Maybe It Really Isn't Fair To Always Just Blame The Germans

The conventional wisdom runs something like this: the northern European (Protestants) are industrious and thrifty and the southern Europeans + the Irish (Catholics) are slackers and high livers who squander their wealth on wine and women. Or... the Nazis won the long-war after all and are now cracking the whip to make everyone in Europe act like a good little Germans-- or starve. After all, who really gained the most from the creation of the Common Market and the Eurozone? German industry is well... very much über alles. Cyprus, Spain, Italy, Portugal, Greece... not so much. German banks have, conventional wisdom has it, underwritten their spendthrift ways-- or at least their ability to buy expensive German manufactured goods.

Over the weekend, Der Spiegel offered an alternative interpretation, basically, why don't the 1% in these crooked countries pay their fair share and stop avoiding taxes? Like here in the U.S. "interest rates are very low, because the ECB [like the Fed] is flooding the euro zone with money to stabilize the system. People who save their money are currently getting the short end of the stick, as they are stealthily being dispossessed. On the other hand, those with enough money to invest in stocks and real estate are benefiting from the boom triggered by the flood of funds coming from the ECB. In other words, taxpayers and ordinary savers are paying for the euro rescue efforts, which are primarily benefiting the rich in Europe's most troubled economies. Their assets remain largely untouched, while the assets of their rescuers are melting away... [T]he aid programs to date have only replaced old loans with new ones, so that the borrower countries will never shed their heavy debt burdens." Ordinary Germans are getting sick of being painted as the bad guys, although keep in mind when you read the numbers below that the averages reflect that many of these southern Europeans countries have much, much less economic equality than the northern countries do. The rich are really rich (and powerful) and the poor are getting poorer and the middle class in smaller, less powerful... and shrinking.

[T]here is also a second image of Germany, one that's based on numbers, not emotions. The figures were obtained by the European Central Bank (ECB) and released last week. This image depicts a country whose households own less on average than those that are asking for its money.

In this ranking of assets, Cyprus is in second place Europe-wide, while Germany ranks much lower, even lower than two other crisis-ridden countries, Spain and Italy.

And this Cyprus, with its affluent households, is now supposed to receive €10 billion ($13.1 billion) from the European Stability Mechanism (ESM), the Euro Group's permanent bailout fund, and the International Monetary Fund (IMF), at least according to the decisions reached after dramatic negotiations, which the German parliament, the Bundestag, is expected to approve this week. But a new question is arising: Why exactly are we doing this? Isn't Cyprus rich enough to help itself?

In light of the new ECB study, a new discussion of the Euro Group's bailout strategy is indeed necessary. So far taxpayers have born the risks of this strategy, by guaranteeing all loans the ESM has paid out to needy countries. Greece, Ireland, Portugal and Spain are already part of this group, and now Cyprus has been added to the mix.

...It would be more sensible-- and fairer-- for the crisis-ridden countries to exercise their own power to reduce their debts, namely by reaching for the assets of their citizens more than they have so far. As the most recent ECB study shows, there is certainly enough money available to do this.

The numbers are potentially explosive. For instance, the average German household has assets of €195,000, almost €100,000 less than the average Spanish household. The average net wealth of households in Cyprus is €671,000, more than three times the German value. Italian and French households are also significantly wealthier than their German counterparts.

The differences are even more pronounced when it comes to median net wealth, which is the level that the lower half of the population just reaches and the upper half exceeds. On this measure, Germany, at €51,400, is actually in last place in the euro zone. The corresponding value for Cyprus is five times as high. Median net wealth is even higher in crisis-rattled Portugal than in Germany.

The conclusions of the ECB study had hardly been published before various efforts to relativize and whitewash the figures began. The results were apparently embarrassing to the ECB itself, but also to the German government.

...[T]he differences in wealth were mainly attributable to property ownership habits in the various countries. Whereas just over 80 percent of households own their own homes in Spain (83 percent) and Slovenia (81.6), and even 90 percent in Slovakia, this is true of only 44 percent of Germans.

