakdown in the social and political consensus in all these countries is the logical result of the tax avoidance strategy adopted during the last few decades by the top 10 percent of income earners, companies and individuals alike. Through what have become known as “tax optimisation” practices, a full one third of the global GDP has been tucked away in some 60 tax havens around the world. This has provoked serious budget shortfalls for many EU member states, which the adoption of austerity policies has only aggravated.

Depriving states of much-needed revenue has ben made possible by favourable laws regarding tax shelters and by the milking of tax loopholes, essentially benefitting the rich. This has enabled the European Union’s largest banks such as Deutsche Bank, BNP Paribas or Credit Agricole to offer their customers the option to avoid paying taxes, by facilitating the opening of offshore bank accounts on their behalf. If we add to this lax or almost inexistent (in the case of Greece) tax collection by fiscal authorities, we could better grasp why and how the sovereign debt crisis came about.

The recent scandal involving the French Budget Minister Jérôme Cahuzac illustrates how fiscal laxity is made possible. Himself the holder of an undeclared Swiss bank account, Cahuzac was supposed to enforce the collection of some 60 billion euros in unpaid taxes per year, representing two thirds of the country’s budget deficit. In practice, however, French fiscal authorities are only able to collect between 10 and 15 billion euros of this sum in a given year. This has pushed the government to impose additional taxes on the hapless other 90 percent of the population, weighing down on those not fortunate enough to benefit from offshore banking services. Across Europe – in Germany for example – similar, meagre tax recovery rates are the norm, leaving VAT collection to make up the bulk of states’ fiscal revenues.

Economists are fond of looking up to northern EU members like Sweden or Denmark, as models of competitive economies. In reality, if we are to avoid another imminent implosion of democracy on our continent, the rest of the Union should emulate the Scandinavian countries for their clean, transparent and efficient political establishments. Failing this, we will witness the rise to power of populist and extremist parties – a process that has already begun in earnest. Start collecting back taxes now !