Europe can’t cut and grow



The EU needs a growth compact, not a fiscal one. Swift action on tax and jobs is the way out of the crisis. The IMF’s representative in Greece, Poul Thomsen, admitted last week austerity measures were leading to deep recession.



Overspending by governments, we have been told, triggered this crisis. The cure thus lies in immediate austerity, hence last month’s German-led push for a eurozone fiscal compact and the UK’s pursuit of similar policies.

But, as demonstrated by the experiences of Greece, Portugal and Spain, this course leads to biting, deep recessions and worsens public indebtedness. The IMF acknowledged as much last week. A focus on growth, not austerity, is the correct answer for Europe’s ills.

The case for “growth-friendly austerity” relies on the argument that public cuts are compensated for by consumers and businesses spending more, and with greater efficiency. However, the collapse of confidence wherein everyone expects the economy to worsen before (if) it gets better, along with excessive levels of private indebtedness, means that consumers and firms are busy repaying debt or building rainy-day funds, not spending and investing.

When EU leaders next meet on 1 March, they must adopt a binding pledge to increase growth-enhancing public investments in the EU, outlining a firm strategy for funding these – in effect, a growth compact.

The axe of austerity falls first and foremost on public investment, as it is easier to cut than other forms of public expenditure. This undermines current growth by shrinking the level of economic activity, and also jeopardises the potential for future growth. Every euro of cuts today could result in many euros of lost growth.

Most important, the focus of efforts to reduce public indebtedness should be on raising tax revenue, not cutting spending. Increasing consumption or employment taxes may be counterproductive when consumer spending is depressed and unemployment high, but other taxes have a less negative effect on growth, even in the short term. The taxation of property, land, wealth, carbon emissions and the under-taxed financial sector needs to be increased across the EU. Dividing this revenue between public investment, deficit reduction and cutting income tax for low earners would boost both growth and employment.

EU states also need to redouble efforts to crack down on tax evasion and avoidance. Greece and Italy (which have large “black” economies) as well as France, Germany and the UK have enacted recent measures to increase compliance. The results are mixed, since domestic measures that have squeezed the tax avoidance balloon at one end have inflated it at the other. London, a haven for the rich rascals, is now adding southern Europeans to its mob, but Greek and Italian money is also flooding into Germany.

Sharing and implementing the most effective anti-tax avoidance/evasion strategies across all EU countries and an agreement to help other members enforce their domestic measures would multiply the revenue from such crackdowns. Urgently renegotiating the EU savings tax directive, that at present captures less than 1% in annual tax revenue on untaxed wealth transferred to other EU members, would also provide a big boost to revenues to fund public investments.

EU member states must use its status as the largest economic area in the world to aggressively negotiate under the banner of the EU and strike much better deals with tax havens so tax losses can be minimised and past, unpaid taxes clawed back.

The UK-Liechtenstein and German-Swiss bilateral deals, on the fate of untaxed UK and German money in these tax havens, have been rightly criticised as being very weak. The US has used its weight as the largest economy in the world to negotiate a much better deal for its tax collectors. This is what the EU must do. Also, the US, under its foreign account tax compliance act, obliges EU banks to share data on accounts held by US citizens. The EU must immediately push for reciprocal arrangements.

Doubling the capacity of the European Investment Bank, which has an excellent record of providing credit to the employment-intensive smaller business sector, would need less than €40bn of up-front cash, and generate investments of 10 times that amount.

Finally, the structural reforms in crisis countries must continue and the liberalisation of services in the single market must be accelerated. These policies will help boost future growth but work best in a growing, not shrinking, economy. Without a growth compact, the social and employment crises in Europe will only get worse. With it, we have a fighting chance to emerge stronger.