Europe is in turmoil. Unemployment is up; wages are down. Industrial production is stagnating. Most importantly, European people are demonstrating on the streets and on the internet in outrage over cuts to social services and worker protections. Economists and Eurocrats demand more suffering, but ordinary citizens seem certain that European austerity policies are the root of the problem.
Voters in Greece have overwhelmingly rejected the austerity politics of the past three years. Voters in France agree. In the UK the governing Conservative-LibDem coalition lost local elections over austerity policies that have plunged the UK back into recession. A battle over austerity even forced the collapse of consensus government in the Netherlands. Irish voters have their say on European austerity May 31.
On the other hand bond markets are demanding higher and higher interest rates as the price of financing Europe’s debt as fears of default mount. The battle lines have been drawn in Europe’s Austerity Wars. It’s the voters versus the bond markets, and in the short term the bond markets are winning.
Just who are “the markets”? There are two main groups of investors in Europe’s government bond markets. The first are Europe’s big banks. Banks understandably want to be repaid for the loans they make, and they should be repaid. European countries should institute financial transactions taxes, clamp down on corporate tax avoidance, and impose windfall taxes on bankers’ bonuses in order to raise the money to repay the banks.
Better yet: to reduce tax evasion, European countries should give the European Union the right to collect these taxes at the pan-European level, then put the money collected into a pan-European fund to help out countries in need.
The second main group of bondholders are the vulture funds. These funds buy up the distressed debt of troubled countries like Greece, Portugal, and Spain at bargain prices, then push for full payment. This second group has no moral right to full payment. Where vulture funds have bought bonds at a discount, governments should simply tax them to make up for the discount. Making money through speculation is, frankly, speculative. Speculators have no inalienable moral right to a tax-free profit.
Austerity is nothing more than a way to make sure that banks and vulture funds get paid. It’s about deciding who deserves more of society’s limited resources and who deserves less. Put that way, it’s hard to see how anyone can think that hedge funds deserve more and minimum wage workers deserve less. If the law implies a different answer, then the law should be changed.
If a country decides that its contracts are sacrosanct, that’s fine. Then the contracts must be paid. But who should be made to pay them? That’s also for the country to decide. If justice demands it, a 50% tax on bond interest can be passed and the proceeds used to pay the interest on bonds. A constitution might require a country to pay its debts, but there’s no constitution in the world that specifies who must be taxed to pay them.