The crisis in Europe is complex, complicated and no clear or obvious solution is in sight. So, obviously for the last month, I’ve been on the fool’s errand of trying to get to the essence of it all in order to provide a simple solution.
It is always advisable to boil down seemingly intractable problems down to the few major flashpoints, instead of getting bogged down in the details. Everything else always will fall into place. As I see it, these are the major issues that need attention:
- Germany and the other richer European countries are seen to be solely shouldering the burdens being foisted on them by their irresponsible brethren.
- To deal with the indebted nations, the current three-pronged approach of (i) reducing costs (austerity), (ii) increasing revenues (improved tax collection) and (iii) no debt forgiveness is flawed as the indebted nations needs to be recapitalized to give their people a glimmer of light at the end of the tunnel.
- The bondholders of all this European debt seem to be European banks and any debt write-offs will potentially trigger recapitalization of these banks.
- The Euro is being destabilized because it is increasingly seen as example #1 of failed implementations of fiat currency, despite the various stability funds, packages, etc. that Brussels has cooked up to restore currency market calm.
These issues need to be dealt with before market calm is restored. And for that, a sizable amount of capital is needed. A new European Value Added Tax (or “EVAT”) could be this pot of gold. The EVAT could be potentially useful for the following reasons, especially if implemented as below:
- Politically, it might remove the pressure that the people in the richer parts of Europe feel because the EVAT would be imposed in the poorer parts too. Necessarily, the richer Europeans would still be paying more into the pot, but at least it won’t feel like the poorer Europeans aren’t contributing anything. After all, it is easier to stomach giving a helping hand to those who are also helping themselves, as opposed to those who seem disinterested do-nothings.
- The funds from this tax should be earmarked specifically to to bring down debt-to-GDP ratios of the indebted nations to more manageable levels by either (i) allowing these nations to immediately repay a portion of their debt, or (ii) force the bondholders (i.e. the banks) to write-off the debt and recapitalize the banks in one shot, or a combination of (i) and (ii). The indebted nations are not asked to repay the funds raised from this tax.
- The establishment of an EVAT to specifically deal with promises made by Euro-borrowers to Euro-lenders should give credence to the Euro as a real currency as opposed to a theoretical construct.
- Make the EVAT a time-limited tax that expires once the necessary funds are raised. This could be one year, two years or ten. The tax should be a function of identifying the amount of money needed, setting the percentage such that it is not an onerous tax on consumers and figuring out how much money can be collected in a yearly period.
The chief obstacle to the EVAT seems to be in logistics and implementation. However, I do believe a bold idea, similar in scope, is needed to re-establish the European economy on solid footing and trust the bureaucrats to deal with the devil in the details.
The EVAT is one big idea. So far, nothing I’ve seen is as big. I now turn it over to you, Internet, to debate the merits of the idea, or propose alternatives.
FYI, I won’t be holding my breath.