Tax Break

John Fisher, international tax consultant

Archive for the category “European Union”

Teaching Mrs Merkel German

How many times in one reign does a monarch have to listen to Tom Jones singing Delilah?

Nostalgia ruled for most of last week. While the British indulged in a House of Windsor love fest, the world delighted in snippets of the Queen over her sixty year reign. It was Prince Charles, the King-in-Waiting, who stated the obvious at the Buckingham Palace Doorstep Concert noting that for many people this was the third jubilee they were enjoying along with the Queen (who, frankly, did not by that stage look like she was enjoying anything very much).

My memory leapfrogged over the Golden Jubilee and sprinted straight for the 1977 Silver Jubilee. That was a very different occasion – the generation which, back then, we called middle-aged had lived through the Second World War and brought an old camaraderie to the festivities, as opposed to today’s middle-aged who brought Stevie Wonder, Tom Jones and Paul McCartney.

Maybe it was just the glasses, Jim. Or maybe not

But, Silver Jubilees aside, I was reminded that 1977 was an annus horribilis (as, indeed, was much of the decade but my Latin does not stretch that far). Britain was governed by a minority Labour Government which, in turn, was governed by the Trade Unions who kept bringing the country to its knees.  James Callaghan, the hapless Prime Minister being fattened  for the slaughter by Mrs Thatcher, had swept into No 10 a year earlier with the slogan “Jim Won’t Fix It”. This was a play on the title of a popular TV show and branded him immediately as totally incompetent.

 Meanwhile, across the pond the Americans put a Georgian peanut farmer into the White House who, apart from claiming to have been attacked by killer rabbits, let his team spread compost over US diplomacy. At one diplomatic function Chief of Staff Hamilton Jordan (another Georgian) was reported to have told the Egyptian Ambassador’s wife that he had always wanted to see the pyramids, while fixing his gaze somewhere well south of her eyes.

Jack and Bobby Kennedy. Or maybe not

From the economic viewpoint  the world was down the tubes. The collapse of the Bretton Woods exchange rate system  early in the decade followed by the Arab Oil Crisis had led to rampant inflation – or to be more specific – stagflation. This state of affairs was the nightmare of every adherent of the  school of economic thought that had ruled since the 1930s – it broke the rules of Keynesianism. Inflation together with slow growth and steadily high unemployment was not to be found in Lord Keynes’s song book.

It was no wonder, therefore, that a radically different breed of economist managed to insinuate itself into the frontal lobes of the world’s politicians and the world was presented with Monetarism in the UK and Reaganomics in the US while the French elected the rabid socialist Francois Mitterand just to prove a point. That should have been the end of history, but it wasn’t. Things started going visibly pear-shaped towards the end of the century and neo-keynesianism ( a potpourri of everything that had come before) has been on the ascendant among economists, if not politicians, ever since.

Sadly, since the financial crisis hit in 2008 all we have heard from European leaders (until the French played their usual “driving the wrong way down a one way street card’  in electing a socialist president) is austerity, austerity, austerity. The Eurozone has to collectively tighten its financial belt, balance its budget (well, almost) and keep within very low inflation targets.  Bung up taxation, slash public spending, pay off your loans. And, meanwhile, let the continent  burn.

Strange. I always thought Paul was born around the same time as Beethoven

Leading this bloody crusade is none other than Europe’s Supreme Leader – Angela Merkel. Locked into a  mindset of classical economics and simple housekeeping Frau Merkel, along with all the other European big chiefs  other than M Hollande who has yet to prove that he is not a left wing nutjob,  is missing something fundamental. And that something was observed by a German – Georg Wilhelm Friedrich Hegel.

Frau Merkel should ask the Queen about Hegel’s “Zeitgeist” . She should ask her about her 60 years of regular meetings with her prime ministers from Winston Churchill to the current young boy. The Queen would doubtless tell her that the spirit of the times  has changed.  Beethoven could not have written the Ode to Joy in 1967 London and Paul McCartney would have had trouble with Yesterday in 1827 Vienna. So why is there an assumption among political leaders that, because something did not work in 1977 it will not work in 2012 OR that something that did work  in 1982 will work in 2012?

Did I say at any cost? Maybe not

Back in the 1970’s inflation had got out of control  and – let’s make no mistake – reasonably stable prices are a sine qua non (Latin again) for a stable economy. Stagflation was a reality. Unions were at their most powerful. People’s expectations were at the bottom of the pit. It was critical to bring order to the money markets and bring the unions in line, at whatever the short-term cost, to facilitate a basis for nations to move on. It was left to  Thatcher to tame the Coalminers and Reagan the air traffic controllers.

The European crisis of the last few years is against a very different historical backdrop. Inflation and the unions are not a major threat. The financial crisis is precisely that and not a crisis of economic fundamentals (with the exception of Greece which will soon be sent on its way to Hades). It is the handling of the crisis that threatens to upset the applecart.

Any fool can see that, by everyone getting their house in order at the same time demand just deflates (Paul Krugman has pointed out that  you cannot use the analogy of a spendthrift household that needs to tighten its belt when referring to an entire country because the spendthrift household can rely on demand being created by responsible households as opposed to the entire country where demand just disappears).

Should I buy ingredients for another cake or pay off the mortgage?

