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Richard Murphy on tax and economics

The Danish government backs the Fair Tax Mark

Fri, 12/19/2014 - 16:05

I admit some things take a little less time than I expect to make progress. I was in Denmark last Friday and the news has just reached me that the Danish ruling parties have agreed to encourage the development of a Fair Tax Mark in Denmark. This news of the Fair Tax Mark’s endorsement in Denmark comes (via Google translate) from Politiken Denmark:

Just like the red eco-label and Max Havel Aars blue and green Fairtrade mark today shows the way to organic cafes and coffee produced under fair terms, a tax mark future show which companies have order in tax payments.

A new tax mark – a FairTax mark – is in fact one of five initiatives against tax havens, which the government parties, the Liberals, Danish People’s Party, SF, Unity and conservatives today have agreed.

Tax label given to firms that meet a number of criteria for transparency in fiscal circumstances, says SF’s tax spokesman Lisbeth Bech Poulsen.

“It must be some parameters reflecting that one can follow tax transactions, there is a degree of transparency and that you pay the tax you have to,” she says.

The label must be a benchmark for consumers, government and others and thus influence businesses to greater transparency in tax matters.

Lisbeth Bech Poulsen hopes that businesses will see it as a competition parameter to have FairTax mark.

The Danish Business believes tax policy chief Jacob Ravn said immediately that a FairTax mark will be of no great importance for enterprises.

“Already today, companies have the opportunity to write on their website that they have transparency about tax payments. And there are also some companies that have a fiscal policy that they have put out. However, it is not so widespread, in this light, one might well consider whether this will have any major impact, “he said.

Yet it may well be that more companies will take it seriously if there is a tax notice from the state, believes Jacob Ravn.

“I think pretty much all businesses are aware of both raising the cost of course, but also that it has a meaning, how they act in society. It is of course a concrete weighing on companies, whether they feel it is so important to them that they will go along with it here, “he said.

I am not surprised by business opposition: gains in transparency have always been achieved despite opposition. I am sure there will be a lot of work to do on this, but as early Christmas presents go this is a good one. Thanks Denmark!

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Which councils are losing from government cuts?

Fri, 12/19/2014 - 13:46

I think the message of this tweet is clear and all sources are apparent:


Click on the image for a much larger version.

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What should the EU do on tax in 2015?

Fri, 12/19/2014 - 07:54

I was in Bloomberg and Newsweek yesterday talking about what the EU should do on tax in 2015. This is the relevant bit:

When the commission unveiled its work program this week, it pledged to drop a stalled energy-tax proposal and resume consultations on a common corporate consolidated tax base. The program also promises an “action plan on efforts to combat tax evasion and tax fraud, including a communication on a renewed approach for corporate taxation in the single market in the light of global developments.”

The EU’s tax policy plans run the risk of sidestepping the central issues, said Richard Murphy, director of U.K.-based Tax Research LLP, in a telephone interview.

“If you want to avoid austerity, it’s ever so simple. Hire tax collectors,” Murphy said, saying cutbacks in tax-agency staff have been counterproductive for the U.K. and other nations trimming their public workforces. He said countries also should put more effort into figuring out what the true gap is between potential taxes and actual revenues, and he called for more work on corporate taxation standards.

“Without trying to create a common consolidated tax base, is there a program of convergence that we can go on even if we never converge?” Murphy said. He said the goal should be to find realistic ways to align national approaches, not a common tax framework to parallel the euro as common currency.

This is, of course, and inevitably, an extract of what was discussed.

I made the point that the EU is, inevitably, in a hiatus in 2015 whilst it waits for BEPS. But that did not mean there as nothing it could do. The programme I outlined was as follows.

First, anticipate BEPS. Get EU information exchange and mutual assistance working as well as possible.

Second, presume BEPS will rely quite heavily on general anti-avoidance principles and make sure the EU can, as far as possible, coordinate these. Also make it explicitly clear that they are capable of being used to tackle artificial relocation of profit in the EU. Nothing may be more important than that. It would kill George Osborne’s Diverted Profits Tax, for a start.

