Economic Science and the EU

June 22, 2013

Every few decades or so we are brutally reminded that the global economic system can experience serious dysfunctions and that the science called upon to find the necessary remedies is rarely, if ever, up to the task. The latest controversies among economists regarding austerity policies or possible solutions for dealing with sovereign debt are a case in point.

The head of the IMF’s research unit and potential Nobel-prize recipient, Mr Olivier Blanchard, has recently revealed that his institution is partly responsible for botching the rescue of Greece and, by miscalculating the impact of austerity policies, for plunging Spain, Portugal, Italy, Ireland and even the Netherlands into recession (Alternatives économiques).

In a parallel development, a 2010 study by former IMF chief economist Kenneth Rogoff and Carmen Reinhart of Harvard University has stirred up a huge controversy involving three economists from Amherst University and Nobel-prize laureate Paul Krugman. The study claimed to have found a connection between economic growth and public borrowing: whenever government debt rises above 90 percent of GDP, the data available seems to indicate that growth slows down, although the authors freely admit that they are not entirely sure if higher debt leads to slow growth or whether it is the other way around (The Economist).

Almost as influential among EU finance ministers is a second Harvard study, “Large Changes in Fiscal Policy : Taxes vs. Spending “, authored by Alberto Alesina and Silvia Ardagna. According to it, deep cuts in public spending generally lead to economic expansion, not to contraction. As the two have explained during a meeting in the spring of 2010 with Ecofin ministers, austerity policies give the private sector the confidence it needs to increase their investments, which compensate for the budget cuts . The study found a convert in Jean-Claude Trichet, who claimed the same year that

[…] the ideea that the austerity measures could bring about stagnation is incorrect […] I am firmly convinced that in the current circumstances such policies that inspire confidence would reinforce, not affect the economic recovery because today’s essential factor is confidance.” (as quoted by P. Krugman in New York Times)

This is all academic, one might say. Only, in an unfortunate turn of events, Mr Rogoff’s or Alesina’s studies determined the European Union’s neoliberal-leaning politicians to adopt stringent austerity policies aimed at reducing public debt, thus bringing about the current recession on the continent. As Mr Rogoff argues, however, his recipe for debt reduction involved not austerity, but writing down bank debt, allowing for some inflation and using “financial repression” techniques.

This, of course, is not the first time that the IMF’s policies have gone tragically wrong, or that macroeconomists’ advice has fallen short of expectations. The ‘dismal science’ – a nickname for economics that many Asian, Latin American and European nations would readily approve as appropriate – is after all relatively young and imperfect.

In fact, during the discipline’s two and a half centuries of evolution, the most influential theorists were actually members of entirely different professions. As we know, Adam Smith was initially a customs agent and a professor of moral philosophy; David Ricardo – a stockbroker; Thomas Malthus – a pastor; Quesnay and Juglar – medical doctors; Marx – a philosopher; and Leon Walras – a mining engineer and journalist. As a rule of thumb, policy recommendations by economists have not been consistently successful to date, when they were not ignored by governments on ideological grounds. Even well-known policies such as Roosevelt’s New Deal were discontinued before they could produce their full effects, such as solving mass unemployment in the US. The latter, as J.K. Galbraith pointed out, was solved not by the adoption of macroeconomic policies, but inadvertently by Hitler, who decided to wage war on the West.

The current economic climate tends to lend full credibility to Keynes’ stagnationist thesis, as it bears many similarities to the long period of stagnation following the 1929 crash. His thesis is again influencing business people and social scientists alike, making economic recovery a distant and uncertain prospect, especially within the EU.

When Elites Expire

 

June 1, 2013

It has been almost a century since O. Spengler heralded the decline of the West. Apart from a 30-year hiatus between 1945 and 1975, this decline has become irreversible, a development even Samuel Huntington was forced to acknowledge.

One of the most telling symptoms of the west’s fall from its former pre-eminence is its citizens’ disenchantment with elites. In its April 25, 2013 issue, the French magazine Marianne has published an opinion poll which shows that only 25 percent of the French public still trusts their national politicians, regardless of party affiliation. This low score is consistent with an IFOP poll from 2012 where just 25 percent of respondents have said they still have faith in the capitalist system.

Sure, in the massive, EU-wide rejection of capitalism and its elites, it could be tempting to read a mere repeat of the social and political developments which followed the Great Depression of the 1930’s. Today’s prolonged economic crisis, the lack of job opportunities for the 20 million European unemployed and the harmful policies of austerity adopted so far seem to justify such a parallel. This time, however, the people’s disgust with their elites in the west is squarely focused on the 1 percent who profited hugely from three decades of neoliberalism, as well as on the associated political and intellectual elites who helped them along the way.

