More on Fiscal Devaluations

This blog has recurrently featured the role of fiscal devaluations inside a currency union –  a good summary of the argument is here.  (HT Desmond Brennan).  There are traces of this in the Irish case (the increase in VAT and the reduction in employer PRSI for low-paid workers) but more could be done.

39 replies on “More on Fiscal Devaluations”

It would be helpful if people proposing this were to discuss what the limits to raising VAT rates might be. Clearly, a little more VAT and a little less employer PRSI will be good for competitiveness, and will contribute to compensating for the extreme progressiveness of our taxes on income. But how high can the VAT rate go before it runs into significant constraints of whatever nature?

An interesting policy option, particularly in the context of the debate on tax harmonisation within the bloc.

The authors might be interested in reading the recently published White Paper of the Commission on the future of the VAT regime in the EU. The subject is more complex than they seem to suggest i.e. a case of each Member State trying to gain export advantage at the expense of others, following the blatant German example, now being copied by France (a move more likely to have a bigger impact than the steps taken by Ireland).

VAT is also a highly regressive tax and the use of high levels, as in the Scandinavian countries, must be compensated for by a high level of income equalisation through other taxation measures.

Are most economics professors retarded are what ? or at least blind to debt based money.

No mention of the debt issue – particularly private debt which is not devalued under a synthetic devaluation.

A Hard Private currency like the Euro means deposits & bonds are at risk from malinvestment – if not, it becomes a criminal enterprise which I am afraid the Euro most definitely is.
Its a sort of protection racket really – very sick and very Italian.

“liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” – Andrew Mellon.
A treasury secretary who presided over another truely massive credit bubble.

I guess its safe to liquidate now that the Euro Bank Bond holders escaped – this market dwarfed the peripheral sovergin market and was truely massive in scale.
What a set up this was.
No talk of fiscal responsibility in the heat of this crisis – no if we were fiscally responsible back then the wrong people would die.

Its time to Eject – this is very Sick system we have gotten ourselfs into , you would be mad ,stupid or seriously twisted to embrace this union of criminals.
Who really wants to live under a Star filled Blue Sky ? – I have never seen such a phenomena – perhaps because Rayleigh scattering make such a outcome a impossibility.
The Euro is the greatest mind trick of all time – a gigantic criminal enterprise of truely epic ambition.
Its goal is nothing less then the outright destruction of the Nation State through Monetory Malice & devastating Blandness.

The EU paper regarding VAT appears to have been written by someone who’s never worked in business and has had limited (if any) interaction with people who has done so.

& the authors of that piece? What is this:
“An increase in VAT raises the price of imported goods, as foreign firms face a higher tax.”
Do they not know that VAT is charged on consumption (consumers) and the VAT rate is the same for domestic supply and imports?

exactly the right question, if VAT taxes get too high, people will find ways around it. This is not an option to “devalue” by any mentionable degree.

the 19% thing in Germany is in fact progressive, since food stuff stayed at 7%, which is much more important for the poor folks.

I wondered that myself, how these folks became professors.
The German employer contributions stayed the same for the most relevant pension 9.x % and health 7.3 %. Not even this they got right.

About one half of Project Syndicate stories are now written by imbeciles, who don’t know elementary numbers of the subject.

Dork: “No mention of the debt issue….”

From the link: “To be sure, feasible fiscal devaluations would be limited in size. But, together with debt restructuring, accommodative monetary policy, liquidity support from the European Central Bank, and much-required structural reforms, they can help to put these troubled economies on a sound footing without a euro breakup or a major austerity-induced recession.”

WTF? Is clicking on a link so hard?

This is totally off topic, apologies.

Karl Whelan has opened a topic about the referendum and PNs and seems to have closed it of to all debate. He has also lambasted Laura Noonan and closed off that thread as well, ostensibly to protect Laura, even though she has tweeted that she would be glad for that thread to be opened. What is happening here? What makes me feel that North Korea is just like this?