Third, get a true handle on the sale of the issue being tackled. It is, I would suggest, a little absurd that the only available estimate of tax evasion in the EU has been supplied by me. That has to change and the EU has to do a proper, top down, estimate of the tax gap on a systematised basis for all EU states. The UK bottom up estimate is not acceptable: it ignores most tax not paid as a result of people not submitting tax returns and massively underestimates the scale of losses as a result. The EU has no hope of demanding the resources from member states to tackle this issue unless its scale, and so the potential recovery, has been properly estimated.

Fourth, and coming to the CCCTB, it is obvious that corporation tax systems are not working. The CCCTB is a powerful conceptual framework for tax even if a unitary base could not be agreed. Common standards need to be agreed in this area.

Fifth, that means increasing awareness of the need for establishing the appropriate data to form the basis for tax collection. IFRS and all equivalent accounting standards are explicitly stated to be unsuitable for the purposes of tax assessment and yet are used in many cases in the only accounts that an entity prepares. When in well over 90% of cases it is likely that tax authorities are the main user of accounting data this is absurd. The EU has to reclaim the accounting standards setting process for public benefit and demand that accounts fit for tax purposes be prepared by all companies and be supplied to their members. Data for financial markets will always be a secondary consideration for almost all companies: the absurd logic of the IFRS Foundation that those markets are the only party interested in financial data has to be abandoned for good. The EU needs to get on with this now.

Sixth, the EU needs to deliver the best possible financial transactions tax.

And seventh, open registers of beneficial ownership of companies is vital if all automatic information exchange systems are to work.

And next? Automatic information exchange has to be delivered within states as well as between states. It is absurd that in 2016 the UK (and other EU states) will receive more data from Cayman on the ownership of companies with UK directors and shareholders than it will from UK banks on the companies to whom they provide banking services in the UK. It is not possible that the EU shadow economy exists outside the banking system: it is undoubtedly using the banks. So bank data on all likely accounts used to record income must be available to tax authorities. This could start with full automatic information exchange on domestic companies and then extend to accounts likely to be used to record self employment via data from Paypal and card providers. Do that and we make progress in tackling crime. Don’t do that and the problem goes on and the EU economic crisis with it.

That crisis can be solved by tax collection. The issue is as important as that. And the stakes are very high. We just require the political will to address it.

But that brings me to the need to hire tax inspectors and lots of them. That is my wish for 2015.

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Trust me, asymmetry matters

Fri, 12/19/2014 - 07:26

There is good news this morning. As the FT notes:

Luxembourg has agreed to hand over a list of the hundreds of tax deals signed with some of the world’s largest businesses after initially promising to take the European Commission to court in a bid to keep them secret.

The expectation is that the Commission will now ask for all EU states to supply the same data to them.

My hope is, of course, that the EU will then supply that data on to the states impacted by such deals because this is the core issue here. The fact is that there is asymmetry in the dealings between a company (indeed, any taxpayer) and the state. The taxpayer knows what they have done and the state does not. The result is that power is always, to some degree, with the taxpayer. The issue I have spent a decade or so addressing is the fact that some states have deliberately gone out of their way to increase this asymmetry by providing secrecy from within their jurisdiction to make it harder still for another state to find out what the taxpayer has been doing. This is the whole core of the tax haven issue.

Luxembourg is a prime example of this. As I said in the Luxemburger Wort yesterday, it is a parasitical state (which I am sure went down well locally) that has deliberately exploited its ability to create law to undermine the capacity of other states to enforce theirs. This is what secrecy jurisdictions do. It is why I and others have worked to stop them. But the EU has to play its part in ensuring that happens by exchanging all the data it secures now with the states impacted by it or its investigation on competition law will not deliver the desired level playing field on which businesses can compete fairly, and that is the aim. Asymmetry undermines that aim. That’s why its deliberate creation has to be defeated.

