The EU’s Plan: Raise Taxes With Bailouts

December 1st, 2011 at 1:44 am | 20 Comments |

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The past two weeks have seen a dizzying array of proposals from virtually every organ of the EU claiming that they can make the eurozone more efficient, durable, and solvent. If you noticed that no one is saying that they will make the eurozone more democratic, you’re not the only one. The most anti-democratic organ which is being set up is a permanent bailout fund, the European Stability Mechanism (EMS).

The ESM will not only be a permanent bailout fund, it will have the ability to raise funds from member states without democratic accountability, while also making it impossible to leave the eurozone if the rest don’t want you to.

The ESM is intended to replace the current bailout fund, the European Financial Stability Facility. The ESM was signed in July of this year and is expected to be ratified sometime in 2013 by the signatories. It purports to enshrine for all time the various legal inadequacies of the EFSF.

The ESM will raise 700 billion euros from eurozone members in pro-rata shares by GDP. The Board of Governors is made up of finance ministers of countries that do and do not get bailed out as well as who does and does not get punished for not paying their share, and vote mostly by qualified majority. Member state contributions are mandatory, the obligation to pay enforceable in the European Court of Justice. Contributions can be raised without limit if the Board of Governors agrees. All future members of the euro must sign on to the ESM.

Ominously, these obligations are to be permanent. “ESM Members hereby irrevocably and unconditionally undertake to provide their contribution to the authorised capital stock” (Article 8(4)) and to “pay,” not guarantee, certain capital calls voted on by simple majority within seven days (Article 9(3)). This provision does not seem to fit with the manifest ability of member states to leave the Union and the euro simultaneously. If the obligation already undertaken is really irrevocable, what contributing country would ever leave the eurozone if it could?

The practical effect of such arrangements is that the eurozone configuration of the Council of Ministers (or Council of the European Union) has just increased its powers grandly without a vote as the treaties call for.

It’s the member states paying in that lose, both by the creation of another huge bureaucracy inside the Union not all have agreed to, and in the knowledge that the Union can effectively now tax them directly, redistribute the money the way finance ministers alone see fit, and call it a bailout.

The document takes power away from national legislatures. Imagine if all finance ministers agree to raise the total subscription amounts from 700 billion to 1 trillion euros. Each country would have seven days to pay. No legislation will be needed to relieve a member state of its money, so the legislature and accordingly the citizenry are without recourse to decide whether to keep its money.

An aggrieved national population, assuming it is even made aware of the transfer, has only one arrow in the quiver: replace the government in the next election. This is a very blunt instrument indeed given it would be only one of many issues upon which an election could turn. Thus heads of state, and of course their finance ministers, have little to fear by giving away their people’s money by this method.

Further, the ESM, though founded during a crisis, is not an emergency provision. Maybe France and Germany will amend the treaties over the next couple of years to backfill the glaring impropriety of the origin and substance of the ESM to make it seem more legitimately wrought. But if this is the state of things to come in December, democracy is in for as rough a ride in Europe as national pocketbooks.

Recent Posts by Jeff Cimbalo



20 Comments so far ↓

  • ottovbvs

    Those countries that do not wish to participate in the ESFS have a remedy. Leave the Eurozone. I’m a member of a couple of clubs and have been a member of others where occasionally they have asked for a special levy on members because of some crisis or other. If you don’t want to participate you can leave.

  • Fart Carbuncle

    Totally worthless endeavor.

    The PIIGS make it a sport to avoid paying taxes. The underground economy rules in those super socialist states.

    I say break it up and stop this global economy garbage, so if states fail they do so mainly on their own. Don’t drag down others.

    • lilmanny

      Dude, take an econ class or at least admit that you post just to hear yourself talk.

      How does one end a global economy? How would you go about prohibiting institutions from one country from investing in bonds and financial instruments built on the value of foreign companies? How would you ensure that the tanking of one economy would not curb the buying power of your own consumers, or the availability of what that tanking economy used to produce? How would you curb the ability of markets within your country to take part int he markets of others? By law? By decree? Now who is the socialist?

      • Fart Carbuncle

        Sir, your argument is absurd.

        A good U.S. President could stop the ‘global economy’ nonsense in one term.

        Hopefully we’ll have one next year.

        • LFC

          “A good U.S. President could stop the ‘global economy’ nonsense in one term.”

          Talk about absurd. We can’t even get the basic common sense banking regulations back that we lost with the repeal of Glass-Steagall (thank you Republican Party for that) and you think any President is somehow going to be able to pull us out of the global economy? You obviously do not live in the real world.