@ All

It is a matter of simple logic that countries cannot collectively run export surpluses with one another. Someone, somewhere has to run a deficit. To quote the new chief economist of the ECB.

“The speed with which persistent imbalances in EMU can result in systemic risks was not fully understood prior to the crisis. An important lesson is that due to high trade and financial integration in the euro area, the build-up of imbalances in any individual euro area country increasingly affects all others. In other words, there are greater spillover effects on account of increasing interconnectedness. The financial contagion of the sovereign debt crisis is a case in point”.

@BW2: “What makes me feel that North Korea is just like this?”

Paranoia can do that, I think. If Karl Whelan doesn’t want comments that’s his call. It’s a big blogosphere, there’s lots of other places for people to sound off.

The Debt restructuring ? – where is the deposit default in this ?

The Euro is a private non Governmental currency – their dogma is no large fiscal debts & no CB defecit spending unless it is to bail out the credit deposits of its friends.(Prom Notes)
So they would not continence lets say a Bank Bond destruction and deposits flowing out of the banking system and into the P.O. “financing” goverment.

Remember our Goverment guaranteed useless credit not Goverment itself – a abomination ,I was out of there after that display of servitude.

Once you accept that most of the credit / deposits withen the banking system is extractive rather then of any use to anybody things make a bit more sense.
The Euro is a purely criminal enterprise – a giant step up from the pillaging done during the nation state years – why would you want to save such a creature?
As soon as enough surplus is created via austerity they will build something useless & wasteful again via bank credit channels as no goverment debts will be tolerated in future.

Nothing less then a private debt Jubilee will sort this monster out.
Thats what I call restructuring , your version of restructuring seems to be a endless debt peonage system , with people just about able to service fraudulently created debt via lowering interest rates and the like.

@ Dear leader – Enda Kenny

I agree I don’t want to be bribed – I want satisfaction

Oh Dear! Has Harvard come to this?

This is the Mairteen_Feldsteen equivalent of a serious discussion on the tone of highlights to be applied to the tail of an Elephant to encourage the Elephant not to run riot over all the poor villagers’ staple crops.

The real problem is ignored: The Rogue Financial Sytem that has trousered its profits and manured/socialized its losses on the lumpen serfs and on the supine captured sovereigns.

p.s. Hi to Dear Lorenzo! He should sit well with these highly erudite peddlers of illusory abstractions.

The proposal in the PS article can only have a marginal impact at best.

Italian shoemakers are being clobbered by cheap imports from china and Vietnam. Some have focused on more expensive items where price differences have less impact.

Devaluation is of little use for exporting if a country’s producers haven’t existing established positions in overseas markets.

Cutting VAT on tourist services seems like a good idea.

Luxembourg keeps its VAT rate at 15% to attract businesses such as Skype. E-books and e-readers are the latest issue of contention.

…and, not surprisingly, I loved the mandatory exhortation to pursue ‘much-required structural reforms’. But, other than clobbering workers, most economists don’t seem to have a clue about what these involve. And if they do, they’re keeping it to themselves. I wonder why?

@ All

The fundamental point at issue with regard to fiscal devaluations is that of the level of trust between the member states of the EU and, especially, the EA. Do they wish to create a genuine single market or not?

Given the extent to which VAT is tied up in the operation of the market, the ideal outcome would have been agreement on an origin based system of payment (as exists with regard to private purchases by individuals) with some system of distribution of revenues between the countries of the EU with regard to business to business transactions (the bulk of the payments). This laudable objective is now to be abandoned as it is not politically feasible (which puts all the hollow talk about political and/or fiscal union in perspective).

The imperative for action now stems from the strains in the euro system as a direct consequence of the major imbalances that have built up as a result of an inadequacies in its design.

As the Target 2 debate is now also firmly back on the agenda, it may be helpful to have the admirably concise and – it seems to me – accurate summary of the situation by Gavyn Davies from last year.