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Paying tax whistleblowers

Thu, 12/18/2014 - 07:36

One of the questions at Tuesday’s session of the People’s Parliament was how we might both encourage and protect whistleblowers.

I answered in the context of tax. My suggestion was that we should copy the States where tax whistleblowers are paid up to 30% of sums recovered as a result of the information they supply.

Here the Revenue does pay for information but if you’re lucky the sum paid might be a thousand or two. However the fact is that whistleblowers often suffer severe economic detriment for acting appropriately. If we are to properly support and protect whistleblowers then I believe we need a much enhanced payment system for information supplied by tax whistleblowers in the UK.

And do remember, paying for information supplied is a well established procedure in other areas of law. This is not creating precedents.

What have we to lose?

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Discussing the Big 4 in Denmark – the video

Thu, 12/18/2014 - 07:24

My talk in the Danish parliament last week is now available on Youtube here.

For some reason  I am having trouble embedding this so please follow the links to see what I had to say about the Big 4 accountants and their role in creating the opacity that denies governments the opportunity to collect tax around the world.

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Another view on Diverted Profit Tax

Thu, 12/18/2014 - 06:56

David Quention has now contributed to the debate on the Diverted Profit Tax (DPT) in a new blog published last night. I think his commentary , as always, well worth reading. I admit I had the chance to discuss his thinking with him before the blog was published and, as is obvious, we do not entirely agree.

The nub of David’s argument is, I think, political. He views the DPT as a General Anti-Avoidance Rule and that, with the inbuilt penalty of a 25% rather than a 20% tax rate, it will work as such as companies will restructure to avoid it. Therefore, like all GAARs it has to be widely drafted and more coercive than actually effective. It also needs, if possible to avoid actually being litigated because when a GAAR is litigated it might be shown to be ineffective, at which point it loses its bite.

I agree with that to a fair degree. My point is that I think GAARs are the direction in which the OECD will travel on this issue and if they are it is better to wait to make sure that coordination is achieved and that it would also be better that this be addressed by extending the YK’s existing General Anti-Abuse Rule that Labour has already promised to address because it is too weak.

But I recognise the politics of this: the Tories have realised, rather late in the day, that cutting taxes does not in any way end tax avoidance. That only shows their naiveté. Now they’re trying to shore up the tax base whichever way they can. Labour faces the dilemma that it might never have been able to introduce a measure as tough as this. My argument remains that it could do so in 2016 now by saying it supports this measure but only if it is not enacted until the BEPS proposals are known.

And in that possibility there is also a way forward. Labour will have leverage on this issue in the dying days of this parliament. Maybe it should let this measure hit the statute book. But its operative date should be 1 April 2016, not 1 April 2015. What that means is companies have time to take action to avoid it, so it becomes a more effective GAAR if that is the intention, and the OECD can also say what it is doing and the UK can modify or enact something better by 2016 if that is desirable.

Going down this route may create the necessary threat of action of BEPS fails whilst providing the compromise that gives it the chance to do so.

The debate remains open, in other words.

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EU cracks down on anonymous company ownership, but falls short of full transparency

Wed, 12/17/2014 - 11:49
This press release has been issued by Global Witness and I think it worth sharing: ——– Late yesterday evening, the EU agreed to new rules to tackle corporate secrecy, in a move broadly welcomed by Global Witness. EU countries will create national registers of the people who really own and control companies, which will make it much easier for law enforcement to track organised crime and money laundering.However, Global Witness highlighted flaws in the new measures. There will be some limited public access to the new registers but it is disappointing that the EU stopped short of agreeing to full access, as had been demanded by the Parliament and campaign groups. The UK, Denmark, France and the Ukraine all support the creation of public registers.

