• What future for the PIGS? The case of Greece, the response of the EU and alternative solutions.

  • Σιγκφρίντο Ραμίρες | 15 May 10
  • In the midst of the Greek crisis, the transform Working Group Brussels organised its second meeting this year after a successful kick-off on 7th April 2010. Like in the previous occasion it brought together a milieu of activists, academics, politicians and civil servants directly concerned by the politics of the European Union. Nearly as numerous as the first time, some 40 people shared three hours of intense debate in the Garcia Lorca Centre. Again, transform Brusels confirmed its role as supranational space of intellectual exchanges in the capital of the European Union. It does so by presenting topics of transform’sworking programme -in this case the crisis- for left-wing citizens working in European Union related matters (NGOs,, trade unionists, think-tanks, academics) and the intellectual and political representatives of the left in European institutions.

     

    The topic was burning in those days and we were privileged in that context to have with us two Members of the crisis committee of the European Parliament, Nicolaos Chountis and Liem Hoang Ngoc. Chountis is the Member of the European Parliament (MEP) representing Syriza, and from 2005 to 2009, he was the Secretary of the central political committee of Synaspismos. This electrical engineer, and graduate in international studies, also sits in the committee for economic and monetary policy of the European Parliament, where he is considered as one of the most hard-working MEPs of all the hemicycle. Together with this politically experienced heavy-weight, we have a young MEP from the left strand of the French Socialist Party, Liem Hoang Ngoc. Member of both EP’s committees, Liem is not only an academic - Senior Lecturer in Economics at Paris-Sorbonne- but also an activist – founder of ATTAC- and most recently member of the direction of his party, as deputy national secretary for economic affairs. In the mid of these two generations of elected politicians from the left, our third speaker was Klaus Draeger, the expert of the parliamentary group of the European United Left (GUE/NGL) in charge of following employment and social affairs. They were accompanied by Elisabeth Gauthier and Haris Golemis, both responsible for two of the founding-members of transform: Espaces Marx and the Nicos Poulantzas Institute respectively.

     

    Liem opened the ball exposing the analysis developed in his recent 2010 booklet in French (The European Social Model: a crisis test) where he synthetically states his precise stands on central issues of the impact of the crisis on the European Welfare State. He started by presenting the communication of the European Commission on the crisis which concluded that once stopped the financial crisis, economic growth will spontaneously arise after some structural reforms of the European Welfare State. In few words, for Neoliberalism the crisis is over. This analysis is extremely worrying, because the speculative attacks on public debts show that there is an underestimation of the current risks linked to the fragility of public debt like in the past for the debts of the private sector. Moreover, Germany is maintaining its policy of wage deflation, which is extremely damageable for the recovery of the whole of the European Union as there is not enough demand in the most important European economy which may take the rely of the fall in the domestic demand of Southern European countries. This accentuates the economic divergence of the economies of the Euro-zone creating economic unbalances, particularly the commercial balance, whose effects are still underestimated. However, the consequences are the same for the Southern European countries suffering the most from these asymmetric shocks, namely, being constrained to follow the German policy of wage deflation. In this case, the perspectives are dime because this will imply to kill the incipient growth recovery stimulated by the liquidity provided by governments. In his view, if Greece, Portugal and Spain defaulted, this will mark the end of the European project as conceived by Jacques Delors, for whom the single currency was a means for further integration, preceding the creation of federal instruments at the European level. Such a crisis of state finances will mark the transformation of the European Union in a de facto Free Trade Area. For this reason, Liem pointed out that the economic crisis is bringing European integration to a crossroad: either it marks a return towards a resurgence of economic nationalism with the return to national currencies, or it succeeds in taking a federalist turn with new European instruments. He singled out three particular instruments that may be used for this turn: an increase of the European budget with macroeconomic ambitions; the issuing of Eurobonds; and last, but not least, the authorisation to the European Central Bank to finance the debt of member states. He pointed out to articles 122 and 143 (see below) to argue that there is a legal basis for this in the Lisbon Treaty but the problem is not legal but political, more particularly that nor Germany, nor Britain are in favour of more federalist solutions. The likely solution will be a reaffirmation of the stability pact rules with the consequences of killing the recovery and bringing down public finances as a consequence given that member states will not be in position of increase taxation or receive more fiscal recipes to reduce their deficit. He concluded by calling the attention of the meaning of this neo-liberal turn for any future Left government in a European country which could experience again what the Greek Socialist government is currently suffering. It is precisely for this reason that the Left needs to attempt from now a modification of the political balance of power in the European Union.

