Published in Business Spectator (Melbourne), 30 January 2014
For a long time, the Bundesbank, Germany’s central bank, has enjoyed a reputation as Europe’s eternal naysayer. Whatever measures were being discussed to save the euro or revive the European economy, the Bundesbank was usually opposed – and increasingly isolated. The Teutonic monetary orthodoxy with its strict adherence to price stability was not shared by many other central banks in Europe, let alone the rest of the world.
Given this background, it is all the more refreshing to see the Bundesbank put forward its own proposal on how to deal with acute debt crises in the future. But on closer inspection, it is plain to see that the Germans are as orthodox as ever, and they will probably also be just as isolated.
The Bundesbank’s idea is neatly hidden in its monthly report for January. (At the time of writing this column, it is only available in German; English translations usually follow a few days later.) Hidden right in the middle of a lengthy document, in a light grey box, there is political dynamite for the eurozone. It starts in neat diplomatic language:
“In the current public debt crisis, there have been strong doubts whether individual members of the European Monetary Union would be able to service their debt or if they would be able to reach necessary measures politically.” That is a nice way of describing the utter chaos that fears of a sovereign default somewhere in Europe triggered not so long ago!
However, after this introduction, the Bundesbank goes on to reiterate its core beliefs: that whatever political assistance packages were put together as a response to the debt crisis, they represented a pooling of liabilities without a corresponding integration of fiscal responsibilities. The central bankers repeat their well-known position, which maintains the validity of the non-bailout clause as well as the rejection of outright monetary interventions to rescue insolvent governments.
If there cannot be any bailouts of one government by another, and if the European Central Bank should not intervene, what other options should be considered? According to the Bundesbank, there is one alternative that would be both effective in solving the debt crisis as well as compatible with European treaty law: countries in crisis should apply a one-off wealth tax on their own citizens to clear a large chunk of their debts in one go.
The idea, of course, is not entirely new. I wrote a column about it a couple of years ago (Putting Greek lessons into practice, 23 June 2011), which considered ways of paying off all government debt within a decade by taxing all forms of wealth. During the Cyprus crisis last year, for a brief while it looked as if all Cypriot savers could be hit by a massive tax on their deposits.
What the Bundesbank now proposes is more ambitious than what was discussed during the Cyprus crisis; rather, it heads in the direction of what my column suggested. Though the report does not put a precise figure on it, it is clear that what the Bundesbankers have in mind is a substantial tax on wealth. Late last year, the IMF had also published a similar thought experiment and suggested a 10 percent tax, and by the sounds of it the Bundesbank is now going in the same direction.
To administer this tax, the Bundesbank suggests a list of requirements. It should be clear that it remains a one-off tax and not a new regular source of revenue. It should also be introduced quickly to limit the options for tax avoidance. Finally, it should be a defence of last resort in the fight against a sovereign default.
Even under these conditions, the Bundesbank readily admits there would be problems with a wealth tax. Questions of credibility may arise with the Bundesbank’s promise that this would be a singular measure, never ever to be repeated. But in a crisis, potentially with riots in the streets and runs on the banks, who would believe politicians’ assurances?
The next problem is timing. If all kinds of wealth, including non-financial assets, are to be the base of a one-off tax, how would they be assessed quickly? If it cannot be done in a short time, there is a danger that capital would either flee the country or that the tax simply would not flow fast enough to have a significant impact on public finances.
Then there are unpredictable spill-over effects. There is no guarantee that a special wealth tax introduced in, say, Italy would not make Spaniards nervous as well. How credible is it that a one-off tax applied in one eurozone country today could not be copied by another eurozone country tomorrow?
The Bundesbank concludes that the risks of a one-off wealth tax are enormous. Nevertheless, it believe that among bad options for dealing with a sovereign debt crisis, this may be the best one. After all, it keeps one country’s problems confined to this one country. It maintains the principle of national self-responsibility. As a matter of fact, and as a most welcome side effect, it also protects Germany from demands of its neighbours.
Unfortunately, there remains another minor problem that the Bundesbank does not even mention in its considerations. Even if a one-off wealth tax of, say, 10 percent on all deposits and property were to be introduced tomorrow, this would only ameliorate Europe’s debt problems – but it would not eliminate them.
According to calculations published in the conservative daily Die Welt, a 10 percent wealth tax would, for example, yield €742 billion ($A1163 billion) in Italy. However, 85 percent of the tax’s revenue would result from property taxes – good luck trying to collect these taxes in Italy! But even if the Italians managed to collect the tax in full, the debt to GDP ratio would fall from 130 to 83 percent of GDP. Sure, that’s a few steps away from sovereign default, but solid public finances look different.
Some observers were surprised to see the Bundesbank openly ponder the chances of a wealth tax. There is very little in the Bundesbank’s proposal that is either new or practicable. As always, the Bundesbank is vigorously defending German taxpayers’ and savers’ interests, probably more so than Germany’s elected politicians. There is not the slightest departure from the bank’s well-known orthodoxy on fiscal integration and monetary interventions. The alternative sketched in the Bundesbank’s proposal, however, remains too faint and timid to really appear like a plausible silver bullet to Europe’s debt problems.
The only thing the Bundesbank has achieved is probably this: it has made itself a little less popular with other European central banks. That’s quite an accomplishment in itself.