“Today the EU has gone a long way towards making life harder for the corrupt politicians, money launderers and other criminals who hide their loot behind European shell companies,” said Robert Palmer, anti-money laundering campaign leader at Global Witness. “It’s a big moment, but not as big as it should have been. By stopping short of giving the public full access to information on who really owns and controls companies, European leaders have missed an opportunity to show that the future of business in Europe is open and transparent.”

For several years, Global Witness has campaigned to show how corrupt politicians, tax evaders and other money launderers can easily hide their stolen loot behind complicated company structures. For example, the organisation recently helped to expose how the presidential compound of Viktor Yanukovych was owned by European shell companies.

The best way to stop this happening is to create public registers of the beneficial owners of companies. These would be cheap, have minimal impact on businesses and would deliver the most benefits to developing countries. Business leaders, the banking industry and law enforcement have all spoken out in favour of this level of transparency.

Under the deal agreed tonight, EU countries have the option of allowing full public access to company ownership information and, at the least, have to provide access to those with a “legitimate interest” such as journalists or NGOs. It will be up to individual governments how to implement this provision in practice, and Global Witness is concerned that less transparent countries will place greater restrictions on access to information. There will be no public access to new registers of trusts that will also be created under the deal. The agreement was part of a broader package to update the EU’s anti-money laundering directive, and will be subject to a formal vote in the New Year.

“Over 20 years, Global Witness’ investigations have shown the damage done by this loophole,” added Palmer. “It is the getaway car for crime and corruption. In the last two years, we’ve seen real progress, with the issue making onto the global political agenda. We now urge all member states to follow the example of the UK and give the public access to these new registers”.

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There may be trouble ahead

Wed, 12/17/2014 - 09:53

These are the latest independent forecasts for the UK economy as summarised by HM Treasury and just published:


Let me speculate on at least three things these do not properly reflect. The first is the Russian economic crisis. The second is the falling oil price. The third is the impact of Greek default. If you wished to add a fourth there is the current drop in UK house prices, but that would just be churlish. Whilst almost inevitable interest rate rises are just a real game changer.

All have the potential to seriously impact UK GDP growth in 2015 and the oil price will pull inflation down.

Inflation of 1% looks likely at most in 2015 to me.

And GDP growth of 2.5% looks wildly optimistic.

Yes: I know I’m being bearish, but I think that’s quite reasonable. Make the most of this whilst you can:

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Bankers’ bonuses were a problem in 1856 and we’ve not made much progress since then

Wed, 12/17/2014 - 09:23

I was reading Hansard from 1856 this morning (as one does) and came across this quote from a speech relating to the freform of partnership law which then governed most banking relationships:

The Bill also contains a clause providing that the remuneration of servants or agents by a share of the profits shall not be held to make them partners. Bankers are omitted out of deference to the course of previous legislation, which has constituted them an exception to the general rule applicable to other occupations. This omission is also made because we do not wish to encumber a question of this kind, which is merely one of limited liability, with questions relating to the banking trade, currency, and other kindred matters: although, for my own part, I see no reason why bankers should not be treated in the same manner as any other class of partners.

So in 1856 we had a problem with bankers being treated differently from all others. And a problem with the accounting for bankers’ bonuses.

148 years later not a lot has changed.

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Why won’t politicians collect tax that’s due?

Wed, 12/17/2014 - 08:28

I have often argued about the absurdity if the UK underinvesting in HM Revenue & Customs at cost to us all in terms of lost public services and in the distortions created in the economy as a result of the unfair competition that is created by the failure to collect races from cheating businesses.

It is a sad fact that we are not alone in suffering this politically imposed failure to uphold the rule of law. The US suffers the same affliction as David Cay Johnston noted in a piece in The Nation yesterday where he reported on the U.S. Budget package, saying:

Another $345.6 million will be cut from the budget of the Internal Revenue Service, in a favor to big corporations and the rich that will have little effect on workers, whose taxes are withheld before they are automatically processed via computer. The cuts mean fewer audits of corporations and rich individuals. Top corporate auditors earn at most about $150,000 a year, but find on average $19 million of taxes owed. To Congress, that $126 to $1 ratio is not worth the political cost, but shifting more of the burden of government to you is cheap and easy. 

