## Thursday, August 18, 2011 ... /////

### Eurozone government and financial transaction tax

Angela Merkel and Nicolas Sarkozy are going through another wave of their radical inventions and assorted ideas in order to show how creative and ingenious they are. To stabilize the fiscal discipline of the eurozone member countries, they have proposed a genuine eurozone government. Or an economic government.

The Guardian is working hard to deny the reports that Merkel and Sarkozy are building The Fourth Reich.

It would have a meeting twice a year or more often, as needed. The boss of this European government would be a Gentleman whom you have probably never heard of but he has been the President of Europe for more than a year: Van Rumpuy. His neutral and invisible image is meant to make the new institution look impartial and international.

The rank-and-file members would be Sarkozy, Merkel, and to make it look even more international and democratic, also the heads of state - whatever it means - from all member countries of the eurozone (which fortunately don't include Czechia). Their names are not important. :-)

The Franco-German leaders' indication that it would be just an "economic government" shows that when it comes to politics, Merkel and Sarkozy are either full-fledged crackpots or hardcore liars. Just imagine what such a eurozone government could be solving.

Most likely, it would decide that Greece needs to do some pretty radical things such as slashing the pensions of their overpaid, young (and often dead) pensioners by 60 percent or so. Papandreou would return home and tell everyone: "Unfortunately, dear fellow Greeks, I tried to protect your feeding troughs but the international capitalist criminals represented by the foreign leaders have defeated me."

If you think that he would be among the staunchest proponents of the needed cuts, you're naive.

Fine. So all the people of Greece would be angry about this dictate from Germany, France, and perhaps their allies. They would immediately start to attack the interests of Germany, France, and all possible institutions that collaborate with the unacceptable foreign leaders who actually dare to demand fiscal discipline. Everyone who tries to impose the Franco-German dictate would be physically attacked in Greece. One third of the lawyers and cops would decide that the revolting citizens are right and they would join, and so on.

The eurozone would quickly find out that it also needs to control the police, courts, and all other parts of the Greek public sector - because their responsibility is related to the economic governance. You simply can't "isolate" just the economic government. There's a very good reason why all countries in the world have just "one government" and not "many isolated governments", each of which takes care of one resort.

So dramatic cuts in Greece would clearly be impossible. They would learn it either the easy way or the hard way. So what would actually happen is that

1. either they would give up and used the eurozone government to force fiscally responsible countries such as Slovakia to pay even more money to Greece in order to make the system going (punishing the good guys and making the system increasingly more inefficient), or
2. they would have to introduce a full-fledged unified country, the Union of Eurozone Socialist Republics (UESR).
While the second option is surely something that both Merkel and Sarkozy are dreaming about - even though they may privately disagree which of them should be the leader of UESR - this is not exactly a peaceful proposal. There's clearly no popular support for the German control over the Greek police or any other police or any other part of the government sector in any generic eurozone member country. So if 2) is Sarkozy's or Merkel's preferred answer, they're actually planning to declare the war against the rest of the eurozone.

Much more generally, every sensible person must understand that the shared currency has contributed to the existence of all these permanently worsening financial problems in Europe. Europe isn't an optimum currency zone so it shouldn't have introduced a common currency. I am surely not saying that the euro can be blamed for everything but whoever fails to see this point - the euro's negative influence on the fiscal order of the member states - is just a nutcase. A solution may be to
1. either admit that it was a mistake and revert it, or
2. deny it's a mistake and make even more radical steps in this direction.
No doubts about it, if you could authoritatively unify Europe or the eurozone in all respects, in a way envisioned by the two leaders' predecessors such as AB (Adolf and Bonaparte), it could enjoy all the advantages of a single country such as the U.S. But if you think about these matters, you are getting into the sphere of science-fiction or speculations about the World War III.

It's just a fact that the political cultures of pretty much all EU countries are completely isolated from one another. They don't breathe together. People largely don't follow politicians in other countries. Swings in the public mood and political opinions of the EU countries almost never transcend the national borders.

So you can't really make a working democracy at the pan-European level. Every political disagreement in such a huge fake country would inevitably be a conflict between nations as well because there would always be huge correlations between the nationality and the political interests or opinions. There are nations that may prefer truly conservative politicians for the next decade and they will be in a constant, inevitable conflict with the nations that vastly prefer the left-wing politicians.

In France and Germany, left-wing and right-wing politicians ceased to exist, there is a single politically correct jellyfish ideology, so it doesn't matter who is elected. But one must understand that this is surely not the situation of many other countries - surely not e.g. Slovakia.

Merkel's and Sarkozy's plans are therefore similar to plans to build the Fourth Reich and the idea that this could be a smooth process that everyone will welcome and that will bring harmony in between the European nations is just downright silly. Instead of these insane visions, the European politicians should admit that the kind of closer unity they have been defending is dysfunctional and what they have participated at was a grave mistake.

They should abandon it and every politician should think about the most productive ways to split the eurozone - about the dissolution of things that don't work, while keeping things that do work and while assuring markets and everyone that there's nothing to be afraid of. Czechoslovakia has not only been Velvet-divorced but it also abolished its currency union. The two new currencies were introduced overnight and there wasn't a single glimpse of a problem. This can surely be done with the euro as well.

It's conceivable that the euro should be split to the Central Euro (CER) and the Peripheral Pig (PIG). The Pigs would be used to pay in the PI(I)GS nations and they could continue in splitting the currency later if needed. However, at least the basic split into two parts is needed.

Today, Merkel and Sarkozy added another twist to their idea - they want an elected leader of Europe. This is just crazy. In a "greatest part of a pie wins" system, such a leader would inevitably be German. If some 2-round or majority system were introduced, it would become a German-vs-the-other-guy contest. At any rate, no one could have a good feeling about such elections because the national considerations would - either openly or secretly - play a key role, with all the messy issues such as the different population of different nations.