...Nevertheless, some attempts to downplay differences in wealth within the euro zone are reminiscent of card tricks. One argument holds that the Germans are portrayed as being too poor, because their figures do not account for their claims against the government pension system. In other countries, people provide for their retirement by buying property, which Germans don't have to do because they have government pension insurance.

But this is a spurious argument. Claims against a government pension fund do not constitute the asset accumulation in the classic sense, but rather a promise that could quite possibly not be kept. The current working generation pays for the pensions of retirees, which is precisely why pension claims cannot be reflected in the wealth calculation. They are offset by the younger generation's obligation, which is essentially a liability to vouch for the claims.

There are in fact understandable reasons why the Germans even lag behind such crisis-ridden countries as Greece, Cyprus and France when it comes to asset accumulation. In the last 100 years, Germans have been the victims of several events with the traits of expropriation. The hyperinflation of the 1920s, a consequence of World War I, destroyed the wealth of a middle class that had seen its fortunes consistently improve during the German Empire.

The monetary reform of 1948 eliminated the Reichsmark, which had become worthless after Germany's defeat in World War II, and wiped out the savings of an entire nation. In East Germany, 40 years of socialism destroyed the last vestiges of wealth and property. In the less than 23 years since German reunification, residents of the former East German states have not yet managed to attain the same levels of affluence as their fellow Germans in the west.

Most countries in the euro zone were spared such disasters. Either they emerged victorious from the two world wars, like France, or they remained neutral, like Spain. Either way, their citizens were able to build wealth over generations.

...The numbers, Italy's leading business newspaper Il Sole 24 Ore wrote, seem to suggest that "la Bundesbank" were trying to say to us: "You're the rich ones, and if you have problems, kindly solve them on your own."

Italy isn't swimming "in money, but in poverty," the paper argued, noting that 16.5 percent of Italians are considered poor while only 13.4 percent of Germans fall below the poverty line. The Italian central bank prepared its own report, which emphasized that Italy has more poverty and a lower average income, but also more wealth and less private debt.

It isn't this supposed wealth but growing poverty that has Italians upset these days. And it isn't the lives of the rich that shape the headlines, but the fates of people like Anna Maria Sopranzi, 68, and Romeo Dionisi, 62. Dionisi was a self-employed craftsman from Civitanova Marche in central Italy.

Sopranzi and Dionisi hung themselves from a heating pipe in their basement. A farewell note was stuck to the windshield of their neighbor's car. "Forgive us," they had written. Deeply in debt and impoverished, they had had no income for months but plenty of delinquent customers. Right up until the end, they hadn't shown any signs of despair or asked for help, neither from relatives nor the church.

They died of shame, and of the burden of the demands imposed by Equitalia, a government-owned company that collects taxes for the tax authorities.

People commit suicide every day in Italy. This was also the case before the crisis, but the deaths of Sopranzi and Dionisi were suicides committed out of despair, a warning sign that shook the entire country. The newly elected president of the parliament, Laura Boldrini, a former spokeswoman for the United Nations High Commissioner for Refugees, attended the funeral. "This is government murder," people said in the church. "To you we are just numbers." The archbishop appealed to politicians, saying: "It must become clear to you that we can no longer manage."

The crisis has plunged many people into poverty in Southern Europe, people who no longer know how they will make ends meet. Unemployment has risen to record level, and there are no new jobs in sight.

In Spain, a third of residents have taken out mortgages on their homes. With more than 4 million people losing their jobs in the years of crisis since 2007, many have been unable to continue servicing their loans with banks and savings banks.

There were 30,000 foreclosures last year alone, and most of them were primary residences. In most cases, the downgraded price paid at auction isn't sufficient to cover the entire outstanding debt, so that the mortgage holder is forced to continue paying high penalty interest and pay off the remaining debt in installments.

