A question on the euro and the EU

OK so we all know that for the euro to survive into the long term it\’s goiing to have to have fiscal transfers.

No, not just a bit here and there for farming or motorways, as the current roughly 1% of GDP EU budget privides.

But serious sums, the sort of transfers that we have from London and the SE to the NE within the UK. I don\’t know what those are as a %ge of GDP, but I do assume that they\’re quite large: 5% mebbe? 10%?

And these sums are going to have to be raised from the rich countries and sent off to the poor.

No, this isn\’t just a one off, to pay for the current debts or anything. This is a permanent system of income redistribution: that\’s what we do mean by the fiscal policy that will allow the euro to survive.

Maybe my numbers are a bit too high. But we are certainly talking about something larger than 1% of GDP: for that\’s what the EU already spends and it isn\’t enough. I think it\’ll need to be higher than the German solidairty tax for example: that\’s 5.5% on the income tax rate.

But here\’s the thing. Is such additional taxation even possible? Certainly, in a political sense it\’ll be difficult to get people willingly paying more tax for what they see as the idle scroungers of the South. But more than that, is it even possible to squeeze a few more percentage points of GDP out of people? Can, say, the already high tax economies of Denmark or Sweden cough up another 3/4/5 % of GDP to pay for the poorer countries?

I don\’t really know the answers to any of this: would like a little bit of help actually.

1) How much of this fiscal transfer stuff would we need for the euro to continue to work?

2) Is it actually possible to increase taxation by that much?

3) If not, what will people be willing to give up that government already provides them with in order to pay for this fiscal transferring stuff?

As 3) is an empty set, it really all depends upon the answer to 1).

As an example, the non-defence part of the US Federal budget is about 12% of GDP. That might be the number that is necessary.

Anyone really think we can get another 12% of GDP out of what are already high tax social democracies?

It\’s not going to work, is it?

7 thoughts on “A question on the euro and the EU”

  1. It would be worth a bit of time on why, Tim – you know, spelling it out for us slower kids. I suppose in my ignorance that it is to make up for the pain the single currency and the singleish interest rate policy impose on the poor bits versus the booming bits – transfers from Germany to Greece, New York City to Buffalo, and from London to the north of England. When the disparities and pain are so great the transfers become impossible, is that when you know you should not have a single currency for the whole space any more, and which bits should be left out? And is one useful corrective that if you don’t do enough everyone economically productive moves from the poor bits to the rich bits, and all the retirees from the rich to the poor bits? Asking, not answering.

  2. Again the fiscal transfers that some believe necessary in a monetary union are to deal with the differing impact of external shocks, not to redistribute money from rich to poor. You could argue (to some extent) in 2008/2009 the fiscal transfer in the UK was to London (through bank support), by far its richest place and certainly say if it is done by a uniform VAT rate with the proceeds given out on an equal per capita basis then a collapse in Chinese demand for German cars would see flows to Germany, not from it.

  3. Why would Sweden be involved ? They had a vote on the Euro and very sensibly said “Nej”. I can’t see they’ll change their minds on that for a looooong time.

  4. Interesting viewpoint you have about the direction of economic flows involved.

    In the UK, for example, the flow of real goods is obviously *into* London from the rest of the UK and beyond. Labour is also supplied to London in quantity. London is the big consumer while the production is outside the city.

    In terms of money flows, of course, London is the main source of newly created money in the UK, being the opposite of the real goods flows. This is achieved by continuously expanding the nominal value of debt, reducing the purchasing power of Sterling (via mortgage and sovereign debt issue). Asset and labour prices are highest close to the money source and fall away as you go down the chain of transactions.

    Net taxation (taxes paid minus value of subsidies, corporate welfare, monopoly grants and privileges) is lowest (in fact negative) in London/SE, and highest in places like Wales and Northern Ireland/NE.

