Piketty and the Economic Crisis in the Euro Zone: Cenan Pirani

PikettyGuest post by CENAN PIRANI

Though the US has seemingly bounced back from the 2008 financial crisis, southern European countries like Portugal and Greece are currently dealing with debt situations that were once only characteristic of the “developing world”. In order to stabilize their economies after the 2008 crisis these European countries took on a series of IMF and European Central Bank loans in which rates of interest were higher than the countries’ rates of GDP growth, thus stagnating their economies for the foreseeable future.

This situation that currently befalls these countries’ economies was explained by Thomas Piketty in a recent interview he gave for the major Portuguese newspaper, PÚBLICO. Piketty, who has become a prominent public intellectual due to the popularity of his recent work, “Capital in the 21st Century”, was in Portugal this week in order to discuss the economic future of the country with some of its political figures. Besides outlining the problem, he discusses possible courses of action for the countries to release themselves from perpetual debt and austerity. These ideas ironically enough come out of the paths once carved by those now economically dominant countries in the Euro Zone, specifically France and Germany.

Though I personally research political and economic history in the Indian Ocean in a much earlier time, which has brought me to the archive in Lisbon, I still find current economic issues interesting, and this one in particular because it shows the complexity of the current global economy. The information regarding the economic plights of Portugal and Greece could also be of interest to a South Asian public given economic programs such as the imposition of austerity measures are something that is discussed and taken seriously there as well. For this reason I have translated and included excerpts from Piketty’s interview that appeared in PÚBLICO on 28 April 2015 below:

Portugal’s debt needs to be restructured. It is as simple as that.

Q: What should be done in Europe?

In Europe we have different problems that are not so much related to the issue of the top 1%. The problem of inequality in Europe is a problem of unemployment, and youth unemployment in particular, as well as how to restore confidence in the Euro Zone. What has been quite tragic is that we transformed an economic crisis that was born in the American private financial sector into a crisis of public debt, even though initially the Euro Zone did not have any more public debt than the US, UK, or Japan. It happened only because of our poor institutions and poor macroeconomic decisions, which created a crisis out of nothing. The tax on the super-rich is not of central importance for Europe at this time, for us it is more important that we have a common tax on businesses. Very large European companies either do not pay any taxes or pay very little, and quite often they pay less taxes than smaller businesses. We have seen this in Luxembourg, Jean-Claude Junker was making agreements with multinationals by letting them pay only 1% or 2% in taxes, by which he came forward and said, “it is known that I had to construct a strategy for development in my country and thus had to turn my country into a tax haven”. We will not build much of a future in Europe if all of us become “tax havens”. I understand that in Portugal there is a discussion about lowering the Corporate Revenue Tax from 21% to 17%, and what will follow is that it will go from 17% to 10%, and then from 10% to zero. If we head down this path in 10 or 20 years there will be no taxes on businesses in Europe. We need a common tax on businesses.

Q: For Portugal it is important to attract capital and new investments. How can a country deal with these priorities and at the same time have a fiscal regime that is concerned with equality?

It is hard, and harder in the long-term with a single currency, with 18 different public debts, and 18 different rates of interest, and 18 different financial systems that are in competition with each other. And about the tax on businesses, if we do not have a common tax then what will happen in the long-term is that this tax will be null. Then those that could not escape the tax would be overtaxed, which would be Small and Medium Enterprise incomes, which make up the lower and middle sectors. But this is not good for employment, if we charge more taxes on the working-class we will create more unemployment. If we want to maintain a common banner with the free movement of capital and with the free trade of goods and services in Europe then we also need some type of common policy on taxes, at least in the area of businesses.

Q: At a European level?

Yes, but it would not have to be all the countries. It could be in the Euro Zone or even a smaller group than the Euro Zone. It would be best if there were three countries in this group instead of one, and even better if there were 10 instead of three. But we have to do something.

Q: Do you see any signs that something like this can happen?

The governments in the Euro Zone are conscious of the fact that the current system is not working. The problem is that in Europe though there are steps, for example determining the rate of financial transactions, much is talked about it but almost nothing is done. This is seen in the case with Swiss banks. Apparently, Europe has to wait for measures to be imposed by the Obama administration, specifically sanctions that restrict banks from transmitting financial information, before we can negotiate an agreement over the automatic transfer of financial information. This makes no sense. The European governments are talking a lot, but they do little.

Q: What is the reason for this inaction?

The institutions are not working. On questions of fiscal order, the rule of consensus does not allow for great changes to be decided. To change this, what is required is the making of a group smaller than the Euro Zone, or even smaller if Luxembourg does not want to enter. It could develop a major political and budgetary union which works according to the decisions made by the majority, and would at least deal with the fiscal questions that involve the movements of capital and investment between borders.

Q: Aren’t there advantages in having financial competition?

I believe in the forces of the market and competition, but we need strong democratic institutions to guarantee that the financial system is just. If the middle-class and the Small and Medium Sized Enterprises feel that the people on top are paying nothing or next to nothing compared to what they pay, then this constitutes a threat to our social contract for a model Europe. It is very important that we change our institutions. This cannot be done with 28 countries, and probably not even 18. For this reason we have to first plan things with those countries that want to participate, and then one day allow others to join. Otherwise, it will exacerbate the tendency by which people feel they are being abandoned, where they feel the system is only there to work for those that are on top.

