At Odds with Europe

 May 11, 2013

Since its reunification 22 years ago, Germany has become the leading economic power in Europe. The sovereign debt crisis has offered it the opportunity to translate economic might into political clout within the EU. Problem is, as the austerity policies currently ravaging the continent illustrate, German politicians – from both the right and the New Left – are rather ill-prepared for such a responsible role.

This assessment belongs to former Chancellor Helmut Schmidt, who in 2011 cautioned his party and conationals against issuing economic diktats and against insensitivity to the plight of other, economically less fortunate, EU members (speech re-published by Alternatives Economiques in 2012). He mentioned the fact that the German trade surplus had been obtained at the expense of other countries’ deficits. (Gerhard Schröder labour market reforms prevent Germany from acting as consumer of last resort in Europe, as the purchasing power of millions of Germans has suffered severe reductions over the past few years. The current leadership’s refusal to introduce a minimum hourly wage and its insistence on the imposition of draconian austerity packages in Southern Europe have greatly unsettled a majority of its partners within the Union).

In this election year, German politicians would therefore be wise to keep in mind Helmut Schmidt’s sensible advice:

“Taking into account our central geopolitical position, our unfortunate role in European history until the middle of the 20th century, as well as our current economic performance, the German government has to take the particular care of the interests of our European partners. Such altruism is indispensable.”

Hedging One's Bets

 May 2, 2013

At the periphery of the European Union, two candidates for membership are trying to hedge their geopolitical bets.

Turkey, the largest of the two, is a long-standing NATO member but has also gained recently ” dialogue partner “status within SCO (Shanghai Co-operation Organization) , which includes China, Russia and four of the “five stans”. While some Western analysts consider Turkey’s SCO membership bid as a bluff used by Ankara in order to speed up EU accession talks, insiders claim that the move is intended to bring in line its military alliances with the country’s new geopolitical agenda, as well as to secure access to the oil and gas reserves from Central Asia. On the 29th of April 2013 Secretary General of the Shanghai Cooperation Organization (SCO) Dmitry Mezentsev has stated that the “dialogue partner” status given to Turkey would make the organization more influential. ( as quoted by Turkish Weekly )

Mezentsev’s positive remarks came after Turkish Foreign Minister Ahmet Davutoğlu commented on further Turkish-SCO cooperation on Friday. “ We declare our destiny to be the same as that of the Shanghai Cooperation Organization countries,” . (Today’s Zaman )

The same negotiating difficulties with the EU determined Serbia to apply for membership within the CSTO (Collective Security Treaty Organization ) , a military alliance founded in 1992 by Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. Serbia obtained candidate status last year and was given observer status as of April the 11 this year. According to general Leonid Ivachov, former director of international military co-operation within Russia’s defense ministry, Serbia’s possible membership of the CSTO “ represents a breakthrough for Russia and its allies, which will help it defend its geopolitical interests in Southern Europe “. (Nezavissimaia Gazeta from Moscow, as quoted by Courrier International ) According to Ivachov, Serbia’s membership also gives Russia the possibility to deploy in the Balkans peace keeping forces and to extend to Belgrade military aid on very favorable terms.

Meanwhile, both Serbia and Turkey continue to negotiate with Brussels and are making sustained political efforts to mend fences with the Kossovars and the Kurds, respectively.

China and the EU Model

 April 20, 2013

For almost two years now I have avoided dealing on my blog with China’s spats with Japan, its tensions with ASEAN partners or its apparent inability to reign in the excesses of its obstreperous North Korean protégé.

Although China is fast becoming an economic superpower, its foreign policy has remained far less successful than its economic performance. The seeming lack of interest among top Chinese leaders in framing a foreign policy to match their country’s economic might and long-term strategic objectives is disquieting. Their failure to deal with rather minor territorial disputes successfully could indeed jeopardise China’s economic agenda in the long run, as well as undermine stability and prosperity in Asia.

One of China’s leading objectives, for example, had been that of creating by 2015 a common Asian market, emulating the European Union. These days, however, tensions in the South China Sea between it, on the one hand, and Vietnam and the Philippines, on the other, are endangering its economic integration agenda with ASEAN. In fact, had the European Union’s integration model been studied more carefully by the Chinese, they would have noticed that in Europe the process started with France and Germany putting behind them their long-running territorial disputes and deciding to share resources essential to growth, like coal and iron.

The gap that has developed between China’s long-term integration objectives and its rather medieval attitudes in dealing with neighbours and their territorial claims has instead played into the hands of the US, not otherwise known for excellence in the field of diplomacy.

As cheque-book diplomacy or old-style kowtow policies are inappropriate for China’s current status even in our post-modern times, the new Chinese leadership should urgently seek to frame a foreign policy which closely matches their country’s long-term interests and its standing in Asia.

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 !