What motivates this lack of willing on the part of politicians to uphold the laws that they pass?

First of all we should not dismiss corruption. This may not involve brown envelopes of cash; indeed, I very much doubt it does. But it does involve favours for parties and that continual hope for preferment once a parliamentary career is over, whether by choice or not.

Then there is ideology. Far too many MPs, Senators and Congressmen seek membership of a legislature they despise and which they suggest can only do harm. They do, therefore, ideologically seek to undermine its capacity to deliver the wellbeing we know government can create.

And thirdly, there is incompetence. Despite the efforts of a few to point out the absurdities of this sort of behaviour there can be little doubt that we are drowned out by those lobbying for cuts. It takes tenacity and effort to find the truth. Not all elected politicians are endowed with such capacities.

So we end up with austerity, maladministration, a failure of the rule of law, poor growth and public dissatisfaction. And it would be so easy to do so much better now if only the political will was present.


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The December Taxcast from the Tax Justice Network

Wed, 12/17/2014 - 07:43

The December Taxcast from the Tax Justice Network is out. In this edition: how mafia is corrupting democracy at the heart of Europe in Italy’s capital city of Rome.

Also: the #LuxLeaks whistleblower is arrested and makes his first public statements on why he did it; the UK Chancellor’s new ‘Google Tax'; is the EU Commission President Jean Claude Juncker backing away from making a register of real owners of companies and trusts public? And more scandal and unique analysis.

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The 12 Tax Dodging Days of Christmas

Wed, 12/17/2014 - 07:27

Paul Lewis (of Radio 4 Moneybox, etc) reminded me of this 38 Degrees poster in a tweet last night. It seemed worthy of a seasonal outing:

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Shut parliament for a year to close the tax gap

Wed, 12/17/2014 - 07:15

Andrew Phillips, who sits in the Lords as Lord Phillips of Sudbury for the LibDems, joined us for the session of The People’s Parliament last night and was one of the first to raise a question. His view was robust and firmly put: he reckoned that in his 17 years in the Lords he has helped pass tens of thousands of pages of legislation but said that despite that he thinks most MPs are “wet behind the ears” (his words) when engaged in this activity because, in his view, the problem is not a lack of legislation in this country but is the lack of enforcement of much of the legislation we have got.

He had a remedy to suggest: he reckoned parliament should close for a year (almost no one would notice right now it has so little to do) and MPs and the Lords should be sent out to see what is actually happening up and down this country. It will never happen of course, but in my response I supported his suggestion because,as I said at the time, if just some MPs went to spend some serious time at HMRC they’d realise just how massively understaffed it is and how vital it really is that it be allocated the funding for at least 20,000 new staff. Those people could make sure individual taxpayers get the service they need from HMRC. Vitally, they could also be engaged in closing the tax gap.

There would, I suggest, be no better way of defeating austerity in this country.

And there would be no better way of creating social justice.

Nor could we reduce inequality more effectively however long we tried.

As important, by showing that cheating did not pay we could change the moral climate of this country and in the process could create the level playing field on which all businesses have an equal chance of competing. That is the foundation of prosperity in the market sector of a mixed economy.

If that could be achieved by shutting parliament for a year I am all for it.

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The Big 4 and the City of London

Wed, 12/17/2014 - 07:09

As I mentioned on Saturday I spoke at a session of the People’s Parliament in a committee room of the House of Commons last night that addressed the Domination of the City of London.

Jon Christensen of TJN is on the left; I’m in the blue shirt clearly holding forth with Robert Palmer of Global Witness and then Linda Kaucher, a regular commentator on tis blog, to the right. The photo is by Atul Shah, another commentator here,

This is pretty much what I said, laid out in my usual mindmap style:

To read it more clearly click on the image and it should open in a separate browser window.