The rise of stateless corporations

In their quest to avoid paying corporate taxes, old-style multinational corporations have transformed themselves during the 1990’s into global entities. Their number increased from around 2,000 to 63,000 and they moved their financial operations to fiscal havens or to countries known for very low tax rates, such as Ireland. They were joined there by the richest 1 percent of the west’s individuals, with disastrous results for the public finances of their home countries.

According to James S. Henry, chief economist of leading management consulting firm McKinsey, the amount of money shifted offshore has reached 26,000 billion dollars in 2012. Half of this fortune belongs to only 91,000 people, or 0.001 percent of the world’s population. The other half is owned by 8.4 million citizens (CEO’s of multinationals, founders of SME’s, financial consultants and so on), or 0.14 percent of the world’s population. (Alternatives Economiques)

The most accomplished tax evaders are the big corporations whose complex “fiscal optimisation” schemes are devised by tax consultants working for the Big Four international accounting houses. Over the last decade, the ranks of the latter have swelled to 700,000 people, garnering 100 billion dollars per year in fees. (Stern)

Consequently, corporations like General Electric are currently able to pay only 2.3 percent tax on their profits; Google pays 2.4 percent. The burden of taxation in a country like France is heavier for companies with less than 20 employees: around 30 percent. By contrast, the CAC40 corporations pay only 8 percent in tax on average. Between 2007 and 2009, 40 percent of all tax revenue from CAC40 companies was collected from only 4 corporations – EDF, GDF Suez, Renault and France Telecom – in which the state is a stakeholder. Regardless of this fact, the current Socialist government is considering selling off its share in the abovementioned corporations.

As US Senator Levin has stated, tax avoidance by US corporations has diminished the share of corporate taxes to just 9 percent of federal government revenues. “A recent study found that 30 of the largest US multinationals, with more than 160 billion dollars in profits, paid nothing in federal income taxes over a recent three-year period” (Senator Levin, in The Economist).

The attitude of the new breed of stateless capitalists was best expressed by Eric Schmidt in an October 2012 interview:

I am very proud of the [tax] structure that we set up. We did it based on the incentives that the governments offered us to operate…It’s called capitalism. We are proudly capitalistic. I’m not confused about this.

An accommodating political elite

Political elites in leading western countries are remarkably homogenous, the products of a limited number of academic establishments. British politicians usually come from Oxford or Cambridge universities; the French political elite is educated at the Ecole Nationale d’Administration (ENA) or the Polytechnique, whereas leading US politicians are usually graduates of Harvard, Princeton or Yale. Firm supporters of neoliberalism or believers in social-liberalism, politicians belonging to these elites are spending the little capital they have left on promoting further privatisations and on defending the austerity policies that have brought most western economies to a standstill. In the United Kingdom even the privatisation of police services is underway. In France, former minister and current IMF director Christine Lagarde has opened the way for private justice to replace the state court system in a landmark (commercial) case in which Bernard Tapie of Adidas fame was awarded 400 million euros of public money in 2008. In many countries across the European Union leading politicians have been involved in mega-scandals involving serious financial fraud (Jerome Cahuzac in France, Silvio Berlusconi in Italy, Adrian Nastase in Romania and the examples go on).

Past solutions won’t work

Although the dire consequences of tax avoidance by corporations and individuals call for resolute political action, western political elites continue to demand more sacrifices from the middle- and working classes instead, in the form of higher VAT, increased taxation or diminished social benefits. Thus, experts like Nicolas Shaxson do not believe leaders such as David Cameron when they say they will now put an end to EU-wide tax evasion which, according to Mr. Barroso, is worth 1,000 billion euros. His assessment is shared by The Economist :

“[…] there are strong vested interests behind today’s flawed system. Chief among them are the governments of places that benefit from acting as tax havens, which are not just small tropical islands but include Luxembourg, Ireland (which gains jobs from hosting some of Apple’s subsidiaries) and Britain, which has a tradition of being relatively lenient on firms that break, as well as bend, the tax rules. So it will be no surprise if any reforms that emerge from the current political fury will do no more than tinker.”

People’s anger with their political and business elites has reached levels not seen since the time of the Ancien Régime in France. The problem, primarily, is not the mismanagement of state affairs, but, as Montesquieu put it in his 1721 Lettres persanes,

“Le plus grand mal que fait un ministre sans probité n’est pas de desservir son prince et de ruiner son people, […] c’est le mauvais exemple qu’il donne.”

Arnold Toynbee explained that when the elites lose touch with the rest of society or even become toxic for it, the civilisation they used to lead is about to implode. The challenge for progressive social scientists now is not to attempt to delay the inevitable, but to articulate alternative visions of our possible future instead.

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.