     

    Departing from this economic analysis and its political consequences for the left, Nicos Chountis followed with a strong criticism of the European Commission, whose action is not being that of building the rescue of Greece on the basis of solidarity. In his view, it is wrong to consider that the financial crisis is just an imported external shock from the USA to Europe, but the depth of the crisis confirms that the institutionalisation of neo-liberalism in Europe with the Maastricht Treaty and all its democratic deficits was the work of irresponsible politicians who supported an Stability Pact which appears now as an structural error. Indeed, the fiscal crisis is not just a particular case of Greece or of the PIGS but also a trend in all European countries including Germany. For Chountis it was also irresponsible to rescue a financial sector which had overcome its structural role by going into other sectors and that now that it has been rescued by public moneys it does not have any problem in attacking the public hand which saved them from bankruptcy. transform’s guest passed onto the solutions suggested by Liem agreeing that the UE budget is now too low to serve as economic stabiliser but it is much more important to underline for the public the absurdity that private banks are doing money by borrowing from the ECB at 1% and then lending to the Greece government at 5%! Furthermore, the Left should insist that the European Council has asked the participation of the International Monetary Fund (IMF) which is the central institution which support the dollar and the international economic policies of the USA. This implies that the European Union has opened a very dangerous door for the future resolution of similar problems as there is no European Treaty which envisages the participation of this non-European institution. If this has been done is because politically, it participates from the same neo-liberal logic of the stability pact, which is not based on European solidarity, but on fearing and shaming Southern European countries, which are constrained to knock in the IMF’s door. I few words, for Chountis, the Left must take act of what this call to the IMF means for the role of the European Union in the future economic architecture of international economic relations after the crisis.

     

    After our Greek guest explained why we are all “potential Greeks”, we heard the presentation of our German speaker, Klaus Draeger, who illustrated his presentation with a hand-out of graphics and statistical data about the German economy in comparative perspective. However, his presentation started by the cultural and political principle which is guiding the German position in the Greek crisis: chauvinism. Like in the late 1990s when there was the domestic debate on monetary Union the conservative media campaign is that Mediterranean countries are irresponsible and penetrated by corruption, tax evasion, and an expensive public sector. At the time the current PIGS (Portugal, Italy-Ireland, Greece, Spain) were derided as the “Club Med” and the political conclusions of such campaign were clear: they should not be allowed to enter the paradise of the Eurozone, something that shared not only Liberals but also some relevant leaders of the German Greens. The social and economic reality is, of course, very different from this nationalistic discourse. German companies has, for example, being involved in several corruption scandals in Greece and not hesitated to profit from the growth of the PIGS, and Eastern European countries, during this period, from supermarkets to the machine tool industry passing by the German automobile industry. In this way, Germany has been pushing away producers from these countries away from these sectors on the basis of higher competitiveness. But where this competitiveness came from? Here Draeger showed us the figures which demonstrated that the German miracle of a quicker increase of exports than increase of German GDP was integrally based on an increasing use of flexible workforce, which is higher than in the USA or UK, and a reduction in business taxes. Therefore, Germany does not leave many alternatives to these countries and the only possible solution is to go back and search for solutions in the Keynesian tool-box, namely, there should be a mechanism to constrai nt countries with a trade surplus to pay premium wages to avoid international economic unbalances, and recur to converging economic policies whose aim should be to bring down current account deficits. Such discussions are been put on the table by relevant economists like the Chief Economists of Unctad- who suggested an increase of German wages by 5% per year in the next 15 years- and the International Monetary Fund- inflationary targets should go from 2% to 4% in order to maintain growth- and the left in Europe should discuss and support such kind of reflection. On the European institutional front, Draeger circulated the proposals pushed forward in the Executive Committee of the European Trade Union Confederation (ETUC) of 9-10 March (see below and www.etuc.org/IMG/pdf_Resolution-The-eco-crisis-New-sources-financeEN.pdf) and suggested to depart from them for the elaboration of our proposals.

     

    Elisabeth Gauthier (Espace Marx France) and Haris Golemis (Nicos Poulantzas Institute) presented a synthesis of the two papers which have recently been published in the last issue of the transform journal (6/2010) with the respective titles “Crisis, Europe, Alternatives and Strategic Challenges for the European Left”, and “Can PIGS fly? It is difficult in this limited space to reproduce two interventions whose main points can be read in the original texts which are now widely available. So let me focus, instead, in the debate which followed these interventions and whose major issue was whether it was realistic to expect a recasting of the European Union, and more precisely of Monetary Union, in the current political conditions of an European Union with 27 member states, or it would be better to exit from the Euro for the countries trapped in this vicious circle. Indeed, this debate has become a central issue within the Greek left and risks to extend towards other Southern European countries.

