By Philip Pilkington, a journalist and writer based in Dublin, Ireland
We hear it time and time again: EU taxpayers are paying for the bailouts in the European periphery. The problem with this statement? As popular as it may be in the media right now, it’s not quite true – at least, it’s not true if you take a proper macroeconomic perspective on the crisis rather than looking at it through the crass lens of nationalism.
This isn’t an argument being put forward by third-rate hack writers either; no, it wasn’t cooked up in a stinking pot of garbled prose stew by a Thomas Friedman. It is instead a fallacy peddled by some of the most respectable writers in business.
First of all, no taxpayers have actually been ‘charged’ for the bailout of the Eurozone periphery. This may seem like an obvious point but the more people I talk to about this the more I feel that it needs to be described as clearly as possible: The German citizenry have not incurred a ‘PIIGS tax’ to fund the bailout.
To be fair, better commentators don’t usually make this assertion, but their arguments do often follow an ‘as if’ logic. They state that the bailouts are putting taxpayers’ money at risk and then they carry on as if poor Hans and Gretel have already had to fork over their left leg to fund the profligate PIIGS.
Take the following article by Otmar Issing that was run in the Financial Times recently. Issing moves from correctly stating that taxpayers’ money is being put ‘at risk’, to a vague moralising about how the stoical core will have to float the profligate periphery. Queue: talk about ‘fiscal discipline’, ‘free riding’ and ‘transfers of taxpayers’ money’.
Don’t be fooled by Issing’s crass use of phrases such as ‘no taxation without representation’, he’s not so much worried about the difficulties inherent in creating a truly federal Europe. His real message is quite clear – although from his sometimes purple patches of rhetoric you might have missed it:
A monetary union with a stable euro can only survive if central bank independence is fully respected. This implies that the European Central Bank abstains from fiscal policy actions.
…it [i.e. allowing pan-European fiscal policy] is a move on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness.
Question: is Issing an anti-EU nationalist? I would be fine if he is – I think anti-EU nationalists have a respectable opinion that deserves to be heard – and in such a case his rhetoric might make sense. But he gives off airs that he is, in fact, a committed Eurocrat (and he has the credentials to boot). This makes no sense. His argument is fundamentally anti-Union – at least, from the perspective of the current union as it actually exists. What he’s doing is sneaking nationalism through the back door via the seeming rationality of, as he puts it, ‘central bank independence’ which he – rather curiously – equates with the ECB abstaining from fiscal policy.
Okay, maybe I’m being unfair; maybe Issing doesn’t actually understand the EU project itself. Maybe he has forgotten the goals set down by European leaders after WWII amidst the current economic turmoil. Or maybe he was never wholly clear on what Europe was imagined to be by these men and women because he always thought in the moral terms of the Stability and Growth Pact – that is, deficit reduction to please some dark but self-imposed god – rather than taking a more detached macroeconomic view.
In order to explore Issing’s fallacies – shared by so many others – we must return to our original point: European taxpayers have not been charged for the bailouts. Instead what has occurred is that various Eurozone governments have had to issue more government debt in order to float the periphery for, broadly speaking, its consumption of goods. However, to stress the point: taxation has not by necessity been increased to float this new debt.
Fine, if we accept this and take a very narrow view we can say that the core countries have issued more government debt so that the periphery could enjoy a higher standard of living. But that oversimplifies the situation.
Core countries such as Germany relied on the periphery as a consumption base during the boom years – and they still do. If the periphery were not consuming German products the growth rate of the German economy would have been significantly impaired. The only way that they would be able to keep up their current (or, if we want to moralise on a hypothetical past, their previous) economic growth would be… wait for it… to run larger fiscal deficits to increase domestic consumption. This would, of course, also lead to an expansion of government debt.
“But,” Issing will say, “Under those circumstances the German people would be the ones benefiting from the newly produced goods.” Fair enough – only one problem: the Germans are, and always have been, terrified of inflation. There’s simply no way any respectable German politician or central banker would allow such domestic consumption by way of government deficits. Spectres of Weimar-era hyperinflation still haunt the German halls of power.
And so we’re brought full circle. We have just highlighted one of the key reasons that the economic union was set up. In a successful economic union all the members could allay themselves of their economic anxieties – whether they be the very real anxieties of peripheral poverty or the semi-imaginary core anxieties about runaway inflation – and work together for the greater good.
The government debt that Germany and other core countries are issuing is simply bolstering peripheral debt that was, in all essentials, used to buy goods from Germany and the other core countries. It’s like fiscal expenditure at one step removed – without the feared inflationary implications for the ever-anxious core.
To say that this is somehow morally wrong as Issing does is the equivalent of a New Yorker complaining about the profligacy of an Alabama resident. It’s one economy, stupid – and you take the good with the bad.
Of course, a key issue here is whether this fiscal spending might actually cost the German taxpayer at the end of the day. We need to be clear on this: if the German government – or any Eurozone country – decides to raise taxes, for whatever reason, this is a purely political decision which they need to be held accountable for by their own people, it does not, nor should it, have any direct tie to the new debt that has been issue to fund the EU bailouts.
Of course, it seems unlikely that the any of the core countries will raise taxes on their citizens as a direct response to the periphery bailouts. However, there is a possibility that the current crisis might eventually make investors anxious about the government debt of the core. We should not view this in the narrow terms of “X bailed out Y therefore Y is to blame for X’s rising bond yields’. To do so is, once again, to moralise rather than look at the overall situation as it actually is. If bond yields in the core countries do rise this will be as a result of the mishandling of the Eurozone crisis – NOT because of a bailout of the periphery per se.
Right now it looks like such anxiety may have arisen among investors not because of Germany’s government debt but rather due to uncertainty and conflict over the handling of the crisis. It is the hesitation that is resulting from arguments like Issing’s that is leading to panic. Add to that the very real threat of major slowdown and perhaps even recession in the Eurozone as a whole – brought on, of course, by the austerity project currently underway – and you’ve got a recipe for disaster and potential investor anxiety. But it is not German debt levels that will drive such chaos – far from it.
We need to drop this crass moralising about profligates and stoics. It’s nonsense. It’s nothing but a stupid, crass way of looking at the situation in Europe that serves no purpose except maybe to increase the animosity between football fans. In short, we need to see the woods from the trees and stop bouncing between implicitly pro-EU and implicitly anti-EU stances. Until we can do this we may as well chalk the EU project up as an abject failure.