The key has to be restoration of confidence in the European banking system so that private funding can again become available. That the gap between rhetoric and reality in this context is as wide as in relation to political/fiscal union can be gauged from the recent article by LBS in the FT.

On the central issue of banking supervision, the ship remains stuck on the shoal of Article 127.6 TFEU which requires unanimous approval of all Member States to move beyond the present unsatisfactory situation. It would be an error to believe that the only opposition lies with London, the other major capitals being equally unwilling to face up to reality.

The authors seem to believe that VAT works the same way as the American sales tax. It does not and this invalidates much (if not all) of their arguments.

Dork, its a tad hard to get folk’s attention if’n they have their eyes and ears covered up. Anyhow, if the’rn ideas, beliefs, opinions, feelings, views (or whatever) are fixed in military grade concrete – why bother? They are un-embarrassable, and worse, if challenged with statistically robust empirical evidence, they resort to ad hominems. Its truely sad.

Example: Big Phil was wittering on about NOT polluting the environment with domestic s**t and all. Very commendable. But the Fracking Brigade want to dump MILLIONS of litres of toxic effluent into our fresh-water acquifers – and you have the likes of Ed Walsh shrilling them on!

Do you reckon I need to adjust my medication?

People who have never worked in cross-border intra-community trade seem to believe that VAT is complicated to handle. It is not. Or maybe I’m just that good 😉


There were some comments about PNs and bank guarantees made by the other participants in that VB show that could have equally been ridiculed by a thread starter of different inclination to that of Karl. Had that thread been opened up I imagine that for example the contention that a default on the 3.1bn payment or withdrawal of the state guarantee on Anglo liabilities might affect credit-worthiness assessments of the Pillock Banks was merely ‘a conjecture’ could have been one of many targets.

Karl is evidently sufficiently irritated by unhelpful comments that he doesn’t want to be bothered to moderate the threads. I assume it is that rather than an intention to stifle debate on this, but that might end up being the effect.

Anyway, having raised a few awkward points on the PN question and generally found them ignored, I kind of wonder myself what the point of a public discussion on this site would be – so why bother.

@ grumpy

I read your comments with great interest and take your points seriously even when I do not reply to them and I assume others do the same. The site is impoverished when commentaters of the class of yourself and hoganmahew, for example, withdraw. But people, of course, post entirely at their own discretion

The ‘no comments’ is understandable but unfortunate, as if nothing else the debate half-spills to other threads as here.

I agree , there is little point howling at the moon now – we are caught up in a diabolical mechanism which you could argue began in 1979 or 73 for us.

There is now so many funtionaries behind this powerful machine serving what they believe is their masters – eventually everbody but the chosen few will end up on the chopping bloc of this wildly corrupt pesudo super state.

Readers here might want to read an excellent report which shows just how irrelevant the ‘fiscal compact’ is to both the current (4yr & counting) Euro crisis & future prospects & stability for Euro member countries.

Whilst it ignores the important potential solutions that I consider MMT offers, it does offer a comprehensive analysis on two things:

1. Why the Eurozone crisis continues & the reasons for its flawed structure as the basis of that.

2. The mechanics of how a country might exit the Eurozone.

(Notably it does draw on the accounting identity of Sectoral balances which MMT uses.)

It is also available as a pdf download. Written deliberately in plain English for a lay audience. See here:


Thank you for bringing Dear Lorenzo’s recent tome to my attention; thankfully I’m ‘regular’ at the mo, but should this change I’ll get around to reading it!

I’ve also popped in a proposal to Enterprise Ireland on how to patent some of Herr Prof Sinn’s Target-2 ramblings as a cost-effective cure for low blood pressure amongst the economically literate classes: beta results on a joint venture with Bayer suggest a 10% rise in low blood pressure on reading each half A4 of Sinn’s drivel but serious concern on potential impacts of overdosing on greater than 1000 words suggest that its toxic effects make it unsuitable for human consumption.