Time for the EU Parliament to Act on Corporate Taxes

 March 28, 2013

Now that Cyprus has ceased to be an offshore financial centre, Martin Schulz and his colleagues have the opportunity to go a step further and tackle the issue of unpaid corporate taxes within the European Union over the past ten years. According to The Economist, the amount of money spirited away by corporations avoiding taxes has reached the staggering global figure of 20.000 billion dollars, deposited in some 60 financial havens.

National EU governments are powerless to redress such massive tax avoidance practices that currently cause mass unemployment and a dearth of financial resources for their treasuries. Corporations , especially from outside of Europe, have been quick to speculate national politicians’ desire to attract FDI, and have extracted unreasonable concessions from them for establishing operations within the EU.

To contain the public’s outrage, gimmicks like the ones employed by premier David Cameron in Britain – getting some US corporations like Starbucks or Apple to make symbolic financial contributions – are simply not acceptable anymore. Such policies will do nothing to deter corporations, which make their profits off the backs of EU consumers and governments, to renounce their massive tax avoidance schemes in the future.

The European Parliament could thus impose a flat 30 percent tax rate on profits made within the EU and deposited offshore by European, Japanese or US corporations. This rate of taxation could subsequently be adopted as the EU-wide minimal norm.

The sums involved in the recovery of back taxes could be as high as 3.000 billion euros, to be collected by national governments. Some of the money thus recovered could go towards shoring up the EU budget and enhancing the pool of money available to the European Stability Mechanism, enabling the latter to deal with problems experienced by countries like Italy. This prevents the tendency of some governments to want to impose top tax rates of 75 percent or more. By the same token, the European Parliament could forbid countries such as Ireland to act as tax avoidance hosts in keeping their corporate taxes exceedingly low. Finally, the European Parliament is the right institution to legislate and mandate member states to : collect corporate taxes there where profits are being made; outlaw transfer pricing and other tax avoidance techniques; and eliminate tax loopholes from national member-states’ legislation.

To be sure, this is no easy undertaking, but in these disastrous economic circumstances exceptional measures are needed, if we are to avoid the implosion of democracy and the parallel rise of populist and fascist parties in Europe.

Today's Predator Class

 March 26, 2013

The days of Cyprus as an offshore banking centre for rich Russians or Britons are well and truly over. All things considered, however, the 30 billion dollars held by them in Cypriot bank accounts is a paltry amount next to the 20 trillion dollars held by Western corporations and individuals in some 60 fiscal havens. ( The Economist)

For a while now, the G20 political leaders have been promising concerted action against these tax shelters. So far, nothing of substance happened, though such bellicose declarations make for great television .The absence of results in this area will irreparably damage the reputation of concerned politicians, highlighting their utter impotence .

Consider for a moment Apple, for instance. The US corporation holds in its treasury no less than 147 billion dollars. For years, its directors refused to distribute dividends to shareholders, let alone pay normal tax rates. The iconic i-pod and i-phone manufacturer builds them cheaply in China; distributes them at premium prices in the West and stashes away the profits on an island .

Bare a few exceptions, this new breed of entrepreneurs and corporate top brass are, at best, a mixed blessing for the global economy. Sure, a large quantity of consumer goods are being produced and sold around the world. But who benefits from it all? Certainly not the workers, the host states or the consumers . If Henry Ford believed a corporation should pay decent enough wages to workers, to enable them to buy the goods being produced, no such scruples bother today’s business leaders; A large amount of corporate time and money is being devoted instead on devising ways to avoid taxes, circumvent national legislations or fight in court against fines imposed on their excesses in some parts of the world, notably in the European Union

These regressive ways of doing business are mainly responsible for the high unemployment rates in the West, a dearth of financial resources affecting governments, whether rich or poor, and low growth rates, even as enormous amounts of unspent cash sit idle in fiscal havens. Not surprisingly, many leading economists believe that this harmful form of capitalism has to end, although there is not yet a consensus as to how. Failing this, we may very well witness the implosion of the whole system as we knew it for the past few hundred years.

Capitalism and the Great Stagnation

 February 9, 2013

At the latest annual forum in Davos, someone came up with the bright idea of including inequality, a growing concern in the west, on the agenda of the gathering. Naturally, the subject stood no chance of being discussed, as participants claimed to be haunted by the spectre of uncertainty and economic stagnation instead (Time).

The issues of inequality within the western world and of the current state of the capitalist system have been dealt with in The Economist ‘s October 13th, 2012 Special Report. The conclusion of the report was that inequality, as measured by the Gini coefficient, has not only increased at alarming levels over the past 30 years, but that delaying measures of reversing this trend would impair the performance and stability of western countries for decades to come. The policies recommended – providing better education for the poor, ensuring a more efficient allocation of welfare resources, means testing welfare recipients, dealing with crony capitalism – are the hallmarks of progressivism.

