A little-discussed but crucial factor in the debate overwealth transfers from Europe’s more economically sound north to its troubledsouth is the relationship between public debt, GDP, and private wealth(households’ financial and non-financial assets, minus their financialliabilities) – in particular, the ratio of private wealth to GDP in theeurozone countries.
While the European Central Bank’s bond-purchasing schemehas calmed financial markets to a considerable extent, some European economies– including Italy, Spain, Greece, and Portugal – are still at risk, becausethey are not growing fast enough to narrow their deficits and stem the growthof their national debts. The grim irony here isthat the ratio of private wealth to GDP in some of the countries that are inneed of support from the ECB and northern eurozone members is equal to orhigher than that in more solvent countries.
Consider Italy, which has the highest ratio of privatewealth to public debt of any G-7 country, and is some 30% to 40% higher than inGermany. Likewise, Italy and France share a private wealth/GDP ratio of five toone, while Spain’s – at least before the crisis hit the country in full – wassix to one. By contrast, the ratio in Germany, Europe’s largest creditor, isonly 3.5 to one.
This discrepancy is at the heart of the question with whichEuropean policymakers are now grappling: Shouldtaxpayers in debtor countries expect “solidarity” – or, more bluntly, money –from taxpayers in creditor countries? Why should taxpayers in creditorcountries have to take responsibility for financing the euro crisis, especiallygiven that high private wealth/GDP ratios may result from low tax revenues overtime, while lower ratios may reflect higher tax revenues?
Before seeking or accepting help from the rest of Europe,countries should employ all available domestic resources. Debtor governmentsshould call upon their own taxpayers to fund some of the national debt in orderto avoid higher interest rates in credit markets. They could, for example,offer an incentive in the form of a 3-4% interest rate on bonds, and even makethem tax-free eventually. This would allow Italy, Spain, and even Greece tofinance their national debts at a more reasonable, sustainable cost.
Citizens’ voluntary financing of their countries’ nationaldebt would be the most effective means of reducing strain on Europe’s financialresources, while simultaneously serving as a powerful symbol of solidarity. Bycontrast, turning creditor-country citizens’ tax payments into forced subsidiesof other countries’ debts would undermine European cohesion. Nordic countries,for example, cannot be expected to fund other countries’ debts in the long term– especially if those countries have not made full use of their own resources.
In fact, while concerns over the eurozone’s survival tendto focus on its indebted members, Europe’s monetary union is at risk of losingone of the few members that still enjoys a triple-A credit rating: Finland.Given Finland’s difficult domestic political situation, its citizens may lookto Denmark and Sweden – which boast rapid growth and low national debt, and donot pay into the European Financial Stability Facility or the EuropeanStability Mechanism – and decide that eurozone membership costs too much and isno longer worthwhile.
Italy and Spain have enough resources to rescue themselves,and to secure the time needed to restructure their economies. Indeed, evenafter taking on the entire national debt, their private wealth/GDP ratios wouldstill behigher than they are in some northern European countries.
Escaping the euro crisis is less a matter of economics thanof political will. By calling upon citizens to finance their own countries’national debts, southern Europe’s leaders can fix their own economies andstrengthen the European principles of solidarity and subsidiarity.