Wealth confiscation in Europe and Japan
In all of the bailed out nations of the euro zone, sovereign default is the worry as this can create a cascading knock-on effect like the failure of Creditanstalt in 1931 that ushered in the banking crisis of the Great Depression. We see this from the default in Greece, which led to bank insolvency in Cyprus and now threatens to bankrupt the sovereign as well. These kinds of cascades of bankruptcy are what Europe is desperately trying to avoid.
The question then is what to do about it. The natural logic of this euro crisis – in which great private wealth still exists in many of the bailout countries – is then toward wealth confiscation. Ambrose Evans-Pritchard has the goods on a German plan for just this:
Senior advisers to Chancellor Angela Merkel are pushing for better-off households to pay towards the cost of any future bail-outs for the weaker members of the single currency.
The proposals, from members of Germany’s council of economic experts, raise the prospect of taxes being imposed on property in a country like Spain if its government was forced to seek a bail-out.
The council, known as the “Five Wise Men”, is often used to test new policies that are later adopted officially.
The German suggestion is the latest sign that Berlin is intent on imposing even tougher rules on weaker southern euro members in exchange for using its economic might to support their finances.
This is pure madness, of course.
And note, I think this is where Japan is headed ultimately as well.
The euro crisis is well out of control if the only solution is wealth confiscation. But this is where it has come to. Moreover, in terms of household wealth, Germans are poor. Spaniards and Italians have great private household wealth that could still be tapped to pay for bailouts. As I tweeted five days ago, Tyler Cowen presciently predicted “the future will depend on whether wealth taxation turns out to be politically feasible.” I agreed with this view in my ‘Germans are poor’ post, writing that the key question is a “political question about apportioning losses that invariably will come to involve the question of wealth confiscation in my view.”
And so this plan, while clearly one step too far, is the inevitable result to which the untenable position of Europe’s political consensus has led.
Will this plan actually happen though? I say no. The euro is on very shaky ground here when wealth confiscation becomes the order of the day. Clearly, the deposit grab – one particular form of confiscation – in Cyprus has opened the floodgates. And now all sorts of ideas on how to grab the wealth to pay for these massive losses are coming forth. On the one hand, some might like the ‘soak the rich’ kind of motif behind these wealth confiscation schemes. On the other hand, I believe the elites of the periphery would rise up and demand withdrawal from the euro zone rather than submit to this kind of policy.
Things are not getting better in Europe yet; they are still getting worse.