     

    In the Brussels debate, our Greek guests presented arguments in favour of each of these possibilities. For Golemis radical social forces in Europe are under attack and not in the offensive: therefore we are in situation of resistance and not of advancing towards Socialism. It will be not a progressive way out of the crisis to follow the path that the German conservative forces would like us to open up, namely, to reserve the Euro for the richer countries. If they wish Greece, Portugal or Spain out of the Euro they will need to oust them but the Left would be foolish to do this job for them because the consequence of getting out will simply amount to bar the road of access to international loans, making impossible a national solution to the crisis. The radical alternative of not paying the debt will amount for Greece to take the path towards “Socialism in one country”, but the real situation today is that in few months the government will not be able to pay their pensions. Even taking such a radical path, we know what happened to Cuba once it had not the possibility to access to international markets after the collapse of the USSR: a fall in their income levels of 20-30%. So, the question is not to support the Euro for a matter of principle, but for grasping the opportunity to spread the social revolt in Greece against neo-liberalism to other European countries in this period of epochal transformation of Europe. But this requires to be within the Euro-zone and not outside because in this case, the resolution of the Greek crisis will be the problem of the Greek people and not of the Europeans.

     

    Chountis provided a counterpoint to this realist analysis of the situation for the Left arguing that the alternatives suggested of a future Federalist path for Europe has already been defeated in the recent past because the real target of ruling classes in Europe is to seal working classes within their neo-liberal project. That is the reason that the path chosen from Maastricht onwards was monetary unification and not a common economic policy, even some forces of the Left hoped that this will spill-over economic and social unification. The reality is that this convergence has not happened. The way forward is not more economic integration but a political integration based on changing the political balance of power to the Left. But monetary union is now dividing the Left about the final destination of each of the stages of this European journey. For him, the only viable path for the Left is providing a complete answer to European integration and not supporting monetary integration as the main road towards further European integration because it is demonstrating to be the starting point for a new wave of neo-liberal policies against European citizens.

     

    As you can see the Greek case is opening fundamental questions in the relationship of the European left with the whole process of European integration: indeed the Greek question is directly requesting a larger debate about how and why the European left would like, here and now, to have European integration progressing. Departing from the current situation of representing less than 10% of the European electorate, the strategic objectives of the Left in Europe can only be reached with tactical alliances with other political, social and cultural forces through political action at different levels, like for example launching campaigns and debates which may serve to have the citizens appropriating of European integration in a left-wing direction: this is indeed, one of transform’s fundamental tasks.

      

    Article 122 of the Lisbon Treaty

    1. Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.

    2. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken.

    Article 143 of the Lisbon Treaty

     

    1. Where a Member State with a derogation is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the internal market or the implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of the Treaties. The Commission shall state what measures it recommends the State concerned to take.

    If the action taken by a Member State with a derogation and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Economic and Financial Committee, recommend to the Council the granting of mutual assistance and appropriate methods therefor.

    The Commission shall keep the Council regularly informed of the situation and of how it is developing.

     

    2. The Council, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:

    (a) a concerted approach to or within any other international organisations to which Member States with a derogation may have recourse;

    (b) measures needed to avoid deflection of trade where the Member State with a derogation which is in difficulties maintains or reintroduces quantitative restrictions against third countries;

    (c) the granting of limited credits by other Member States, subject to their agreement.

     

    3. If the mutual assistance recommended by the Commission is not granted by the Council or if the mutual assistance granted and the measures taken are insufficient, the Commission shall authorise the Member State with a derogation which is in difficulties to take protective measures, the conditions and details of which the Commission shall determine.

    Such authorisation may be revoked and such conditions and details may be changed by the Council.

    The Economic Crisis: New Sources of Finance

    At its meeting in Brussels on 09 - 10 March 2010, the Executive Committee of the European Trade Union Confederation (ETUC) adopted a Resolution on the Economic Crisis: New Sources of Finance.