        • lilmanny

          “Sir, your argument is absurd.” Sir, your argument doesn’t exist. If you want to post “Obama Sucks” just do that and stop trying to sound like you know what you’re talking about. It saves time and it gets your point across much better.

          Further, it’s clear that I don’t know what I am talking about, so feel free to explain to me how one insulates a capitalist economy from the global economy it takes part in, much less by presidential decree, much less in one term. You not only have all the time you want, you have a lifetime to come up with that answer.

  • SteveThompson

    The world’s next banking crisis may result from their use of derivative products, particularly debt Credit Default Swaps. The balance sheets of many American banks contain rapidly increasing volumes of CDS (think insurance) on Europe’s sovereign debt as shown here:

    http://viableopposition.blogspot.com/2011/12/european-debt-credit-default-swaps-next.html

    Should a major Eurozone nation default, there could be a cascading tsunami felt throughout the banking industry because it is entirely possible that banks simply could not pay what was owing on the CDS, similar to what happened to AIG in 2009 – 2009.

    • LFC

      What a shock. The titans of the financial industry created a different pile of derivatives that they only understood from the sell side and really have no grasp how they should be valued for risk/reward.

      It’s past time to regulate these bozos as tightly as we regulate the life insurance industry. At the very least banks (i.e. with gov’t insured deposits, access to gov’t loans, and other backing) can not be allowed to dabble in this casinoesque part of the financial markets. Restrict wild gambling to the private investment firms and if they collapse then so be it. We can’t let them tear the guts out of our economy yet again.

  • zaybu

    The crisis has little to do with democracy but more about implementing sound economic policies. If you incurred debts, that’s okay if your’re in a downturn. But when the economy goes upward, that’s the time the debt must be paid, which most countries have failed to do in the past. And so since 2008, with most countries having deficits in the stratosphere, the world has been struggling to get out of this downward trend, and it will take many more years to get out of it.

    Saying that Europe would need to be more democratic might be honorable, which certainly needs to be addressed at some point, but that will take a long time before it is ratified by every member. In the meantime, the ECB has to shed its irrational fears of hyperinflation, this is not 1923, and start to behave as a central bank – the lender of last resource – which means buying sovereign debt. And can we forget this idiotic thing called austerity. You do that when inflation is going sky high. We are not in that period, idiots.

  • nhthinker

    CDS was supposed to be “insurance” against having all eggs in one basket syndrome and help individual bank stability…It has become more like a contagion to spread economic infection. The remedy being advocated: more swaps!

    The US got screwed up when the invention of the 401K system made people more likely to invest a greater percentage of their net worth outside of their local communities and into investments that they not only did not understand, but had no relationship with the entities they were investing in.

    Libertarians will have their day or global bankers will wrestle the last bit of democracy from the population of the Earth. Neither will be a very “pretty” future.

    • lilmanny

      “The US got screwed up when the invention of the 401K system made people more likely to invest a greater percentage of their net worth outside of their local communities and into investments that they not only did not understand, but had no relationship with the entities they were investing in.”

      That is interesting. I usually include myself and others within earshot that we are somewhat to blame for the WS culture as we switch out investments based on a difference of 1% over the last 6 quarters, adding to the pressure to be that 1% better investment vehicle. I’m not disagreeing with you at all, I’d love to hear that idea developed, but don’t you think that the 401k is the only reason most people even save anything for retirement, mostly because someone else does it for them?

      • nhthinker

        It used to be that people would find their own investments in preparation for retirement. Often buying into someone else’s local business. If they did not save/invest, then they usually moved in with children. The 401K’s made it less likely that local business investments would occur. Many people also were very conservative and stuffed their money in CDs in local banks or even mattresses. All this natural fiscal conservatism and buy/invest-local mentality was dramatically corroded by the 401K system.

        There is no good reason why saving to invest in a local business for retirement are taxed but saving to buy 401K for a retirement are not.

        To counter this bad behavior, I would suggest that 401K needs at least an “invest in my zip code” as a recommended option for at least some percentage of one’s money. Obviously the “not all eggs in one basket” still applies. (But having more baskets than you understand the content of is not good either.)

    • sweatyb

      Libertarians had their day, we call it the Middle Ages.

      • Levedi

        Bwahahahahahaha!!!! *Snort, wheeze, slap thighs* Wow, haven’t had a good laugh like that in a while. The Middle Ages was anything but libertarian. For one thing the concept of human rights hadn’t been developed yet. For another, the divine right of kings was in full force. You think the Middle Ages was libertarian? Try looking at the laws of England ca 1100AD – Bakers could be fined or even whipped if their bread loaves didn’t weigh enough. The king had the right to quarter troops in people’s houses indefinitely and to appoint bishops. (Actually that last one was hotly contended by the church, but William I and his immediate descendants won on it most of the time.) Tithe was enforced by law. And the guilds were the biggest protection racket and only pension plan in town. Libertarian?! Yeah, right.

