Europe’s troubles

Print edition : July 22, 2016

E.U. Finance Ministers at an Ecofin meeting in Luxembourg on June 17 to discuss the issues of tax fraud, banking union and a controversial financial transactions levy. Photo: JOHN THYS/AFP

A shrewd economist makes sharp observations on globalised capital gone mad, largely in Europe.

THOMAS PIKETTY rose to global fame in 2014 when the English translation of his Capital in the Twenty First Century came out that year ( Frontline, November 28, 2014). Between April and end of that year, the book had become a bestseller, overtaking even the bestsellers in the fiction category.

Unlike that heavily data-based and rigorously analytical magnum opus, the French economist’s latest book, Chronicles On Our Troubled Times, is an easy read. It consists of some 50 newspaper articles published between September 2008 and November 2015 with a preface of 11 pages.

The pieces, says the author, “represent one social scientist’s effort to understand and analyse the day-to-day world, to get involved in the public debate; an attempt to reconcile the rigours and responsibilities of scholarship with those of citizenship”.

How one wishes that more saintly savants, especially those in India, climbed down from their distant secure towers.

For Indian readers, the specifics of the pieces, practically all of them dealing with the 2008-09 financial meltdown in the United States and its continuing impact on Europe, may appear to be somewhat distant, both in space and in theme. But the running theme, says the author, is “globalised capital gone mad”. Which part of the world can escape from the consequences of that madness?

United States of Europe

Europe has its special problems, though. One of them is its size. While geographically it covers the major part of an entire continent, demographically it is small. The population of the European Union (E.U.) in 2015 was 510 million. While that is larger than that of the U.S., it is a poor second to India with a population of 1,200 million and China, with an even larger population. Considering that the U.S. is a superpower from an economic perspective and India and China are rapidly growing economies, the E.U. does not have much to boast about. Even worse, while the U.S. bounced back fairly soon after the meltdown, the E.U.’s troubles are continuing and would appear to be far from being resolved.

The E.U., launched in some sense to counter the smallness of individual members, has other problems, too, which arise from the very nature of the union and became embarrassingly evident when it started facing specific issues. When the question of the external value of the euro became an issue, each one of the 17 central banks of the member-countries had a position of its own. Nor was it an isolated issue. Soon it was the question of public (sovereign) debts. When in two of the member-countries (Italy and Greece) the sovereign debt issue became one of controversies, Germany and France could not resist the urge to render friendly advice.

Piketty puts it tersely: “A single currency with seventeen different public debts and twenty-seven different tax policies that are mainly trying to siphon tax receipts from their neighbours does not work. But to unify public debts and institute a budget and tax union, Europe’s political architecture must be fundamentally revised.”

And, “A single currency with eighteen different public debts on which markets can freely speculate, as well as eighteen different tax and social systems in unfettered competition with one another, does not work and will not work.” Halfway house solutions are neither economically sound nor politically feasible.

A United States of Europe is the only option, affirms Piketty.

There are harsher indictments also. Here is one: “To pick up a few billion in exports, we’re now willing to sell anything to anyone. We’re willing to become a tax haven, to have oligarchs and multinationals paying less in taxes than the middle and working classes, to ally with rather unprogressive oil emirates just to get a few crumbs for our football teams. And conversely, we’re subjected to the law of the big countries…which use the weight of their justice systems to impose record fines and arbitrary decisions pretty much everywhere in the world….”

Surely, these are not the problems of the E.U. alone. They are symptoms to be seen in many parts of the world arising from the unplanned and uncoordinated “globalisation” of economies, while in the political sphere “might is right” is the rule.

Hyper inequality

Those who are familiar with Piketty’s Capital will recall his famous equation, r>g, where ‘r’ is the rate of return to capital and ‘g’ the growth rate, which he used as the basis of his main theme, the growing inequality of incomes and wealth practically all over the world especially since the 1980s.

He holds the view that the disparity between income and wealth will grow in the 21st century giving further disproportional weight to wealth as financial transactions are, and increasingly will be, dominated by the wealthy. There will be resistance to progressive taxation as it is considered to be a hindrance to “growth”. Thus, what is in store is “hyper-inequality” resulting from what he calls “patrimonial capitalism”, wealth accruing to families that are already wealthy. This has a long history in Europe, but ironically in the U.S., which was founded in large part as an antithesis to this social evil, it is now becoming quite pronounced.

Piketty’s considered opinion is that the opacity of finance and the growing concentration of wealth are challenges for the whole world.

Another matter discussed in these pieces, which will be of special interest to economists, is that of the measurement of national income. There are two standard measures, gross domestic product (GDP) and net national income (NNI). The two are used in national income accounting in most parts of the world. Although the former refers to product and the latter to income, both are stated unavoidably in value terms. However, there is a critical difference between the two. Apart from the fact that the GDP is inclusive of depreciation of capital (hence is “gross”), it is a measure of what is produced in the country concerned (hence “domestic”), not taking into account the flow of profits between countries.

It means, for instance, that while output may increase in a country heavily dependent on foreign capital (which is the basis of calculations of “growth”), its income may go down after the profits of the foreign companies are repatriated.

Similarly, since avoidance of double taxation (the taxation of the same income by two countries) is an internationally accepted practice, profits can fairly easily be transferred to tax havens without paying taxes in the host country.

It is well known that Luxembourg, a member of the E.U., is such a tax haven that allows (encourages?) multinational corporations working in other parts of the E.U. to set up their subsidiaries on its soil enabling what has come to be known as “LuxLeaks”. It does not take much effort to figure out who the beneficiaries are.

This slim volume, thus, consists of the observations of a sharp and shrewd economist about the happenings largely in Europe, but which are replicated or have their equivalents in other parts of the world increasingly ruled by the might of free-flowing capital.