    The system would work a whole load better for ordinary people if the taxes and hidden subsidies were removed (for example with geoist policies). Allowing German finance businesses to issue new money (eg as Hypo Real Estate was doing before collapse) for use in land purchase in Ireland is particularly bonkers – economic rents derived from Irish government and private activities are transferred to German government and private interests.

    Technically, the solutions aren’t difficult or complex. But the current system is working rather well for the various vested interests, and the “leaders” in charge appear to be complete economic morons.

    Direct collection of the land and resource rents for public purposes and distribution would have prevented the current chaos (they couldn’t have been used as collateral for money/debt and whisked away). Things like VAT and the ETS would be redundant – a systemic fiscal reform. http://www.systemicfiscalreform.org/

    Although this approach is that advocated by Smith in his Wealth of Nations, it is opposed by the (Austrian) economists at the Adam Smith Institute. This is perhaps the most puzzling aspect of the debate – why would anyone advocate taxation of production, labour and transactions while advocating the privatisation of land and resource rents?

  5. Adrian: You could argue (to some extent) in 2008/2009 the fiscal transfer in the UK was to London (through bank support),

    I’m not an expert on monetary economics, but I thought the intent of the bank support was to stop the banking system seizing up entirely, which would have hurt everyone in the country, regardless of where the IT systems were. So by intent it was a public good, like a military defence.

    In the UK, for example, the flow of real goods is obviously *into* London from the rest of the UK and beyond.

    When you say “real goods” are you referring only to physical things, eg food, oil, or to services as well?

    In terms of money flows, of course, London is the main source of newly created money in the UK, being the opposite of the real goods flows

    What is your source for this statement?

    Net taxation (taxes paid minus value of subsidies, corporate welfare, monopoly grants and privileges) is lowest (in fact negative) in London/SE, and highest in places like Wales and Northern Ireland

    Can you source this statement?

    Direct collection of the land and resource rents for public purposes and distribution would have prevented the current chaos (they couldn’t have been used as collateral for money/debt and whisked away).

    Hmm, a puzzling statement. For a start, my understanding is that land can’t be whisked away by creditors or the taxpayers (by the sea, or volcanos, or earthquakes, yes, but that will happen regardless of the law). The government could directly collect ownership of land, but due to the long-term nature of many investments in land it would be massively disruptive to suddenly have your land taken by the government. Why should a farmer, eg, invest in soil protection? And, once the land has been directly collected, what then? How does a government transform a piece of land into a Harrier jet, or a hip operation? Well, they could sell the land and then use the money. But, then, why bother collecting the land, why not just charge a tax on it in the first place, to be paid in money?

    Ditto for other natural resources, while the government can use some oil, and some coal, and so forth, it does have a need for other things that aren’t natural resources.

    Secondly, while I am not an expert on the current chaos, my understanding of the current problem is that many debts are not backed up by land or other resources, or at least not to the value of the debt. In other words, the current problem is not an ability to whisk away.

    This is perhaps the most puzzling aspect of the debate – why would anyone advocate taxation of production, labour and transactions while advocating the privatisation of land and resource rents?

    Well, because:
    1) The point of taxation is to get the government more wealth.
    2) Wealth comes from production, including the application of labour, to land and other natural resources.
    3) So if you want to transfer wealth to the government, you need to transfer the results of production one way or another.
    4) The 20th century tells us that market economies where most resources are in private hands, and the legal system is set up so as to reward the creation of wealth, produce more wealth than economies where most resources are in public hands, as if someone doesn’t get to keep most of the gains from maintaining a resource, they have a tendency to not care about maintaining it.
    5) With an aging population, persistently rising healthcare costs, the likelihood of a need to shift to a low-carbon economy or deal with the results of AGW, make increasing economic efficiency a valuable task (at least in my opinion), so privitisation is good as a way of increasing the efficiency of the production of land.

    To put it in shorter-terms, you tax production because that’s where the wealth is. You privitise land and other natural resources because you want the economy to create more wealth.

  6. Tracy W: When you say “real goods” are you referring only to physical things, eg food, oil, or to services as well?

    Yes. The direction and size of the flow of services in/out of London isn’t obvious (to me, at least).