      • Bingham

        If the Netherlands is lazy, corrupt, stupid and a byword for nepotism, (as we’ve known it is since time immemorial,) then why should Germany keep subsidizing The Netherlands? Isn’t it time for Europe to cut Holland, etc, off and let them float off to Brazil, India or China where they really belong? When is enough enough? Has Europe not reached that point yet?

        Of course, without the Netherlands, there would be no Eddie Van Halen…Have you seen my favorite video? Here it is….

        http://www.youtube.com/watch?v=lN-4lX0QyZc

    • LFC

      CDS was supposed to be “insurance” against having all eggs in one basket syndrome and help individual bank stability…It has become more like a contagion to spread economic infection. The remedy being advocated: more swaps!

      The derivative instruments created like CDS’s and CMO’s are not necessarily a bad thing, but an unregulated market in them is just insane. I’m not allowed to start an insurance company, back it with $100,000 in assets, and then sell tens of millions in life insurance policies to people over the age of 90. The reason for that is that I can’t reasonably be expected to pay off the insurance policies as I’m contractually obligated. Saying “whoops, my little company is bankrupt, so sorry” doesn’t cut it. The Gramm-Leach-Bliley Act said that this type of regulatory oversight wasn’t necessary for derivatives, despite the fact that they are a form of insurance that can depend upon the seller’s ability to pay up if things go bad. Then again, Phill Gramm is an idiot.

      So the answer isn’t to do away with huge swaths of derivatives. The answer is to strongly regulate them like insurance and allow people to use them for the purpose they were originally intended, i.e. as a hedge and not a pure fee generation machine.

      The US got screwed up when the invention of the 401K system made people more likely to invest a greater percentage of their net worth outside of their local communities and into investments that they not only did not understand, but had no relationship with the entities they were investing in.

      There’s no doubt that most people don’t understand their risks and rewards. To make matters worse, the financial industry doesn’t have the best record of explaining that. I yanked my mother-in-law out of the criminal enterprise known as American Express (now Ameriprise) when I realized they had put a 70+ year old woman with no stomach for risk into tech funds and had her in front-loaded and back-loaded annuities invested in freaking bonds. One annuity was invested such that its load was over 1.5%. Not a bad return for Amex for a fund invested mostly in Treasuries returning about 3%. (I believe front-loaded funds are now illegal.)

      Finally, I think this take-off on the E*Trade baby says it all when it comes to the people who bounded into the market with lots of zeal but not experience and little knowledge:

      http://www.youtube.com/watch?v=AYrpROr9Gmk

  • sweatyb

    Europe is in critical danger of plummeting into a depression and Cimbalo is running around like a chicken with its head cut off over budgetary concerns! Sure that makes sense.

    Look, as can be seen from Germany’s behavior, the governments of these European countries have plenty of options at their disposal if they get an unreasonable request from the ESM. The most obvious one, that you overlook entirely, is to tell the ESM to take their request and shove it.

    It’s important to reflect on the nuances of rules such as this one, and it’s possible that Cimbalo is right in decrying this rule as anti-Democratic.

    However, it’s equally important to keep in mind that Europe’s current crisis stems from its member governments being unwilling to look past their provincial concerns and regional stereotypes to do what is best for the entire region.

    The new rules coming out of the Euro-zone seem to be mainly focused on addressing the current crisis and strengthening their economy as a whole. To attack those efforts as “anti-democratic” without giving them a chance to be effective and the benefit of the doubt about respecting Europe’s democracies seems a little Chicken Little-ish to me.

  • dugfromthearth

    “If you noticed that no one is saying that they will make the eurozone more democratic, you’re not the only one.”

    That is so true. Likewise I noted that Winston Churchill did not declare in his “blood, sweat, and tears” speech how he would make Britain more Democratic. It is shocking that when dealing with a crisis some people tend to focus on the actual crisis rather than some other topic.

    Not all people of course. The author seems as determined to ignore the fiscal crisis in Europe (while supposedly writing about it) to rail about democracy, as the GOP is determined to ignore the lack of consumption and inflation while railing about the dangers of hyperinflation.

    • Bingham

      So, with a name of “dugfromthearth,” you’re advocating capital and oligarchy over people and democracy.

      Wow. Just wow. …

      In case you missed what I just wrote, I’m going to repeat it.

      So, with a name of “dugfromthearth,” you’re advocating capital and oligarchy over people and democracy.

      Wow. Just wow. …