Guest Post: Europe’s Future: Inflation And Wealth Taxes

Tyler Durden's picture

Submitted by David Howden via the Ludwig von Mises Institute of Canada,

Tax burdens are so high that it might not be possible to pay off the high levels of indebtedness in most of the Western world. At least, that is the conclusion of a new IMF paper from Carmen Reinhart and Kenneth Rogoff.

Reinhart and Rogoff gained recent fame for their book “This Time It’s Different”, in which they argued that high levels of public debt have historically been associated with reduced growth opportunities.

As they now note, “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point.” Up to this point in the Eurocrisis the primary tools used to rescue profligate countries have included increased taxes, EU and IMF bailouts, and haircuts on government debt.

These bailouts have largely exacerbated the debt problems that existed five short years ago. Indeed, as Reinhart and Rogoff well note, the once fiscally sound North of Europe is now increasingly unable to continue shouldering the debts of its Southern neighbours.


General government debt (% GDP) Source: Eurostat (2012)

General government debt (% GDP)
Source: Eurostat (2012)

Six European countries currently have a government debt to GDP ratio – a metric popularlised by Reinhart and Rogoff to signal reduced growth prospects – of over 90%. Countries that were relatively debt-free just five short years ago are now encumbered by the debt repayments necessitated by bailouts. Ireland is a case in point – as recently as 2007 its government debt to GDP ratio was below 25%. Six years later that figure stands north of 120%! “Fiscally secure” Scandinavia should keep in mind that fortunes can change quickly, as happened to the luck of the Irish.

The debt crisis to date has been mitigated in large part by tax increases and transfers from the wealthy “core” of Europe to the periphery. The problem with tax increases is that they cannot continue unabated.

Total government tax revenue (% GDP) Source: Eurostat (2012)

Total government tax revenue (% GDP)
Source: Eurostat (2012)

Already in Europe there are seven countries where tax revenues are greater than 48% of GDP. There once was a time when only Scandinavia was chided for its high tax regimes and large public sectors. Today both Austria and France have more than half of their economies involved in the public sector and financed through taxes. (Note also that as they both run government budget deficits the actual size of their governments is greater yet.)

With high unemployment in Europe (and especially in its periphery), governments cannot raise much revenue by raising taxes – who would pay it? With already high levels of debt it is questionable how much revenue can be raised by further debt issuances, at least without increasing interest rates and imperiling already fragile government finances with higher interest charges.

Instead, Reinhart and Rogoff see two facts of life for Europe’s future: financial repression through higher inflation rates and taxes levied on savings and wealth. This time is no different than other cases of highly indebted countries in Europe’s history – just look to the post-War examples as similar cases in point. Don’t say you haven’t been warned.

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hedgeless_horseman's picture



It must be another day at ZH to help prop up the USD and GBP by jawboning down the EUR.

    Euro (EUR), 57.6% weight
    Japanese yen (JPY) 13.6% weight
    Pound sterling (GBP), 11.9% weight
    Canadian dollar (CAD), 9.1% weight
    Swedish krona (SEK), 4.2% weight and
    Swiss franc (CHF) 3.6% weight

I just love watching synchronized diving.

Germany, like Japan, are post-war pawns. Their currencies are DESIGNED to be debased, as and when needed, to achieve synchronized diving with the pound and dollar.
If Germany wasn't in the Euro, its prior experience with
hyper-inflation would prevent it from debasing when instructed to do so
(obviously not a problem with the Nips).  Both countries go along as
willing pawns simply because they have been re-created post-war as
export nations totally reliant on weak currencies.


The PIIGS profligate spending has ALWAYS been there, like a fat
store, and can be used by the brain when needed to feed the body.

LawsofPhysics's picture

but if the EUR is 57% of the dollar, what happens when it's 100%?  Sounds like I need to buy some more swiss francs... or something.

Probably won't matter as all paper promises will go to zero.

Skateboarder's picture

But... but... we're number 1?

Boris Alatovkrap's picture

You are like youthful Amerikan soldier in Vietnam tempt by young prostitute, "you are number #1 Joe!"

You are just keep tell self that... end of day are still cripple by festering canker and open sore.

