Les Jones

European Union > Highly Recommended Article on Europe's Economic Future

From Brussels Journal, Europe’s Ailing Social Model: Facts &Fairy-Tales looks at Europe's liabilities. Not just their official debt, but thei long-term liabilties of their social programs and pension system.

Unfunded pension liabilities now average some 285% of GDP [pdf], more than 4 times the officially published public debt figures. Total public liabilities now exceed assets in most EU countries, and are causing runaway debt service. Richard Disney calculates [pdf] that if social policies are kept unchanged, tax hikes of as much as 5 to 15 percentage points will be necessary over the next couple of decades merely to avoid the rate of indebtedness increasing any further.

Unfortunately, this will just kill growth completely. Europe’s present social model is unsustainable because it is based on robbery of future generations. Keeping the system in place would jeopardize the next generation’s future with an unbearable and uncompressible tax burden, and would seriously add to the risk of a total collapse of Europe. Moreover these expansionary social policies have not worked so far. In spite of the largest debt buildup in history Europe’s growth has remained weak anyway. Europe’s social model is built largely on credit to be paid back by its own children.

and this, on inflated European taxes:

Gwartney’s findings provide the final explanation why continental European economies, such as Belgium, no longer grow. The Belgian tax burden is 20% above the optimal tax level burden as calculated by Primo Pevcin [pdf]. It is 9 %-points above the OECD average and 15 %-points higher than the tax level in the US and Japan.

WorkForAll’s empirical study analyzing 25 plausible causes of economic growth in a comprehensive regression arrives at the same conclusions. The best way to spur growth is by reducing the tax burden and Europe’s languishing government sector, and by shifting taxes from income to consumption.

Adapting Europe’s Tax Structure for Globalization

With an excess proportion of direct taxes, Europe’s tax structure is totally unadapted to globalization. Direct taxes on profits, wages and capital increase the cost of domestic production, and in doing so have exactly the opposite effect of import duties. Direct taxes roughly double the cost of Europe’s domestic production, making Europe’s produce uncompetitive both in the home market and in global markets. Just as import duties cause protectionist distortions in world trade, direct taxes do the same, but in the absurd opposite sense. Globalisation therefore necessitates more urgently than ever a shift of the tax burden from production to consumption.

The author suggests that European countires adopt the highly successful Irish approach of not just low taxes, but low taxes that are spread evenly between production, labor, and consumption.