Bankrupt

José Ignacio Torreblanca. Professor. IE School of Arts & Humanities

15 November 2011

The integrated tax system that so many want for Europe has to be accompanied by political union if it is to work.

There was a time when the power of states was greater than that of the markets. The old absolute monarchs could get into as much debt as they wanted to finance their dynastic wars, enlightened schemes or personal whims. When the situation grew unsustainable, bankruptcy was declared and you started over again. In some cases, as in France, the debt “haircuts” were carried out using methods as expeditious as executing the bankers. Comparing those rulers of old with ours today, humiliated by the ratings agencies, tightly supervised by all sorts of international institutions and scrutinized in their decisions by constitutional courts, the latter look positively wimpish. Even Angela Merkel seems just as impotent as the rest.

Until the 19th century, a state bankruptcy was not seen as something to be ashamed of. Some revenue ministers even held that a bankruptcy now and then was an effective way to put things in order and make a fresh start. In practice, state bankruptcies were something that only rich countries could afford and, in a way, reflected the power of the state and of its monarch. It is not by chance that between 1300 and 1799, Spain declared bankruptcy no less than six times, and France, coinciding with the expansion of its power in Europe, eight. But in the 19th century France stabilized its public finances (its last bankruptcy came in 1812) while Spain continued the tradition with no less than eight more bankruptcies between 1809 and 1882. In the 20th century, before World War Two, Germany, Austria and Poland each went bankrupt on two occasions.

The impression is that since the pre-history of the modern state, a great part of political activity has consisted of nothing more than in finding ways to deprive the rulers of their power to spend taxpayers’ money, or alternatively, to keep them on a tight leash and oblige them to account for it. In the classic formula (no taxation without representation), the bourgeoisie and the monarchy agreed that the former would pay taxes and, in exchange, the latter would share its sovereignty. Hence the 13 American colonies refused to pay taxes to the British crown, in whose parliament they did not sit. Hence even today, many rentier states, namely states that obtain income not from the citizens but from oil or natural gas (think of Saudi Arabia), can afford the luxury of not taxing their people and, in exchange, not allowing them any say in public finances.

Historically, national parliaments have never been capable of effectively controlling the executive’s leanings toward deficit or inflation. Since governments persisted in the ugly old vice of printing money to cancel their debts and boost their chances of re-election, in the second half of the 20th century modern democracies opted to transfer monetary policy to independent central banks. In Europe we have gone yet further, transferring monetary policy to the European Central Bank. But the politicos, with the compulsive gambler’s sixth sense, found in fiscal policy new ways of racking up debts to maximize their chances of re-election. This is why, just as in the past the markets pushed us to take monetary policy out of their hands, now they are pushing us to take fiscal policy away from national politicians, and place it a safe distance away (also in Brussels). This situation may be effective from an economic point of view, but leaves national parliaments practically devoid of meaning, and poses a democratic question of the first order.

After all, history shows us that without taxes there is no democracy, and that without democracy, taxes are illegitimate. This is why, if we are headed for a common EU fiscal policy and a common treasury, we need to reconsider the extent, meaning and institutions of the political union that goes with those policies. Will it be European taxes that bring European democracy?

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