Q: In terms of inequality, what consequences do you anticipate if nothing is done in the next 10 to 20 years?

The great risk in Europe is that those people with the most difficulty, those who fall into unemployment, or those that are in the middle-class, feel that they are receiving no benefit from an integrated Europe or from globalization in general. If this happens, they could turn to a nationalist solution. I have seen this happen in my country. When inequality or social problems cannot be solved in a civilized or peaceful way, then there is always an attempt to blame other people. One could blame the foreign workers, or other countries, one could blame Germany – in my country that is a national sport – one could blame the Chinese workers. This is what I worry about, the growth of nationalist tendencies. For example in the case of Greece, everyone knows that Greece will not manage to produce a prime surplus of 4% in the next 30 years as has been claimed. But, there is no European government that is prepared to have this discussion, and we just wasted four months speaking about other things that have nothing to do with this. Why are we waiting on this? We could try to pass blame on each other, but finally the truth of the matter is that we are collectively doing a poor job, and this can be attributed to both the left and the right. Just compare what happened in the US and UK, less austerity, more growth and less unemployment. The way we have governed in Europe, where we have substituted democracy for rigid rules, we are afraid of making democratic decisions in the European parliament at the level of the deficit and at the level of taxes on enterprises. We are scared of this type of democratic decision making in Europe, and this will not work. The US does not have a Maastricht Treaty to deal with the deficit, it is a decision that is made by the majority in Congress. And I am not saying that the North American institutions function very well, but when compared to European institutions, we replace democratic decisions for rigid rules that are incapable of adapting to the circumstances.

Q: When Syriza won the elections in Greece it was said that it would liberate Europe. Are you disillusioned with what happened so far?

The governments in the rest of Europe, and in particular Germany and France, should help Syriza and Greece in redefining the political strategy. The agreement with Greece that exists now requires it to post an enormous prime surplus in the next decades. Currently it has a small surplus, which means that the Greeks pay a little more in taxes compared to that which they receive for public expenditure. To get an understanding of what this value means, just look at the total budget for the university system of a country such as Greece or Portugal, which comes to less than 1% of the GDP. Do we really want to put four times more money into paying the debt than investing in the new generation?

Q: As a counterpoint to Greece, do you see Portugal as a successful case?

Greece is not only having these problems, Portugal is also having them too. At this time there are people saying that Portugal will return to a state of growth, that the rates of interest are low and that the problems are resolved. The truth however is that the economy is growing, but the level of GDP is still at its lowest state in 10 years. Regarding the rates of interest, some are low, but if you take into account the entirety of the debt, the average value of GDP is still at the order of 4%, and that which is paid in interest every year is 5% of GDP, which is five times as much as is invested in the university system. Is this the right way to prepare Europe for the future?

Q: What do we do with the debt that exists?

It is important to understand that when we look at history, at times, we find public debts that were much greater. For example, France and Germany in 1945 had a debt of 200% of GDP. But, after 10 years they barely had any debt, it was below 30%. So what happened? They did not pay their debt with budget surplus, instead they used a combination of methods to lower the debt. First, they enacted inflation, which is not perfect but at least it reduced the debt. Then, they restructured the debt. People now say that this is not possible but the truth is that it happened in the past. The two countries – Germany and France – who are now requiring Greece and Portugal to pay off their debt fully without inflation and without debt restructuring, never did this themselves. Had they been obligated to do so they would still be paying off their debt. It was this that allowed the European countries, in particular Germany and France, to invest in growth in the 50s and 60s. It was a clear decision they made.

Q: In the Euro Zone it would be difficult for Portugal or Greece to have inflation, and should they really gamble on a debt restructuring?

I believe that there should be a combination of that which we had in the past: inflation, debt restructuring, and an exceptional taxation on private wealth. In France for example, we had a rate of 25% tax over wealth exceeding a million Francs.

Q: In Greece, this was believed to be the approach of the Syriza government, but it never was put into practice. For you what would be worse: an agreement in which Athens concedes, or a non-accord in which a possible exit of Greece from the Euro could occur?

Greece’s exit could be catastrophic for the Euro Zone, it would be the beginning of the end of it. It is clear that on the day after an exit the markets will begin to ask who will be next. What we have learned in the last few years is that, since the markets cannot speculate on exchange, the countries in the Euro Zone would be subject to speculation on the basis of interest rates, which could be even more dangerous. If we let a country leave we would be running an enormous risk. And the political leaders of those countries that participated in this disaster would have to assume enormous responsibilities going forward. For this reason, I do not believe this will happen. These people are not so crazy as to let this happen.

Q: What should happen next?

What should happen is that the public debts of Greece, Portugal, and Italy need to be restructured. It is as simple as that. People now say it cannot be done, but it has always been the case in the history of public debt: people say they cannot restructure debt, but then it happens.

3 thoughts on “Piketty and the Economic Crisis in the Euro Zone: Cenan Pirani

    1. Ahilan Kadirgamar

      Thanks for catching that mistake, I am editing the original post so it now says “Capital in the 21st Century”.

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