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The PIGS syndrome



The southern European countries hardest hit by the 2008-12 financial crisis (Portugal, Italy, Greece and Spain) are trying to overcome a debt crisis which crippled both the public and the private sectors. In Italy, typically, the public sector has over decades piled up the world's second highest public debt mountain, still growing. With the public administration unable or unwilling to honor its payment obligations, banks struggling to remain liquid although 20-30 percent of their debtors are unable to pay interest, unemployment at record levels, Italy is experiencing what in the best case is a deep crisis and in the worst case an extended period of economic stagnation which is likely to delete Italy from the list of the ten richest countries.

How could this have happened? The French economist Thomas Piketty (Capital in the Twenty-First Century, Belknap, Cambridge 2014) has shown that the peaceful and relatively orderly decades since about 1970 favored the rapid accumulation of private capital in all developed countries irrespective of their socio-economic policies. In the PIGS countries, poor governance allowed private capital to flourish at the expense of the public sector which was exploited through rampant corruption and tax evasion. Especially since the introduction of the euro currency in 1999, low interest rates permitted governments to borrow funds as stopgaps to maintain a minimum of public services despite empty coffers and to provide funds required for corruption.

In southern European countries it is notoriously difficult if not altogether impossible to implement drastic reforms. The traditional approach of increasing taxes and streamlining tax collection quickly hits the wall. In businesses large and small that have always dodged taxes tax cheating is a pillar of their business plan. Once they have to pay taxes as they should they get in trouble and are often forced to close down, as happens on a mass scale in countries like Greece and Italy. Three of five small to medium size businesses in Italy currently need to borrow in order to settle their tax debts, says a report by the research institute Unimpresa. Bankruptcy also threatens millions of individuals who in these countries never really paid taxes. Many decide to vanish; they disappear without leaving an address behind. Others fall terminally sick or commit suicide.

Despite improvements tax collectors are still unable to secure more than a small fraction of the amounts owed to the state. Governments are therefore seeking unusual ways of transferring private capital into public coffers. Piketty has proposed a heavy annual tax on "patrimony capital", i.e. inherited riches. In the case of Italy several Berlusconi governments abolished property taxes and even encouraged tax evasion in favor of private capital growth and inheritance. Small wonder that — instigated by the IMF and the Bundesbank — Italian economists are now thinking aloud about a "patrimoniale" tax to act as a haircut on private capital. In Greece, both ND and PASOK governments found making debts much easier and popular than collecting taxes.

The new idea is clever: instead of past periodic devaluations of the national currency — drachma or lira — to wipe out debts and stimulate the economy, periodic bouts of patrimonial "una tantum" haircuts would refill the public coffers and alleviate the crippling stagnation of the economy. Recognizing how volatile capital is, Piketty is thinking of an EU-wide regular annual patrimony taxation instead of the:"una tantum" currently discussed in Italy and Brussels.

How politically realistic both approaches are, remains doubtful.

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—— John Wantock