The session was animated and the questioning was of high quality (although two nay-sayers claimed nothing had changed in twenty years in tax havens or tax, which very politely suggested to me they’ve had their heads in the sand for a long time).

Some of those questions will result in blogs over the next few days. I’ll raise the issues then rather than elaborate now.

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UK’s tax havens say they’re still dedicated to secrecy and abuse

Tue, 12/16/2014 - 11:41

This comes from the Cayman Compass:

Fighting off last-minute overtures from the United Kingdom on the implementation of a public, centralized beneficial ownership registry for locally registered businesses and potentially trusts, Cayman Islands Premier Alden McLaughlin said Monday that the British Overseas Territories are standing united against such a move.

“Unless such registers become the new global standard…neither we, nor any other overseas territory or Crown dependency intend to go first and intend to have our economic experimented with and potentially damaged,” Premier McLaughlin told the Legislative Assembly.

So, all the UK’s tax havens or secrecy jurisdictions are standing together to say they will continue to sell the secrecy that permits tax evasion and crime. And they have confirmed that at the same time they are dedicated to making sure that they prevent free trade, open markets and fair competition because none of them are possible with the opacity that they make available.

Or to put it another way, they want to promote monopoly and criminogenic environments whilst undermining the rule of law whilst being used as the epicentres for the attack on democracy that the so called tax competition that they promote actually represents.

This is their economic experiment. It is an experiment in destroying democratic society.

But at least we know where they stand now.

And if David Cameron does not stand up to them – as the UK can because we have the right to legislate on foreign policy for these places and this is undoubtedly a foreign policy issue – then we also know where he stands.

Hat tip: Robert Palmer, Global Witness


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Your new doctor is advised by a tax consultant, recently from Luxembourg

Tue, 12/16/2014 - 11:28

Pulse is a GP focussed newspaper. In this week’s edition it notes that English hospital trusts are seeking to set up GP practices. But what is particualrly interesting is who is behind this scheme:

Exclusive Management consultants have held seminars with several hospital trusts about setting up new GP practices as outlined in NHS England’s five-year plan, and have told Pulse they have seen a ‘huge appetite’ for the move.

PwC have been holding the seminars following NHS England’s Five Year Forward View, which outlined new ‘primary and acute care services’ (PACS) that would allow hospital trusts to use their surpluses to set up GP practices with their own registered list for the first time.

Pulse has learned that PwC has observed an ‘extraordinary level of interest’ among trusts in setting up GP practices, as they could benefit from it financially and prevent the current drain of funds due to early discharge and community care schemes.

So PWC have moved to Luxleaks to taking over the NHS.

Is there any limit to the harm they can do?


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Looking after Greece

Tue, 12/16/2014 - 07:48

To continue this morning’s macroeconomic and foreign focus, I share here (with permission) the macroeconomic briefing written by James Meadway of the New Economics Foundation for NEON (the New Economics Organisers’ Network) that was published yesterday. His focus was Greece, and the impact that the forthcoming general election may have there on financial stability within that country and beyond. The financial markets are terrified of instability resulting from election of a left wing government. The reality may be is that such a government could create the tipping point that breaks the Eurozone out of the paralysis that is gripping it.



SUMMARY: The sudden possibility of early elections in Greece has raised the prospect of an outright election victory by Syriza. Europe’s financial markets have been thrown into turmoil at the result. The stakes have been raised massively: Syriza have repeatedly said they will not honour Greece’s illegitimate debts and will end the harsh austerity measures, but Europe’s leadership is still insisting they must be met.