    1) The European economy is finding itself in an increasingly difficult position. On the one hand, the economic recovery remains fragile and subject to several downwards risks such as job shedding, rising unemployment, wage stagnation and ongoing and continuing deleveraging of high private sector debt positions. On the other hand, with public deficits in Europe twice as high as the Maastricht criterion, economic policymakers are keen to return to the pre crisis approach to cut public deficits and reduce the role of the state, hoping that private sector investment would automatically follow. The Ecfin Council and the European Commission have already decided that fiscal consolidation should start at the latest in 2011 (and even earlier for member states where financial markets set high risk premiums in interest rates) while procedures for breaching the Stability Pact have been opened against a majority of member states. Meanwhile, central banks in Europe, which through their liquidity injections into the banking sector have until now indirectly financed public deficits, are also taking a more conservative attitude and are calling for urgent and ambitious consolidation efforts involving, amongst other things, public sector wage cuts.

    2) Pressure to cut deficits is also coming from financial markets. Whereas Central and Eastern European countries have gone through serious financial turmoil in 2009, hedge funds and investment banks are now speculating against countries that are members of the euro area. It is highly likely that several euro area members will be singled out one by one, with financial speculators hoping to cash in big profits during this process. This is highly cynical: If deficits are high and public debt has been soaring, this is mainly because governments were forced to step in to save the financial markets from their own irrational herd behaviour and from the damage they themselves were inflicting on the economy. Blinded by the quest for excessive profitability, financial markets now turn on the very same actor that saved them in the first place. In particular, the role of Wall Street rating agencies, having provided triple A ratings to toxic assets and now downgrading the ratings of sovereign bonds, as well as the role of investment banks like Goldman Sachs, suspected of manipulating Greece’s accounts to deceive EU authorities; and now trying to influence financial market opinion by spreading unfounded rumours [1], is now even more questionable than it already was.

    3) These three pressures on public finances are already delivering results (see overview table attached). National stability plans, introduced by governments beginning this year, imply consolidation efforts and deficit cuts over the next three years in the order of 5% of GDP for the UK, 3% for Germany, France and Italy and 9 to 10% of GDP for Spain and Greece. A very ambitious and European wide [2] consolidation policy is on its way. This is hardly compatible with the fragility of private sector demand dynamics or with the fact that monetary policy has already hit the zero bound of nominal interest rates.

    4) The ETUC argues against both a premature ‘fiscal exit’ strategy as well as a strategy of ‘wait and see what happens’. The former risks to repeat the mistake of the 1930s when governments responded to the crisis by cutting deficits, thereby contributing to create the Great Depression. The latter (‘too early to exit so let’s do nothing’) would tolerate unemployment to rise and to remain high, with the associated risk of persistent unemployment becoming ‘structural’, for example because employers discriminate against those who have been long term unemployed.

    5) Instead of a premature ‘deficit cutting’ strategy, the ETUC wants an ‘entry strategy into growth, investment and jobs’. The only way to get public deficits and public debt down over the medium term is by ensuring an immediate and forceful recovery of the economy and jobs. To do so, and as the ETUC has insisted upon before (October 2009 statement of the ETUC Executive), Europe needs a renewed, stronger and better targeted recovery plan. For the next three years, 1% of GDP should be invested each year in major European investment projects rolling out the necessary infrastructure and networks for the ‘greening of the economy’. A key question is how can this be financed?

    New sources of finance for European recovery and jobs

    6) Obtaining a stronger recovery plan as well as funding employment policy aimed at avoiding persistent unemployment turning into structural unemployment will be a major challenge. To help member states withstand the triple pressure of financial market speculation, rigid Stability Pact rules and conservative central banks, Europe needs to organise and make available new sources of finance for economic recovery.

    A common Euro Bond

    7) A common bond, issued by the European Investment Bank, collectively guaranteed by European governments, backed up by national tax revenues as well as by liquidity support from the European Central Bank is urgently necessary. There are several advantages [3]:

    (a) ‘Fighting fire with fire’. Issuing a common bond will allow member states to stand together and support each other to face the irrational and self destructive herd behaviour of financial markets. A common bond will make it harder for financial markets of singling out national states and their sovereign debt. Financial players will know that their usual game of trying to cash in on extraordinary profits by taking speculative positions against individual sovereign debt and thereby setting in motion a self fulfilling vicious circle will not work.

    (b) ‘It’s the economy stupid?’ A common bond will also shield member states from the ‘animal spirits’ of financial markets’ in other respects. Excessive financial market pessimism and fears of a debt default usually forces countries into a radical and disastrous deflationary policy. However, once the economy goes into a tailspin, financial markets shift their attention to the state of the economy and maintain their position of financial restriction, now fearing a bankruptcy of the economy. Again, this is highly irrational: Countries still end up in being distrusted by financial markets, exactly because they follow up the Wall Street’s bidding. A common Euro bond allows member states to break out of this other vicious cycle and set member states free from the irrationality and the stupidity of the global financial marketplace.