IMF Survey: Continued Recovery for Ireland After three years of recession, Ireland’s economy is on a slow recovery path. Led by a pickup in exports, it saw growth turn positive in 2011. But the crisis is not over, with unemployment unacceptably high at more than 14 percent. The slowdown in other eurozone countries also hampers Ireland’s efforts to fully recover from its 2008 housing bust.


re Your link: FT report on Bundesbank seeking collateral for its BOP surplus via Target2.

It really makes one wonder what these people are up to. I understand that in the past BOP was settled by the physical transfer of gold from one country to another.
As far as the BUBA is concerned we are back to that. A ECB controlled Euro system clearly no longer holds their confidence. Perhaps they are right.
But if each country is going have settle its BOP via collateral, be it gold, silver or slaves, then the obvious thing to do is for each country not to run a BOP deficit and to stop people buying the surplus of other countries. The second obvious thing to do is to force the repatriation of foreign assets.

I am surprised that the BUBA people do not see this. Perhaps they do.
The fact that the latter is from Weidman to Draghi clearly means that they are serious about this.
Of course it could be old fashioned pique at the fact that Draghi appears to be his own man at the ECB so they would like to ratchet up the pressure on him a bit.

Germany may be pushing the fiscal compact, but there appears to be powerful forces within Germany that are actively pushing for actions that will dismantle both the Euro and the EU in short order if they get their way.

@ Joseph Ryan

As to “powerful forces”, I am not too sure. “Dispersed centres of power” would be a more accurate description.

One way or the other, this is what Merkel has to deal with, including the judges of the Constitutional Court who have a view of their role which would be unthinkable in other EU countries. cf. (Google Translate gives a reasonable idea of the content).!88792/

@ Joseph Ryan

Solution is to copy and paste full address into internet address line!

@ All

This paper by Jens Ulbrich and Alexander Lipponer of the Bundesbank – which appeared in a CESIFO journal – sets out its position with the qualification that “this contribution reflects the personal opinions of the authors”. The references to Ireland may be noted.

This contribution, of course, has not stopped Sinn and the homepage of Ifo now contains a graphic of Germany sinking beneath the waves of the supposed enormous sum at risk.

The question is whether the head of the Bundesbank now shares his mistaken views?

The key concluding paragraph is as follows;

“A decline of Target2 balances is expected as soon as
foreign banks no longer seek or are able to procure
excessive liquidity from the Eurosystem and the liquidity
then is indirectly distributed throughout the system.
This should happen as soon as the tensions abate
in the financial markets and not least the euro-interbank
money market has regained its full functionality
so that the liquidity balancing among commercial
banks (also international) will function once again.
This would require that the confidence in the banking
sector in the euro area and in the individual banks is
restored and the problem banks are rehabilitated or
exit the market. For the Eurosystem it is decisive in this
context that the corresponding responsibilities
between monetary policy and fiscal policy are preserved.
In concrete terms this means that the short term
special liquidity measures of the Eurosystem
aimed at containing the acute crisis-like developments
must not delay the necessary restructuring process or
even replace it. For this reason alone a timely reduction
of the special measures is a must”.

It seems to me that there can be no reconciliation between the opposing views as one – the correct one – is posited on the euro continuing to exist while the Sinn view is posited on either its failure or the exit of several countries, including key participants Italy and Spain.

DOCM: Replacing payroll tax by VAT isn’t regressive when you account for the increase in employment, which reduces the revenue requirement and expands the VAT base. Neither is it simply about trade deficits; a VAT, unlike a payroll tax, exempts the value added by labour in the formation of capital, and therefore encourages net investment. Not all countries can be net exporters; but all countries CAN be net investors. This is not a beggar-thy-neighbor reform. For details see .

The same article explains how fiscal devaluation can be expanded so that it replaces or offsets not only payroll tax but also pay-as-you-go personal income tax.

P.S. to Jesper: The essential point is that a VAT (like a retail sales tax) taxes consumption while a payroll tax taxes production. Implications for trade and capital formation follow from that.

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