Ckierst1's picture

Boris, it was sarcasm.  I know better.  I try to take the lessons of history to heart, discover truth and differentiate between truth and reality.  Sometimes I think truth is more scarce than rhodium.  It also isn't always pleasant knowledge to get.

max2205's picture

War IS the answer to govt debt problems....don't people do anything the govt says when there is a war


Oppps forgot we've been at war with terorists for over 14 years.....used that chance up federalies

Boris Alatovkrap's picture

"Crisis is rally cry of tyrant, creed of serf" - William Pitt the Younger

NOTaREALmerican's picture

Re:  used that chance up federalies

Naaa,   just need another "style" of enemy.   The dumbasses always love a good war as long as the slow-motion eagles and flags are invited to come along. 

NOZZLE's picture

Yeah, its now in the top ten regarding debt to GDP, that's an accomplishment aint it.  Next time don't go around bombing tiny countries like Serbia which led to further adverturisms in places like Shitcanistan.

NOTaREALmerican's picture

It is our moral duty to spread freedom to those unfortunate nations that are unable to spread freedom for themselves.  And, with our infinite "Keynesian" debt capacity we can easily afford to do so.

Flakmeister's picture

Re: Top ten 

Lets see:

Swissyland: Socialist Nanny State

Canada: Pretty socialist, high taxes

Denmark: Socialist Democracy

Mauritius: Who cares, it will be under water shortly

Ireland: Socialist democracy...

ANZAC: Socialist Democracies with single payer universal health care

Singapore: Repressive Nanny State

Which leaves Hong Kong: Place most likely to the breakout of the next Avian flu pandemic and

Chile: Former fascist state with nationalized production of copper (most important export)... 

Boris Alatovkrap's picture

Swiss Franc is also debase by intention. Great fallacy is Swiss is neutral in war without pick side. Swiss is just smart to position for quick switch to winning side. Swiss game is up with AmericKa destruction of secret banking guild.

max2205's picture

Start with taking a nice 20% off those 7,000 bazilonares assets. ..not savings...assets

Boris Alatovkrap's picture

Uh-oh, Boris is offend national Switzerland, is receive down arrow. Boris is apologize. Swiss is bastion of freedom and neutrality, is never collaborate with Nazi, is never expose depositor information to US Government (collection arm of Federal Reserve), is never debase currency or re-hypothecate gold holding.

NOTaREALmerican's picture

Re:  Swiss is

very clean, too.  Don't forget that.    That's gotta count for allot.

Boris Alatovkrap's picture

Appearance of cleanliness, like photoshop of aging glamour model.

Buckaroo Banzai's picture

Can we please stop calling it "tax revenue"??? Revenue is EARNED, not appropriated.

"Tax confiscations" is the correct terminology.

Boris Alatovkrap's picture

Sound is about right...

IRS (USA) = Internal Confiscation Services

CRA (Canadia) = Custom and Confiscation Agency

FTS (Russia) = Federal Confiscation Service

At least Italy "Tax Collection Service" is not to lie about confiscatory nature of money is steal from citizenry.

NOTaREALmerican's picture

Re:  steal from citizenry

Somebody has to pay for all the cool stuff the government makes (plus the management fee of course.  You can't expect the big idea people to work for free).

Boris Alatovkrap's picture

Boris is define "Theft"

- to take not yours and keep or give to other person*

There, you are welcome.

* Give to other person some time is call "Fraudulent disposition of asset", for example, big bank is give bonus to junior bankster, or Bernie Madoff is give diamond tennis bracelet to daughter.

Overfed's picture

It's not theft. It's robbery at gunpoint. Big difference.

AngelEyes00's picture

So all that debt may need restructuring?  WTF does that mean?  Does it mean redefining debt as non-debt?  The amazing fiscal follies we are now seeing in a desperate effort to just keep on going are stunning!

Are we as individuals allowed to restructure our debt?  Maybe if we go bankrupt, but we presume govt's will not go bankrupt but instead 'restructure' their debt. 

Greenskeeper_Carl's picture

buy some shiny euros, you win either way. Just like shiny mexican pesos

Boris Alatovkrap's picture

Inflation is cause by deflation of currency, not economic growth. This is expose great fallacy of bankster class which is profit by inflation (monetization of debt) as skim illegitimate profit from velocity of money. Velocity of money is occur by economic growth and by inflation, so is easy for fancy pant economist to use inflation fallacy to obfuscate theft of citizenry.

