It is now too late for Europe to avoid a major implosion. Happen it must, because policy-makers have locked the economy into a death spiral.
No, it need not happen. There is an escape route, but the blueprint is ostracised by the power-brokers; for now.
If Europe was conforming to the post-recession pattern, its economy would be gradually building out of the trough into the path of steady growth. Instead, the Eurozone is back in recession. In reality, this zero growth phase is no more than a blip in the protracted depression that began when land prices peaked in 2007. So what to do about it?
Angela Merkel foolishly sealed the zone’s political fate two years ago when the German chancellor declared: “If the euro fails, Europe also fails”. This meant that she was willing to gamble the post-World War 2 settlement (no more territorial wars in the European homeland) on a bizarre financial arrangement that was doomed from the outset.
The alternative to the Germanic tight-lipped position is vigorous intervention by the European Central Bank. It could start to pump liquidity into the economy (QE), to head off deflation. But a programme of asset purchases would do no more than postpone the inevitable. The US and UK central banks engaged in frenzied credit-creation, and the outcome is not one of balanced, sustainable growth. Full employment has not been achieved, and wages are not rising.
The general outlook, then, is grim. Europe’s fate will be sealed with an almighty collapse. Where and when is in the hands of the gods: we only be certain about the why – the policy failures of governments.
So what’s the third option, the one that’s taboo in the minds of politicians and those who acclaim themselves as social scientists?
Europe needs to rebalance just about every important element of the economy. This cannot be achieved by government diktat. The people alone can implement radical change. They would undertake the work, if it was in their best interests. In essence, this means that the transformative power of 300m working people would come on stream if governments adjusted the financial incentives.
What would trigger the release of the vast pent-up energy to reshape the continent’s future? “Bad” taxes need to be scrapped: the ones that are brakes on muscle- and brain-power. How, then, would people fund the public services they need? They should pay for the services they receive from both nature and society. But that is not a radical departure from current practise!
- Those services are already being valued in private markets. The single most important exercise in valuation is undertaken when people choose where to live or to work. The rents they pay for the services they access are negotiated by the users themselves: the values are not set by bureaucrats.
- Those rents (which, when property is purchased, are capitalised into the sale price) are already being paid. But the payments are not made to the agencies that provide those services. Ethical economic behaviour requires that the payments be made to the public agencies which provide services like the highways, schools and hospitals that we want at or near our doorsteps.
The new fiscal settlement would be phased in over (say) five years, as taxes that restrain work and wealth are eliminated. Government would not extract a single penny more from the people who go to work.
From Day 1, there would be a measurable increase in productivity. Rising incomes would flow from two sources: (1) elimination of the huge losses inflicted by current government taxes; and (2) from the innovations that would be generated as people adjusted their plans for the future. The trajectory of the balanced growth path would be above the historic plane, and it would be sustained as people found themselves free to exercise choices about the kind of lifestyles they wished to enjoy.
How do we get this option onto the negotiating table?
Fred, very interesting but could you expand,if even by pointing me to previous articles you have written , on what taxes you want scrapped eg are you talking about VAT Income Tax and national Insurance or are you including Corporation Tax.
Secondly further explanation of what would replace the income lost by the treasury in tax take would be helpful, I assume you are talking about cutting out wasteful payments made to commercial parties effectively skimming off from transactions but can you provide some examples.
Finally can I assume from your comments on Europe that if Scotland votes for independence and don’t manage to negotiate a currency union which would enable them to continue to use the £ they should at all costs avoid joining the Euro especially at this point
David. The first taxes to scrap? Depends on where we are in the business cycle. Right now, we need more jobs and increased consumption – so cutting income taxes would be a good starting point. Corporation Tax is a voluntary tax – it might as well be scrapped, and the revenue more than recovered from an increase in the charge on the sites occupied by the likes of Starbucks outlets. The primary source of replacement income is: (1) drawing revenue from the nation’s land rents; and (2) additional rent revenue accruing as a result of the greater efficiency in production, stemming from the deletion of taxes that distort economic activity. In the process, the “rent-seeking” privilege seekers (such as subsidies to farmland owners), would be removed, lessening the burden on the budget. And, yes, at all costs, Scotland should avoid the euro. Scotland, for all its vaunted oil-rent wealth, is geographically on the European periphery – along with Ireland, Portugal, Spain, southern Italy, Greece, Cyprus – and so would suffer the marginalisation process endemic in our economic model. On this, watch out for the film we are producing on the Euro, which explains why the “convergence” theory of the euro was a hoax; the euro project, as structured, was bound to cause DIVERGENCE (enriching the centre at the expense of the peripheral economies) from the outset.
Mr. Harrison,
Could you please recommend to me which of your books would be the best introduction to your theories and ideas?
Many thanks.
Regards,
Eli
Eli: read the downloadable book which is available on the Cheating Index page – I called it “2010: The Inquest” – and, then, the best overview of the world’s predicaments and how they would be solved is to be found in my most recent book, The Traumatised Society (2012).