Krugman, like Keynes, has no problem with  balancing budgets when the economy is booming. However, when the economy is in recession it is time for increased government spending. It is clear that, whilst in the long-run governments may be highly inefficient participants in the economy, in the short run they will spend much more freely than private households concerned about the future. This supports the contention that taxes should not  be reduced in a recession if that means less government spending. Alongside all this there should be quantitative easing (basically, central banks injecting cash into the economy) and increased targets for inflation.  Balanced Budgets would  still be sought but over a much longer period. Within the Eurozone they will need more banking unity and some form of joint eurobonds to protect weaker economies that cannot devalue their currency to increase competition.

Angela, go with the flow!

It is not an exaggeration to state that the next few months are going to be  critical for the future of the European Union. If Mrs Merkel prefers not to battle with the stark prose of her fellow German, Mr Hegel, she might prefer that nice Mr Shakespeare’s Julius Caesar (not in Latin):

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

The Euro – a mental exercise

Polish ex-president demonstrates best tool for unblocking an S bend

Zbig does not understand what the fuss over austerity in Europe is all about. He fails to comprehend the fall of the Dutch government, the elevation of a socialist to the presidency of France, the  inconclusive election in Greece, bailouts and quantitative easing.  All he can say, with his utterly limited command of at least 10 European languages, is that the European Union is “good”.

Whenever he finds himself a bit short of  work Zbig chucks his monkey wrench into his volumnous bag of tricks and heads for the next member state and fortune.  An optimistic chap, his education evidently did not include Steinbeck’s masterpiece “Grapes of Wrath” about the hardships of American migration during the Great Depression or, for that matter,  AA Milne’s “The House at Pooh Corner”. Noticing that children’s classic in the bathroom of one of his clients, he casually asked the lady of the house if it was the only book they had on plumbing.

“Next stop, Berlin!”

The media is currently obsessed with the woes of the Euro.  Faced with the inability of some countries to service sovereign debt 25 of the 27 members of the EU entered into a pact, under the extremely persuasive eye of Angela Merkel of Germany, to slash  deficits. Meanwhile rescue packages were put together where required and the European Central Bank eased credit.  The  austerity resulting from the contractionary fiscal policy has been roundly condemned by much of  the economics profession and is being clearly rejected by the electorates of countries with the chance to choose.

With only an undergraduate degree in monetary economics, when the Euro was first mooted my inital reaction  to the plan was “This is mental but I am sure that better men than I know what they are doing”. IT WAS MENTAL.

Don’t tell me what to do!

Now our economic gurus are telling anyone willing to listen (which is  just about everyone except Angela Merkel who is the only person who needs to listen) that prudent northern Europe needs to expand demand and encourage inflation to compensate for the inability of countries like Greece to devalue their Euro against everybody else’s Euro. A few days ago the Germans gave the first indication that they might be prepared to budge on this.

At the same time they place faith in the ability of workers to migrate freely between states thus solving the chronic unemployment problem in distressed countries. While Zbig, working with his hands in a pretty homogenous Europe-wide market for pipes and washers,  can get by with a few necessary words in whatever language he happens to be being paid in – for most people migration is hardly an option. Language barriers, recognition of qualifications, home ownership and pension rights are just some of the factors that put paid to serious mobility.

As it appears to be silly season for macroeconomics, I thought I might throw in an idea of my own. I am aware that it is full of holes – indeed, when I briefly spoke to the editor of  a respected financial newspaper last summer, he gently advised me that, although I was clearly a young man,  economics had moved on a bit since my student days.

If they want to save the Euro, it is time to employ some highly unorthodox tax policies “for a limited period only”  that go against everything the EU and OECD believe in (which is probably as  good  a reason as any to employ them). The following idea might provide a short-term solution to the mobility problem.

Greek workers demonstrating their flexibility

Countries with official unemployment above a certain level should be allowed to ring fence job-enhancing investment from low unemployment EU countries from taxation.  Thus, for example, a German company could invest in a factory in Greece starting  2012 or 2013 employing 800 workers and would get a tax holiday in Greece for, say, 10 years. At the same time, to ensure that the tax is not simply shifted, Germany would apply tax sparing (a credit for notional tax paid in Greece). Investing companies would have to prove that their existing employment numbers in other EU countries did not drop as a result of the new investment. What the Germans should like is that it does not involve them directly dipping their hands in their pockets and, as long as the OECD can imagine the EU as one country – there is no issue of unfair tax competition.

As a result of investment and increased employment in distressed countries demand should be enhanced, leading to optimism and recovery. In the meantime economists can keep pushing for the European Central Bank to continue printing Euros (quantitative easing) and German expansion  while citizens sporadically revolt against draconian deficit reductions.

With the spread of English as the international language across the globe (even the French, Russians, Japanese and Chinese have learnt to play the game) when all is said and done mobility may one day work in the EU. But there is one country that still seems to insist it hasn’t lost the language war – and that country is quite important.

In those days there was always someone who spoke English

A few weeks ago I had to join a conference call with a foreign colleague and his client in Germany. When I called the conference number the taped instructions were entirely in German which, I confess, I did not understand. Mildly frustrated by the experience of getting nowhere and surrounded by my bemused team I started jokingly shouting at the phone. Exasperated and beyond hope, I eventually hit the hash button and, to my utter surprise, was connected to the call.  At that point, the prerecorded call identifications started – first my German colleague, then his client and then……..a bellowing “Speak English!”  I don’t think they understood.

Post Navigation