...Southern Europeans in a number of countries have traditionally paid no taxes on a good share of their income, which is one reason households with far smaller incomes have been able to accumulate substantially larger assets than German households.

Estimates by Friedrich Schneider, an economist in the Austrian city of Linz, reveal how horrifying the scope of the shadow economy is in the crisis-ridden countries of the euro zone. Among all the countries in the Organization for Economic Cooperation and Development (OECD), Greece, Italy, Portugal and Spain occupy the first four positions in the applicable negative ranking.

On the Iberian Peninsula and in Italy, the hidden economy makes up 20 percent of GDP, compared with almost 25 percent in Greece. By comparison, it only constitutes about 13 percent in Germany, and significantly less than 10 percent in other euro countries, like Austria and the Netherlands.

The greater the importance of moonlighting, the lower the tax revenues. The shadow economy deprives Spain, Italy and other countries of dozens of billions of euros in tax revenue each year, and has been doing so for decades.

Schneider's figures also show that in Greece, Spain and Portugal, the shadow economy plays an even greater role today than it did in the late 1980s. The scope of the shadow economy has declined in Italy, but only slightly. In other words, if attitudes toward taxation in Southern Europe were just as good as they are in the north, the debt-ridden countries would have solved their budget problems long ago.

All problems aside, Lars Feld, a member of the German Council of Economic Experts, also sees the ECB figures as good news. "They show that Germany, with its tough conditions for the euro bailout funds, is in the right."

After all, the debt-ridden countries are only eligible for the billions from bailout funds if they satisfy certain conditions in return. In addition to spending cuts and tax increases, they generally include the obligation to actually collect taxes. If tax laws not only appear on paper, but are also enforced, then "even Greece will be able to set aside doubts concerning the sustainability of its debts," says Feld.

Despite the drawbacks and qualifications of the ECB's wealth figures, one realization remains: The countries of the south are far more prosperous than previously supposed.

For these countries' governments and the politicians in the partner countries dealing with bailouts, this can only lead to one conclusion: There is still plenty to be had. Cash-strapped countries that have already taken advantage of aid from the bailout funds should be required to increase their own contribution even further.

In fact, the ailing economies have already begun increasing taxes on their citizens, in some cases substantially. In this context, many governments are also taking aim at assets.

Last year, for example, Spain reintroduced a wealth tax that had been abolished five years earlier. It doesn't generate much in revenues, in fact, less than €1 billion. This is because of generous exemptions that can reach €1 million on properties used as primary residences.

The Socialist government in France introduced a special tax on assets last year, which generated €2.3 billion in revenues. The Greek government plans to tax the rich to an even greater extent. After the government drastically increased revenue goals for the wealth tax last year, it now expects revenues to increase from €1.2 billion to €2.7 billion.

Economist Labrianidis also favors requiring the wealthy to play a stronger role in repaying the government debt. "The biggest problem is tax evasion and tax flight. And I'm not talking about the kiosk owner who doesn't give you a receipt for a pack of cigarettes," says the professor. He is referring to "the very rich," and he is calling for political will and a "wealth registry." Still, Labrianidis sees "no steps being taken in this direction. There is no political will to chase capital."

The average wealth of Greek households may seem high, but the country ranks near the bottom in Europe in terms of tax revenues. In 2011, tax revenues, including social security contributions, amounted to 35 percent of GDP, compared with an EU average of 40 percent.

Greek authorities are also making very little headway in their fight against tax evasion. Lists exist of delinquent doctors, wealthy people unwilling to pay their taxes and tax fugitives in Switzerland. There are also lists of undeclared swimming pools (which are subject to a tax) and proud owners of luxury yachts whose incomes are barely large enough to pay taxes. But the tax collectors continue to come up short. Last year, tax authorities were expected to drum up €2 billion in back taxes to help pay off the country's debt, at least under the conditions imposed by the troika consisting of the International Monetary Fund (IMF), the ECB and the European Commission. The actual figure was barely €1.1 billion.