... but what is Boris know?

Fuh Querada's picture

why not just write in Cyrillic?

Boris Alatovkrap's picture

You and other ZHer is read Cyrillic?

Beside, ZH is not support for Unicode or Windows 1251 (IBM Code Page 866). You are show Boris Cyrillic? Here is Cyrillic

??????? ????? ?? ????????? ?? ?????????.

See, cyrillic is not work.

Fuh Querada's picture

Yes, I can read Cyrillic, and you are right, ZH will not code it. More is the pity. Cyrillic script unfortunately looks ridiculous when transliterated into Latin letters. Cyrillic has the advantage compared to other Slavic alphabets in that there are no diacritic marks that one has no idea how to pronounce (Croatian, Czech, Slovak, etc).

Boris Alatovkrap's picture

Croatia, Czech, Slovak, Pole is unduly influence first by Latin (Italy) and then is germanic (Austri - Hapsberg), and is lose Cyrillic writing system. Yes, is pity.

Maybe Tyler is add Unicode support (UTF-8) for ZH! Boris is like Chinese Character (cannot read, but is enjoy for tattoo!).

Fuh Querada's picture

When learning to read & write Russian, I had to practice 2 Russian alphabets, the printed and the handwritten. I was not told that here is a third - the italic printed alphabet - which is a sort of bastardized mix of the first two and drives me to distraction when trying to read it, for example in newspaper subheadings.
Chinese I am saving for the next incarnation. At least there are no cases and verbal aspects!

Boris Alatovkrap's picture

Chinese is speak like primitive language, but when is hear, is sound like music, up and down, up and down, like sing.

BigJim's picture

Cyrillic looks like a lot of work to me.

Boris Alatovkrap's picture

No, no, is much easy than English (using roman script) because one phonetic character is only to make one sound.

BuddyEffed's picture

Wouldn't it just be a kick if at some top level, ZH was occasionally used as a propaganda tool and for market influence by some member of TPTB?   Just choosing which articles and commentary gets published could have market effects/consequences.

LawsofPhysics's picture

at these readership levels?  math is not on your side...

BuddyEffed's picture

Math may not be on my side on the reader count, but I'm guessing a lot of these readers have serious coinage, a lot more so than average.

NoDebt's picture

Thank God R&R made that math error in their seminal work on debt and growth.  Having been thoroughly discredited, we can now ignore everything else they say from here forward and keep going on the current path without fear of every paying any consequences.

Fuh Querada's picture

You have to ask - who pays their salaries and grant funding?

Flakmeister's picture

The uber-rich will be given a choice, either pay wealth taxes for redistribution or have their throats slit by a mob...

After ~250 years, the social contract rooted in the Enlightenment is unraveling as real economic growth is grinding to a halt and the "peasants" will not return to the days of lese majeste with a mere whimper... 

optimator's picture

Tenth, haven't you noticed the Uber-rich have been preparing for the mob that's slowing finding out they're being had?

Sudden Debt's picture

Well.... if history is a guide... that will not happen.

History shows us in Europe that the rich will pull all the strings and controle the mobs which they'll use at their discression.

The French revolution wasn't a guide. It was a fluke untill Napoleon took over aver the chaos of the revolution.

Useualy when the fabrics break down... scores are settled.

Anusocracy's picture

The Ancien Regime never went away, it just called itself Democracy.

Flakmeister's picture

Once again, you smack it out of the park...

Too bad it was a hanging curve that you popped up into section 103 just behind the dugout...

Anusocracy's picture

Section 103 is INSIDE the park.

Wrong as usual.

q99x2's picture

Get rid of the banks and let people determine what can be done. Replace all governments with open source software.

NOTaREALmerican's picture

Nice concept, but like any current or past ISM you've still got the problem of the sociopaths manipulating dumbasses with bullshit.

Something tells me if somehow "they" did what you suggested "they" would "be" the open source software.

Now, if you could develop some open-source software to detect sociopaths or bullshit...  

agent default's picture

So in short the EU is set for a breakup. The moment this crap is underway there will be a revolution.