Here is the background note on this topic that formed the basis for my talk at today’s DEW/UCD Economics Workshop.
Category: EMU
In the Monday edition of the Irish Times, David Begg lays out his analysis: you can read it here. It is in line with the interpretation put forward by ICTU in its recent “There is Still a Better, Fairer Way” report.
Below I make some comments on specific points articulated in the article; I will return to the broader analysis in the near future.
Comment 1: Mr Begg has persistently made the analogy to Japan, arguing that overly-aggressive fiscal retrenchment could “impart a severe deflationary shock to the economy which could precipitate a prolonged slump.” As has been persistently pointed out, this analagy is not appropriate: Japanese-style deflation is not possible for an individual member of a monetary union, since declines in the price level are ultimately self-correcting through a competitiveness gain from cumulative real depreciation.
Comment 2: Mr Begg suggests that a 50 percent tax rate on high earners (as has been announced in the UK) could be copied here. Putting together the various levies on top of the statutory income tax rate means that a top rate of effective tax in excess of 50 percent already applies and kicks in at a relatively modest income level. (See the graph in my note here.)
Comment 3: Mr Begg notes that there may be €1.8 billion in outstanding uncollected taxes. I am not familiar with the source of this number – I wonder how much of it may be explained by business enterprises that have failed (with little chance of recovery of the outstanding taxes), rather than by tax evaders.
Eurointelligence today carries an interesting news report
Sweden proposes stability tax
The Swedish finance minister Anders Borgh has written to his EU colleagues in favour a stability tax levied on banks who proceeds could be used for future bail-outs. Sweden has already imposed a tax of 0.0036% of bank liabilities. FT Deutschland points out that this is not a Tobin tax on bank transactions. Sweden has introduced this tax this year, and expects the revenue from this tax to grow to 2.5% of GDP in fifteen years.
Such a ‘rainy day’ fund would have been helpful during the current crisis (although there is a classic moral hazard counter-argument). Indeed, I had previously suggested the establishment of such a fund as part of Ireland’s preparations for EMU membership, given the fiscal costs that accrue in the event of banking crisis. My contribution can be downloaded here. The difference is that the Swedish fund is financed by a tax on the banking sector, whereas I had in mind a fund to be accumulated from general tax revenues.
The European Commission has released its annual report on the euro area – this is very helpful in providing a comparative perspective on Ireland in relation to the other member states of the euro area and in communicating the ‘Brussels view’ on economic events.
The full report and other materials are available here.
Today’s Irish Times carries an interview with Joseph Stligitz. A striking element is his advocacy of a uniform cut in wages and prices (the internal devaluation option), as the substitute for the nominal devaluation strategy that has been pursued by several countries with independent currencies. He also highlights the importance of fairness in pursuing this option. While he does not describe in detail how this can be achieved, my own work has advocated a twin-track strategy: wage reductions, coupled with more vigorous pro-competition policies to ensure that wage cuts are not simply absorbed into higher markups.