A Simple Solution: Europe-Wide Tax

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:

  1. Germany and the other richer European countries are seen to be solely shouldering the burdens being foisted on them by their irresponsible brethren.
  2. 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.
  3. The bondholders of all this European debt seem to be European banks and any debt write-offs will potentially trigger recapitalization of these banks.
  4. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Cross-posted at Seeking Alpha: A Simple Solution: Europe-Wide Tax

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9 Responses to A Simple Solution: Europe-Wide Tax

  1. zolltan says:

    Wouldn’t the EVAT, to the extent that this it is a good source of revenue, be a further heap of austerity on the citizens of the poor countries? I also dunno to what extent “misery loves company” is a good political selling point with which to buy support in rich countries. But I think I can make sense of this more generally. What you are trying to get here is political integration in a way that implies “by the way, we’ll totally undo this political integration thing once everything’s cool, so don’t worry about it, People of Europe!” right? If only there was a way that this could be made believable (and, importantly, true)! Somehow the fact that the financial management of Europe is totally opaque and undemocratic – and additionally pretty incompetent – makes me dubious.

    • Zuuko says:

      Austerity refers to government expenditures, and not personal finances of the citizens. Is EVAT another tax on Europeans? Yes. Are they overtaxed? In my opinion yes. At the end of the day, its citizens that pay for the mistakes of their governments. The austerity that I’m referring to is for their governments only which need to be recapitalized and have some form of austerity imposed. The recapitalization involves the debt being paid back or forgiven and proceeds from the EVAT could be used for this purpose.

      I think you’re slightly off-base in the “we’ll totally undo this political integration…” comment. What I’m suggesting is further integration and one, that if you wanted to reverse it, would be more like breaking up a country. So, its not a “don’t worry about it, People of Europe!” Its more an attempt to say “This is for real. For shizzle.”

      Go back to my previous post, Europe: Is the Sum Greater than the Parts. I really do believe that Europeans are at a fork in the road. What you’re suggesting is half-assing it. They really need to pick and commit to whatever fork they choose and commit to it.

      • zolltan says:

        Oh, I agree that it’s either political integration or economic disintegration for Europe. But the problem with political integration (you yourself pointed it out) is that the people of Europe REALLY REALLY do not want it, even if elites do. Thus I interpreted the sunset clause of your EVAT suggestion to be a spoonful-of-sugar to help assuage peoples’ fears by suggesting that political integration can be rolled back once the crisis is over.

        As I think we both implicitly agree, it actually can’t and won’t be.

  2. ethnobongo says:

    Isn’t the problem effectively that countries like Greece have bit off more than they can chew? Isn’t bailing them out effectively like giving a screaming child a candy bar to shut him up? Shouldn’t they just be allowed to fail and suffer the consequences? Are any lessons learned when there’s always someone there to clean up the mess?

    • Zuuko says:

      Define failure and consequences. Think what that could mean for a country. Failure of a country is defined (by me anyway) as: country defaults on debt, country’s debt needs restructuring, government must cut budgets, improve revenues, the economy is going to be in the shit for a generation, their best and brightest will be leaving the country, their neighbours and peers will outstrip them, etc. By that definition, Greece is a failure and is going to suffer the consequences. It will be a long and painful restructuring of the entire economy. How exactly is Greece being sheltered?

      That said, the problem Europe’s facing right in this particular moment which needs solving right away is that the amount of debt that needs restructuring is too massive for Germany to absorb by itself. If the bondholders are asked to suffer losses, then the banks need money from Germany because their equity levels are too low. Or Greece needs money to bring their debt levels down immediately. Whatever way you slice, there needs to be another source of revenue and my solution is some kind of Europe-wide tax.

    • zolltan says:

      Obviously you and Zuuko know the financial and economic world much better than I do, but I disagree with this interpretation for about 70 different reasons.
      (a) ditto Zuuko, what part of negative GDP growth, giant debt, massive unemployment, huge protests, deadly riots and general strikes is the part where there are no consequences?
      (b) If the fault was the Greek government’s, the consequences are being borne by the nation. And by other people who aren’t even in Greece.
      (c) If the fault was excessive pre-crisis debt for Greece, what is the fault of Spain, for instance? What lesson are you hoping that Spain learns?
      (d) Wouldn’t letting Greece fall be cutting the nose to spite the face? Who does it help if Greece is insolvent? German banks? (no). If it helps assuage some sense of cosmic justice to you but everyone is worse off as a result, well then to me that’s immensely not worth it.
      (e) If it comes to that, why is it so clear that the ones needing to be taught a lesson are the Greeks and not the bondholders?
      etc. etc.

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