Europe doesn't contain a single demos. It's a continent with many nations. Any attempt to deny this basic reality is guaranteed to end with similar hassles as those that resulted from the eurozone - except that in this case, armies could be involved, too.

Financial transaction tax

Let me get to a smaller topic. One of the things that Merkel and Sarkozy also want to do as the new economic Führers of the eurozone is a financial transaction tax. They want it to stabilize the markets and reduce volatility. Let me first mention three related notions:
Tobin tax (for each currency conversion, from a Nobel prize winner in the 1970s)

Financial transaction tax (general term)

Robin Hood tax (a very recent, 2010 U.K. movement with a similar goal)
Recall that Robin Hood was a notorious English criminal whose victims were usually rich and he used a corrupt (sometimes by himself) mob of poor, hungry, and angry jerks to cover up his shameful criminal activity. ;-) In the past, I once wrote he was a Swiss criminal. I apologize to Wilhelm Tell for this embarrassing confusion. :-)

You know that I have expressed some opinions that such a tax could be a good idea - but I will discuss many "buts" below. Needless to say, the libertarian, politically correct (in the better sense) attitude is to oppose such a tax:
Tobin's Folly (newspaper article)

A hostile report (report by the Adam Smith Institute)
I think that the volatility is excessive, largely driven by motivations that have nothing to do with the "search for the right price", and this volatility makes the planning (and life) of most market players harder because to be sure, they must also include some extra unexpected expenses that are related to daily flukes.

On the other hand, there are many speculators who make living out of the fast and unnecessary chaotic motion of the prices.

The currently semi-realistic ideas include a fee of (up to) 0.5% of the price of the thing you're converting or buying. This is way too huge. Some other proposals talk about 0.05%. That may be too small. But you get the idea.

The Adam Smith Institute thinks that this fee wouldn't decrease the volatility. I am convinced it would. However, there are of course many important points that have to be addressed:
• Exodus from a country with this tax
• Required variable rate for the tax
• Need to preserve enough transactions so that the price is being adjusted and well-defined at all
• Paperwork complications
Concerning the first point, the most catastrophic experience with the financial transaction tax occurred in Sweden of the 1980s. They introduced a huge, 0.5% tax on the transactions. As a result, most of the trading moved from Sweden to London. The income from the tax was 30 times smaller than advertised. After five years, the whole system was abolished.

This attempt surely teaches us that you shouldn't neglect the possibility that you will chase the traders - including those whom you really need - away from your country or away from your eurozone or EU. You should better think about this possibility. This could be a problem even at the pan-European level. Europe surely doesn't want all traders and all the traffic at stock exchanges to move to New York etc. The side effects could be much worse than the expected advantages.

If such a tax were introduced pretty much globally, it could be more interesting and more stable and the first complaint could go away. I don't expect such "synergy" to emerge anytime soon.

The second point I mentioned says that the rate for the tax should be variable. I think it's totally clear. A one-size-fits-all financial transaction tax would be bad for almost everyone. Some things have a rather low volatility and traders just can't afford to pay something like 0.5% for every transaction. On the other hand, the emerging markets have a high volatility and a financial transaction tax of 0.5% wouldn't make a visible difference.

So I think that the tax rate, if meaningful, should be proportional to the characteristic volatility of the stock or currency pair or anything else that would be affected. It could be 1/5 of the average daily movement of the price (in absolute value) during the recent month, or anything of this sort. Note that if the prices "completely stabilized", such a transaction tax would go to zero and it would cease to be a consideration, allowing the fluctuations to re-emerge.

A variable rate would probably address the problem with a potential loss of liquidity and traders that are needed. The tax would have to be designed in such a way that it wouldn't kill "all traders". It shouldn't even kill "all short-term traders". It should just make the business of the latter tougher - and kill the worse part (XY percent) of the fast traders.

Finally, I mentioned bureaucracy. Clearly, you don't want to introduce a tax that would require millions of extra bureaucrats and dozens of extra forms being filled by every trader. This would be a huge burden for everyone - especially those of us who hate bureaucracy.

The system, if meaningful, should be automated. Assuming that all transactions are seen by some computers, those computers should subtract the right tax and send it to the government right away. Traders should know in advance, at each moment, how much they will pay, too. As a modern tax, this one should completely avoid the complicated system of old annual tax forms etc. Otherwise, even a potential supporter like me would badly disagree. In fact, I strongly believe that because we have entered a computer era quite some time ago, all taxes should be instant and annual tax forms etc. should be completely eliminated.

In particular, I don't think that people should individually evaluate some complicated formula involving all of their transactions during the last year. If this were necessary, the cure would be worse than the disease once again.

So my overall opinion is that if such a tax were introduced by the EU politicians who don't exactly look like bright experts appreciating many layers of the economic reality and who are not able to responsibly think about all conceivable complaints, the resulting financial transaction tax is very likely to be a catastrophe. On the other hand, I am no fundamentalist and inside my soul, I do believe that there exists a sensible way to define and enforce such a tax that actually makes the markets a better place to live.

And the extra income, if it worked, could be substantial. I won't discuss "how the extra money would be spent" because I don't think that they're separate money that should be considered in isolation from other tax revenue etc. And the tax would probably reduce some other kinds of revenue, so it's questionable whether it would be a net plus for the governments' budgets at all.

Still, there are governments in the real world and they collect taxes. We have income taxes, sales taxes, value-added taxes, and so forth. It's very likely that some of them - or completely new ones - are actually more productive and sensible than others and they could be a better way for the governments to obtain their finances (and perhaps push the markets in some positive direction along the way, too). It's very plausible that some of the taxes will be considered obsolete in the future.