    Me: In terms of money flows, of course, London is the main source of newly created money in the UK, being the opposite of the real goods flows
    Tracy W: What is your source for this statement?

    I apologise for a somewhat vague and unsourced statement. London is the UK’s centre of banking and of government. These establishments control the creation of new money. There must be a flow of money out of London to match the goods flowing in, but as your previous point indicates, the reverse might apply in real services. Browsing financial data suggest that it is financial services which flow out of London, which I believe is little more than money creation without much real economic component.

    Me : Net taxation (taxes paid minus value of subsidies, corporate welfare, monopoly grants and privileges) is lowest (in fact negative) in London/SE, and highest in places like Wales and Northern Ireland

    Tracy W: Can you source this statement?

    You can infer this from the economic rents of land. Since taxation comes out of rents and subsidy goes to economic rents, the (well-known) land rent differentials support this statement. I accept that skeptics may want to do the direct calculations of the separate terms themselves, something which I’m sure would provoke considerable debate.

    Me: Direct collection of the land and resource rents for public purposes and distribution would have prevented the current chaos (they couldn’t have been used as collateral for money/debt and whisked away).

    Tracy W: Hmm, a puzzling statement. For a start, my understanding is that land can’t be whisked away by creditors or the taxpayers… The government could directly collect ownership of land…

    we’re talking about the land rents here, not the land. It is perfectly normal to collect and whisk away land rents. Perhaps I was unclear when referring to land rents and resource rents with the phrase “land and resource rents”?
    You are quite correct that rental flows are best converted into money flows.

    Tracy W: Secondly, while I am not an expert on the current chaos, my understanding of the current problem is that many debts are not backed up by land or other resources, or at least not to the value of the debt. In other words, the current problem is not an ability to whisk away.

    I don’t think this is quite correct. The issue is that interest is collected on debts. The interest is a flow which comes from economic rents. Taxation is also a flow from economic rents. The current problem is that the total rents are insufficient to meet the interest and normal taxes. The solution involves artificially reducing interest rates and expanding the net issue of money (inflation “tax”) using deficits. The shortfall in payments is met by wealth transfers from savers. In the European context, it is land rents in Ireland which have been pledged to German, French and British savers which fall short.

    Your five point advocacy of production taxes is interesting.

    3) So if you want to transfer wealth to the government, you need to transfer the results of production one way or another.

    OK. So we can use corvee (direct labour), taxation in kind (sharing production), taxation in money in a myriad of forms. Economic rents are one of the results of production. Rents more closely reflect the value of production and the beneficiary than, for example the total sale price of production (revenue), transaction volume, asset prices.

    4) The 20th century tells us that market economies where most resources are in private hands, and the legal system is set up so as to reward the creation of wealth, produce more wealth than economies where most resources are in public hands, as if someone doesn’t get to keep most of the gains from maintaining a resource, they have a tendency to not care about maintaining it.

    Excellent! A point where we are in broad agreement. But you are using this point to advocate production taxes(?) I am use the same point to oppose production taxes!

    You advocate “keeping most of the gains from maintaining a resource”, but isn’t this exactly what production taxes take for government purposes? Economic rents are the consequences of production and by definition are an economic surplus.

    Tracy W: …privitisation is good as a way of increasing the efficiency of the production of land. To put it in shorter-terms, you tax production because that’s where the wealth is. You privitise land and other natural resources because you want the economy to create more wealth.

    I wasn’t talking about private vs public ownership of land or natural resources. The issue is about privatisation of wages, return on capital and economic rents.

    You advocate the part-nationalisation of wages and return on capital as the main source of government funds. So when wages are paid, the government demands a share. When capital investment produces a return, the government demands a share.

    Production is where the wealth is created. But rent is where the wealth ends up. And rent is where government spending ends up too. You’ve explained eloquently why production shouldn’t be taxed and conclude that it should be taxed.

    The puzzle remains.

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