  • The announcement on Tuesday last week that Greek Prime Minister Samaras is to call early elections for the Greek Presidency has caused turmoil this week. Should Parliament fail to elect a new President, in three rounds of votes, Greece will go to the polls early in the New Year. Syriza, the “Coalition of the Radical Left”, is currently ahead in the opinion polls and most likely to form the next government.
  • The Greek stock market fell 12% on the news, the biggest single-day fall since the global market crash of late 1987. The interest rate on Greek government bonds, reflecting the fears of potential lenders, rose to its highest level in two years. Stock markets across Europe, including London, have been jittery all week partly as a result, with the biggest drop in London share prices for three years.
  • Syriza, meanwhile, has been attempting a charm offensive on Europe’s financiers. They were seemingly more offended than charmed, with an (alleged) email leaked from $1tr investment fund Capital Group after meeting Syriza representatives in London describing their plans as “worse than communism”.
  • They may have a point – Communists tried to pay their debts. Poland introduced austerity measures in 1980 to meet the costs of its $24bn external debt, leading to the formation of the Solidarnosc trade union, the 1981 imposition of martial law and, ultimately, the fall of the regime. Yugoslavia’s $21bn foreign debt was renegotiated through the International Monetary Fund (IMF) in 1982, who imposed austerity. Nationalists adroitly exploited the economic crisis that ensued, pushing the country towards eventual civil war.
  • When Yugoslavia fell apart in the 1990s, Greek capital moved in swiftly.  Greek investment (FDI) in the Balkans is now around $10.9bn, or about 6% of all Balkan FDI, second only to Austria, but it is in banking that Greek capital has the most significant presence. Greek-owned banks are four of the ten largest in Bulgaria, three of the top ten in Serbia, and two of the top ten in Romania. Bulgaria already suffered a bank run over the summer on KTB bank, one of its largest, leading to the collapse of its government. Romania’s banking system is currently under European Central Bank (ECB) supervision.
  • The relationship between Greek and Balkan banks is like a mini-me version of the relationship French and German banks have to southern Europe – including Greece. Right up to the crash, and beyond, German and (especially) French banks were happy to lend money to the Greek government in the belief that no eurozone member would be allowed to default. When that became obviously untrue, following Greek elections in late 2009, the euro debt crisis erupted.
  • Since then, Greece has undergone the most stringent austerity programme of any high-income country, totalling cuts of 41bn euros. Public healthcare spending has been cut by 40%. Unemployment is still over 25%, and as high as 58% for those under 25. The economy is 25% smaller than it was four years ago, and feeble growth this year doing little to reverse the decline. The real pay for those in work, after taxes and inflation, has fallen by around 50%.
  • These drastic austerity measures were in return for loans totalling 245bn euros. These have ensured Greece’s creditors kept on being paid, with Greek sovereign debt totalling 318bn euros, or 175% of GDP. Its creditors are mainly other institutions in Europe, the bailout package having transferred Greece’s debt from private hands (principally French and German banks) to official, like the ECB. Around 85% of Greek sovereign debt is now owed to the “official sector”. Substantial payments on this debt are due to the ECB over the next year, including on 38bn euros that was loaned to support the banking system.
  • Syriza leader Alexis Tsipras has repeatedly said he will refuse to meet such demands for repayments. Syriza’s alternative plan for the debt is in three parts:

o   a European conference on debt, modelled on the 1953 London conference that cut Germany’s debt;

o   major cuts to debt owing to the official sector, reducing the total Greek sovereign debt to a sustainable level;

o   linking interest payments on the remaining debt to GDP growth (thus resurrecting an idea of Keynes’).

  • Meanwhile, Syriza’s rescue plan for Greek society includes:

o   ending the “Memorandum of Understanding” between the Greek state and EU/ECB/IMF “Troika” under which draconian austerity has been imposed;

o   provision of free food, health care, shelter, electricity and water to all those in need;

o   plans to lift the minimum wage 750 euros/month (up from 450/euros), up from 551 euros/month;

o   same minimum income for pensioners;

o   income taxes will be cut for all but the wealthy, who will face a clampdown on avoidance expected to bring in 70bn euros;

o   the re-establishment of collective bargaining in the workplace – abolished in 2012;

o   a massive, publicly-funded, job creation programme.