In all southern European countries, the rich show little inclination to help pay for the consequences of the crisis. One exception is Diego Della Valle, 59, the inventor of the driving shoe and the president and CEO of Italian leather goods company Tod's. He proposes that companies like his, which are doing well despite the crisis, invest 1 percent of their profits to help the weakest members of society: the local elderly and unemployed youth.

In the case of Tod's, that would amount to €1.5 million, and if other profitable, publicly traded companies follow suit, he hopes to raise €150 million. Della Valle, who plans to launch his voluntary welfare contribution campaign this week, notes that this is something he can afford, and that for him it is "no great sacrifice, nor is it populism."

As nice as that may sound, keeping the government's hands away from private assets is a very popular pastime in Italy. It's an approach embodied by Silvio Berlusconi. More than anyone else, the self-made billionaire and longstanding former prime minister personifies the notion of circumventing the law and living according to the motto: Taking is more sacred than giving.

Although Italy has a high income tax rate of up to 43 percent, the government loses an estimated €120 billion a year to tax evasion and tax flight. There have long been discussions of tax increases and capital levies, but as is so often the case, little has ever been implemented.

Some ideas that have been discussed are the reintroduction of the land tax, an increase in the value-added tax and a wealth tax. The IMU, a tax on real estate ownership, including primary residences, was finally introduced under former Prime Minister Mario Monti. His predecessor Berlusconi had pledged, if re-elected, to reimburse around €4 billion in money that had been paid under the IMU tax. There was also a levy on yachts 10 meters or longer.

...Spain is a little further along in this respect. The conservative government of Prime Minister Mariano Rajoy, which came into office in December 2011, felt compelled to increase the maximum income tax rate from 45 to 52 percent. Rajoy also limited the possibility of reducing corporate income tax with write-offs. Before, on average, companies paid a de facto rate of only 10 percent to the government, says Josep Oliver i Alonso, a professor of applied economics at the Autonomous University of Barcelona

. Rajoy also reinstated the inheritance tax abolished by the Socialists, which will now apply to medium-sized and large estates. But because the crisis-torn population is already suffering under the increased value-added tax of 21 percent, as well as prescription fees and increases in taxes on alcohol and tobacco, Spaniards are growing less tolerant of the rich who try to avoid paying taxes on their money. New scandals are uncovered almost daily.

A former treasurer with the governing party, the conservative People's Party, hid €38 million in Swiss bank accounts, while a son of the former head of the Catalan government reportedly moved €32 million to tax havens. Even the son-in-law of the Spanish king allegedly siphoned ill-gotten public funds abroad.

...Peter Bofinger, a member of the German Council of Economic Experts, which advises the federal government, also believes that the crisis-ridden countries should ask the wealthy to make a substantially larger contribution. To clean up government finances, he is even calling for a capital levy. "The rich would then, for example, be required to relinquish a portion of their assets within 10 years."

A model of this sort of capital levy is the so-called Equalization of Burdens program implemented in Germany after World War II. At the time, the wealthy were compelled to pay a special tax for a period of 30 years.

Bofinger is convinced that a wealth tax would be far more appropriate than imposing a levy on savers, as was recently the case in Cyprus. "Resourceful wealthy people from Southern Europe will simply move their money to banks in Northern Europe, thereby evading the levy."

For Brussels economist Wolff, the ECB statistics provide more than just an answer to the question of who should pay the bill for the crisis in Southern Europe. "It becomes clear, once again, how unfair wealth is distributed, in Germany and elsewhere."

What he means is that wealthy Germans should also be expected to cover the costs of the crisis. "The effort to rescue the euro would be completely absurd if, in the end, the relatively poor average German household helped the super-rich in Greece avoid paying higher taxes."

Sounds like Paul Ryan and Silvio Berlusconi have substituted the same childish Ayn Rand books for the Bible on their bedside tables. Or are greed and selfishness just part of the inherent nature of conservatism?