    (c) ‘European money for European Investment’. A common bond should not only be used to fight financial speculation, it should also be used to secure economic recovery as such. The negative demand impact of fiscal consolidation at national level (which will be required in return for access to the financial proceeds of the European bond) can be offset by European financial flows entering the country, investing in infrastructure, networks and innovation, thereby re launching both short term demand and economic activity as well as long term growth potential.

    (d) ‘European wide solidarity’. The solidarity which the common Euro bond implies should not be limited to the members of the euro area only. Several member states of Central and Eastern Europe have found themselves in a similar position, with their currencies de facto linked to the euro exchange rate while at the same time having to continue high (private sector) debt levels expressed in euro. The policy approach up to now has been up to now to call in the IMF as an alibi [4] by forcing incredibly tough adjustment measures upon several of these countries, resulting in a major depression and a social bloodbath. The common Euro bond should also be used to rectify this approach and end this ‘barbaric’ structural adjustment.

    8) However, let us also be clear. A common bond has the objective of liberating member states from the irrational herd behaviour of financial markets. It is certainly not the intention of trying to ‘mimic’ financial markets by imposing the same (or even worse) type of pro cyclical and anti social policies upon member states. However tempting it may be for some to abuse the euro bond by pushing through a liberal model of deregulation, this will not help the economy and deservedly give Europe a bad name in the minds of workers and citizens. Any conditionality to be attached to the euro bond should respect the need for a strong social dimension, strictly steer away from deflationary wage cuts and wage freezes and be sequenced in time so as to avoid pro cyclical fiscal tightening.

    9) The ETUC urges a move forward on the idea of a common euro bond issue.

    Postponing or even rejecting a common bond will prove the speculators right, reward them and allow one country after the other to be subjected to speculative attacks. In the absence of European solidarity to face the speculators, there will also be enormous pressure to cut wages in major parts of the euro area, internal market demand dynamics will be destroyed (who to export to if a major part of Europe is mired in depression and deflation?) while surplus savings countries will import a renewed banking crisis [5].

    10) In short, a single currency and a single market need a common bond.

    Financial Transaction Taxes

    11) Studies [6]show that a carefully designed tax – not necessarily at a high rate - on particular financial transactions would make them more expensive and so less attractive, helping to stabilise the prices of shares, commodities and exchange rates. Speculative trading would be hardest hit, with short- term investors paying higher taxes due to their higher transaction frequency. Debates on the advantages of a general tax on financial transactions are also taking place beyond the frontiers of Europe and are being actively pursued by the International Trade Union Council and TUAC with the G20 and the IMF. But the European Union is an independent economic entity, able to introduce such a tax on its own for purposes of international development, environmental improvement and anti crisis measures. The revenues from this tax could be allocated entirely or partially to the European budget .From a public-finance perspective , a FTT should essentially be collected for either of two reasons: to collect revenues for public expenditures and to discourage activities that are deemed to have negative side effects not properly taken into account by market participants (the so called Pigou taxes)

    12) The European Commission, following questions raised at the meeting between the Economic and Monetary Affairs Committee and the Commissioner responsible for taxation on 6 October 2009 is currently working on ideas for "innovative financing" in the context of global challenges, including financial transaction taxes in order to put forward proposals at an appropriate time. The IMF is currently seeking views from the public on the matter of financial sector taxation as part of the request made by the G-20 at the Pittsburgh Summit of 24 and 25 September 2009. In fact, taxes and levies on financial transactions exist in different forms in the Member States; but these national taxes and duties usually cover only transactions of selected assets – Belgium and France have adopted legislation on a currency transaction tax at national level, but will only put it in effect if implemented at EU level.

    13) There has been a huge and rapid increase in the past decade of the volume of financial transactions as compared to the volume of trade in goods and services, which can be explained, amongst other things, by the fast-growing derivatives market. G-20 leaders have a collective responsibility to mitigate the social impact of the crisis, both in their member states and in developing countries, which have been hard hit by indirect effects of the crisis, whereas financial transaction tax would contribute towards covering the costs generated by the crisis.