The same month in Florence, a gathering of economists from Spain, Italy and France has founded the European Progressive Economists’ Network (E-PEN). The new association is open to economists from all EU member countries and is lobbying for an end to the austerity measures that are ravaging the old continent, for the generalisation of the Tobin Tax and the urgent adoption of policies aimed at kick-starting economic growth. Some progressive economists are calling for the reintroduction of progressive taxation, deeming as optimal an 80 percent rate for the top income bracket.

To be sure, the economic and social climate have deteriorated over the past 5 years to levels not seen since the Great Depression. After 30 years of neoliberalism, most western countries including the United States have turned into industrial wastelands and are affected by stubbornly high unemployment rates, anaemic growth and a sharp fall in the incomes of workers and middle classes alike. While the coffers of many corporations are bulging with liquidities, most long-term investments for developing new products are shelved in favour of financing innovations in labour-saving devices, a fact that could only aggravate unemployment. As a result, the reputation of capitalism as a system is now in tatters. In a December 2010 IFOP survey, only 15 % of the French, 25% of Italians, 40% of Germans and 45% in Britain have expressed support for capitalism.

A mere two decades after the fall of communism, capitalism itself is being exposed as obsolete and, to a large extent, harmful for humanity’s current and long-term development prospects. Its decline has become evident in the 1970’s – today it is proving irreversible. Sure, the conservative revolution begun in the ‘80s – that engendered the mass privatisation of state assets, deregulation, outsourcing, offshoring, downsizing – has, for a while, looked good on paper and exponentially increased the incomes of the global 1 percent, though at the expense of everyone else. To defend these policies on a global scale, David Rockefeller founded in the 1970’s the Trilateral Commission, a kind of Opus Dei of the capitalist system. As history accelerates itself, however, just as it had taken Catholicism a few centuries to lose its power after the Reformation, a few decades of steep decline seem to have done the job for capitalism. The fact that it is still touted as “the end of history” or “the only possible alternative” has to do with denial, inertia, fear of the unknown and a certain laziness affecting our political and intellectual elites.

On the other hand, the working classes have for a long time accepted a flawed vision of capitalism. According to the supporters of the Marxist-Leninist vision, every shopkeeper, every owner of a piece of land, a small factory or a restaurant is, necessarily, a capitalist, when in actual fact they are but minor players of the exchange economy:

“Every day and every moment, small-scale production gives birth to capitalism and to the bourgeoisie, in a spontaneous manner. […] Capitalism appears where small ownership and the free exchange of goods still survive. […] Capitalism starts with the rural markets.” (Lenin, Selected works)

This confusion is largely responsible for the mass tragedies that accompanied the implementation of the Marxist theories in practice within the communist world, until the Chinese experiment.

As Fernand Braudel’s three-volume opus on the history of capitalism demonstrates, the exchange economy precedes capitalism. According to him, only a small number of market players deserve the label of capitalists, or have any real power over the economic system:

“Capitalism is increasingly viewed as a superlative [F.B.] . Who is popular revolt aimed at in France ? Against trusts and multinational corporations. […] The stand I buy my newspaper from is not capitalist-related. […] Nor are artists’ workshops capitalist, or the small independent enterprises – what we in France call the ’49ers’; these enterprises do not want to reach the ominous number of 50 employees, because of the tax and union implications that entails.” (Fernand Braudel, Les Temps du Monde, p.545)

Braudel’s analysis also proves that modern states, bare a few exceptions, have not been mere instruments in the hands of the affluent. Moreover, history proves the existence of a love-hate relationship between the two, which since the 1980’s has steadily tilted towards hate, directed against the state administration and its powers of taxation. (Strangely enough, this is a sentiment that capitalists share with communists, whose founders, as we know, had proposed abolishing the state altogether…)

Braudel’s work is equally important in other respects, for it implicitly disproves capitalism as an evolutionary system. Thus speculating in shares, of Goldman Sachs notoriety, or the betting for and against the same shares by the same operators , as well as recurrent financial crises, had been standard fare during the 17th and 18th centuries on the Amsterdam Stock Exchange . The tax avoidance industry, as well, has been a hallmark of capitalism from its early days, as is the propensity of states to shift the burden of taxation on the working classes via levies on consumption .

As inequalities between states have diminished over the past few decades, they have increased internally within each state, especially in a number of leading western countries. Accordingly, the adoption of policies capable of arresting and reversing such trends is needed and should go beyond band-aid measures aimed at ensuring the survival of the capitalist system.

Update* Lexington’s column published by The Economist on February 23rd, 2013 on page 38 illustrates the inability of western political elites to deal with the current economic stagnation: ” Today, honest politicians feel something closer to impotence: they are unable to bring the old economy back, and have yet to figure out a sustainable replacement. That leaves much of Washington haunted by a guilty dread of voters, and of the populists who successfully channel the public’s anger, fear and disappointment […] Voter anger fuel the tea-party and anti-government groups thatdrag the Republican Party to simplistic solutions on the right. On the left, voter expectations tempt Democrats, starting with Barack Obama, to pander and hint thatonly modest adjustments are needed to entitlement spending. ” QED …