  • These measures will be expensive, but Syriza’s leadership appear to be pinning their hopes on a return to rapid growth, increased tax collection, massively reduced debt payments and finally direct assistance from the EU institutions. For this to work, it will be necessary persuade Europe’s leadership that the costs of a managed write-off of Greek debt, and possibly a ”European New Deal” to reconstruct the country and others in southern Europe, will be less than an uncontrolled default and exit from the euro.
  • There are some indications that Germany’s political leadership are inclined to reach a compromise, viewing the costs of (in effect) paying Greece to shut up as less than the costs of the euro’s disintegration. The ECB has softened its hard line, adopted under former President Trichet from 2009-12, in favour of easing monetary conditions – making it easier for banks to lend. This did not stop them threatening Cyprus with being pushed out of the eurozone in 2013, however.
  • If Greece is granted any leeway, with anti-austerity Podemos also leading the polls in Spain the potential for such demands spreading across southern Europe is high. More likely, for now, will be a continuation of the pressure applied most recently by EU Commission chief Jean-Claude Juncker, describing Syriza as “extreme forces” and warning Greeks not to deliver “the wrong election result”. The EU and ECB believe that the threat of Greece being thrown out of the euro can be used, as it has in the past, to discipline any future government there to keep to the Memorandum.
  • Economics is about choices, and developments in Greece further emphasise that there are real alternatives to business as usual. The wide-ranging, fundamental economic debates in Spain and Greece can only be a good thing for democracy in Europe.


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We can’t afford an angry bear

Tue, 12/16/2014 - 07:29

The FT has reported this morning:

Russia’s Central Bank has raised its main interest rate from 10.5 per cent to 17 per cent in the middle of the Moscow night, just five days after the last rate rise and hours after the rouble suffered its worst drop since 1998.

I have no love for Putin, his regime or what he has done in Ukraine but I know the world cannot afford an angry bear in the form of an economically wounded Russia. But that it what it looks like we’ve got. It may have happened more because of the oil price crash than because of sanctions, but that will not matter. In the court of Russian public opinion the problem will have been created by people outside the country, and Putin will no doubt fuel that idea because it will pay him to do so.

Russia is best not left alone when tormented. Serious steps to enhance its economic stability are needed now or we will all pay a price. I sincerely hope the IMF and others are reaching out to Moscow right now, because that is what is needed if we are to keep stability in the region, and in the world economy. This is a moment when economics could get dangerous if left to it own devices.

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Burning our future – and risking our present too: why oil price falls demand action

Tue, 12/16/2014 - 07:11

The FT has a major feature on the impact of falling oil prices in the paper today.

The term global warming does not appear.

Nor does emissions.

There is a cursory mention of carbon pricing, where cursory means a nod to Nicholas Stern.

But the overall suggestion is that oil use is something with no externality barring the impact on exchange rates, growth and deflation.

There are moments when I wonder what world some people live on. It would appear they do not think it is the same one as I know I inhabit.

In which case I guess I should say what I think should be done as a consequence of this oil price fall.

First oil production should be cut, by agreement. Economic stability requires it. So does the environment.

Second, Nicholas Stern is right: this is the moment to increase carbon repricing: revenue can be raised as a result of this fall to help fund energy repricing.

Third, governments have an urgent need in many countries to take action to prevent the deflation that will result from this price fall. Deflation always creates the risk of recession as spending stops because people anticipate price falls by delaying current spending.

And we need to take urgent action in anticipation of major economic failure. Russia is on the brink. And yes I know all the political reasons for that situation, but we really cannot afford a country like Russia facing collapse which its 17% interest rate suggests is happening.

Oil is a scarce commodity to be used wisely. For all sorts of reasons it looks likely that will be forgotten in the short term. We could pay a considerable price for it. Once upon a time such a price fall would have been universally welcomed. This time, I’m not so sure.

This time we may not be just burning our future: this time there may be real risk in the present as well unless urgent action is taken. But I suspect short termism at the petrol pump will prevent that. And that will reveal the poverty of our politics if it does.

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