Europe needs even more debt, but not for the reasons you might think


The time is right, conditions are ripe: it is time for European governments to take into more debt to fund the structural reforms our countries need.

With Eurozone unemployment stubbornly stuck at 11.30% and with our countries systematically failing to produce growth, it is time to take advantage of the temporal macroeconomic bright spots and valiantly pursue structural reforms long overdue.

First, the facts: in Europe there are a number of clear economic winners and losers. In the European Commission’s Spring 2015 Economic Forecast, low-taxes, small-regulation Ireland, Poland and the Baltics are all set to grow at a 3% rate or higher. Reformist Spain jumps to an astonishing 2.8% rate. Chronically overregulated, over-taxed France and Italy trail the rest.

GDP growth 2016

Small countries with few natural resources or significant workforces have long been forced to compete for firms and talent, in stark contrast with large countries that boast equally large markets and national champions that, more often than not, used to be state-owned monopolies.

But what do we do when it is the big fellas who fail to grow?

We imitate the winners.


One way to compete in a globalized world where a company can be registered in the Netherlands, with its headquarters in the States and its main operations in the UK is obviously the tax you make companies pay.

Corporate taxes in Europe

But while significant (I never get tired of news of more and more companies relocating their European tax base to Ireland) corporate tax rates are not everything in this world.

How is it that the USA has one of the highest rates in the industrialized world and still has historically grown at almost full potential? Why don’t they relocate to significantly less punitive tax domiciles like Canada or even Mexico?

It can be summarized in two words: stability and simplicity.

Let’s use Spain as an illustrative example. When crisis hit the country in 2008, public debt was a measly 35.5% of GDP. With growth rapidly stalling, the Socialist government quickly readied its Keynesian cannons: 12 billion euro were put to work in local projects meant to keep people employed and create growth via public spending multipliers. Also, corporate taxes were lowered. None of that mattered, and by 2009 GDP was falling by 3.7% and unemployment was soon to reach 25% levels.

But if injecting cash into the economy and lowering taxes does not immediately work, how else to stimulate the economy?

My suggestion is, by making it less vulnerable to such dramatic swings by pursuing stability and by pursuing simplicity in our laws. Do not just lower taxes, cut goddamned regulations that suck in money unnecessarily. Do not inject government cash in the economy, prevent us from needing it.

Ease of doing business index

Why are politicians willing to spend political time and capital on costly-to-implement tax deductions and exemptions that change with every new government or even more? Instead they could simplify the system dramatically, ridding companies of making tax planning a part of their strategy, and stopping the trend of individuals discouraged to establish their own firms because of fear of regulations.

Would it cost money? Yes, initially. But after all, external debt is mostly concentrated in the private sector in most European countries, not the public one. That is where governments would need to take shield temporarily in the historically low interest rates and 60$-a-barrel oil prices that are giving budgets a breather. Are the rewards worth it? Absolutely:

Margaret Thatcher was impopular for many reasons, but there is one area where she must be credited: her Big Bang of financial deregulation gave the UK a nascent industry at a time when uncompetitive traditional factories were closing down at an alarming rate. The results?

The Global Financial Centers Index

Lee Kuan Yew, founder of modern Singapore, was once equally impopular at home. Singapore was a place so poor and crime-ridden that Malaysia kicked it out of its federation. Under a policy of small government, transparency and simple regulations, Singapore is today a regional powerhouse despite a population the size of metro Berlin.

So, are transparent, stable, easy to follow regulations a guarantor for success? Not by themselves. But combined with Europe’s tremendous human capital, open frontiers and large, dense market, it could bring us again to a time where living in Europe was a promise of a better future if only one had the right ideas and the will to pursue them.