Euro Crisis

The European Union may be on the verge of compounding the financial crisis with a fiscal disaster, writes Fred Harrison. The euro zone cannot operate a single currency without a complementary system of taxation. It tried to do so, which is why democratic governments have fallen to technocrats in Greece and Italy. But creating a fiscal treaty on bad principles would not be the road to salvation.

Politicians believe they can save Europe by baling-out the banks and cobbling together protocols that discipline countries that rely too heavily on borrowing money to fund their spending.

Germany’s Chancellor, Angela Merkel, wants the euro zone to develop rigid rules that would force governments to balance their budgets. This is setting an impossible standard of behaviour. For Europe’s tax policies make it impossible to balance the books.

Taxes on people’s earned incomes damage their capacity to work. This translates into an automatic shortfall in output. The fiscal bias also creates a permanent force of unemployed and under-paid people. Democratic pressures force governments to embark on welfare programmes that cannot be funded out of current revenue.

The European Commission offers a glimpse of the stresses in this tax system in its Monitoring Tax Revenues in EU Member States 2010: Tax Policy after the Crisis, Working Paper No. 24 (2010). This acknowledges the need to raise more revenue from the rents that may be imputed to property. But the analysis does not go far enough in identifying the rent of land as the appropriate fiscal base.

The study notes that Germany escaped the house price bubble of the past decade. That is why she recovered quickly from the recession. It is not fair that German taxpayers should now be asked to shoulder the costs of bailing out countries that recklessly fuelled house price booms.

The only fair solution is to treat Europe’s land and natural resources as the asset that belongs to all citizens. This can be achieved through tax reform. Carefully constructed, that new fiscal policy would remove from contest the one object that has been the cause of wars and economic boom/busts over the 20th century: the land.