    14) The European Union should agree on a common position in the international framework of G-20 meetings as regards the options as to how the financial sector should make a fair and substantial contribution toward paying for any burden which it has caused to the real economy or which is associated with government interventions to stabilise the banking system. We also take the view that the EU, in parallel and consistent with the G-20 work, should develop its own strategy with regard to the range of possible options for action.

    15) The Commission should elaborate, sufficiently in advance of the next G-20 summit, an impact assessment of a global and European financial transaction tax, exploring its advantages as well as drawbacks.

    Balance sheet levies, moral hazard and the banks

    16) The financial crisis has in fact assured the market that governments in practice do bail out the financial sector and that there is little risk of being allowed to fail. Public support for the banks, both in terms of capital injections, government guarantees and central bank money at almost zero cost for the banks has been and still is massive (3 trillion Euros in Europe). Moreover, this huge public bail out has come with few strings attached. The single ‘conditionality’ attached was to force banks to pay interest premiums on government provided loans and guarantees. In this way, banks are motivated to repay public support and get the public actor out of the banks as soon as possible.

    17) However, the latter implies that banks having restored liquidity and in the process have paid back public support in order to save on the interest premiums and fees required by it. That is not necessarily so. Banks continue to have an implicit but strong guarantee on a public sector bail out but at the same time do not have to pay any fee for this.

    18) A balance sheet levy on banks’ liabilities (excluding deposits since these are covered by an explicit deposit scheme guarantee with a fee to be paid) is therefore a logical and fair measure: The ‘bail out’ guarantee banks enjoy would no longer be ‘free’ and banks would contribute at the same time in the general costs of the crisis they have inflicted on the economy.

    19) Moreover, the ETUC insists on additional advantages of such a balance sheet tax: By modulating the tax rate in function of the size of balance sheets, governments can increase the levy on big banks, thereby addressing the additional problem of banks becoming so big that they are ‘too big to fail’.

    A tax on banks’ bonuses, dividends and stock options

    20) There are strong reasons for tax policy to intervene in financial sector remuneration policy. France and the UK have taxed bonuses for one year but this is not enough. Bonus payment structures as well as stock option systems have not aligned CEO and traders’ interests with long term shareholder value as they were supposed to do but have instead promoted speculative behaviour, short termism and excessive risk taking. Taxing bonuses will flatten the pay structure and take away some of the incentive and reward of risk taking. It is also clear that the financial sector is now maintaining or, in some cases even increasing its profits [7], not because of ‘good management’ practice but simply because of government and central bank support. Banks can not continue to pay out bonuses and dividends, coming from public money support while at the same time the entire economy, governments included, has to pay the price of a crisis which was caused by the banks in the first place. Social welfare is not to be replaced by ‘welfare for the banking sector’.

    ‘Unconventional’ Fiscal Policy

    21) Household savings rates have increased massively because of fears of rising unemployment, troubled capitalisation pension systems and destruction of financial and housing wealth. Moreover, the pressure to cut public deficits with which public opinion has become entrenched makes households anticipate tax hikes as well as major cuts in social protection (including raising the retirement age) and public services. Households will most likely react to this by maintaining or even increasing high savings rates. This will work to drag a possible recovery further down.

    22) At the same time, high savings rates also present an opportunity. Mobilising high savings by transforming them into productive investment strengthens economic recovery as well as economic growth potential. This can be done by a ‘smart’ fiscal policy which increases the tax pressure on high savings while using the receipts from it to increase public sector led investment. In this way, demand dynamics are strengthened without the deficit increasing (or even with deficits falling).

    23) The ETUC therefore urges the Commission, the Ecfin council and the European Council to explore this avenue and develop a coordinated tax policy targeting high savings rates and connected income flows. This concerns taxes on business profits, on income from capital (dividends, interest rates), on capital gains and on big fortunes. We note that the US is taking this direction: In the US ‘stabilisation plan’ (which by the way is using a ten year horizon, unlike in Europe where a three year adjustment period is planned), measures like hiking marginal tax rates on high revenues, increasing the tax rate on capital gains and dividends and raising taxes on business profits, amount to 1,6 trillion dollars over the next ten years.

    24) These proposals are even more justified with regard to tax evasion, which has reached a very high level in several Member States.

    The current crisis makes this situation even more unacceptable because workers are in a situation where they have to foot the bill not only for the impact of the crisis on jobs and wages, but also because they are the ones reliably bearing the tax burden.

    That is why the ETUC is calling on the European and national political institutions to develop tougher measures for fighting tax evasion, to step up audits and penalties and, more generally, to pursue a progressive tax policy as opposed to a flat-rate tax policy.