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Private Wealth and European Solidarity

COLOGNE – A little-discussed but crucial factor in the debate over wealth transfers from Europe’s more economically sound north to its troubled south is the relationship between public debt, GDP, and private wealth (households’ financial and non-financial assets, minus their financial liabilities) – in particular, the ratio of private wealth to GDP in the eurozone countries.

While the European Central Bank’s bond-purchasing scheme has calmed financial markets to a considerable extent, some European economies – including Italy, Spain, Greece, and Portugal – are still at risk, because they are not growing fast enough to narrow their deficits and stem the growth of their national debts. The grim irony here is that the ratio of private wealth to GDP in some of the countries that are in need of support from the ECB and northern eurozone members is equal to or higher than that in more solvent countries.

Consider Italy, which has the highest ratio of private wealth to public debt of any G-7 country, and is some 30% to 40% higher than in Germany. Likewise, Italy and France share a private wealth/GDP ratio of five to one, while Spain’s – at least before the crisis hit the country in full – was six to one. By contrast, the ratio in Germany, Europe’s largest creditor, is only 3.5 to one.

This discrepancy is at the heart of the question with which European policymakers are now grappling: Should taxpayers in debtor countries expect “solidarity” – or, more bluntly, money – from taxpayers in creditor countries? Why should taxpayers in creditor countries have to take responsibility for financing the euro crisis, especially given that high private wealth/GDP ratios may result from low tax revenues over time, 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 governments should call upon their own taxpayers to fund some of the national debt in order to 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 make them tax-free eventually. This would allow Italy, Spain, and even Greece to finance their national debts at a more reasonable, sustainable cost.

Citizens’ voluntary financing of their countries’ national debt would be the most effective means of reducing strain on Europe’s financial resources, while simultaneously serving as a powerful symbol of solidarity. By contrast, turning creditor-country citizens’ tax payments into forced subsidies of 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 tend to focus on its indebted members, Europe’s monetary union is at risk of losing one of the few members that still enjoys a triple-A credit rating: Finland. Given Finland’s difficult domestic political situation, its citizens may look to Denmark and Sweden – which boast rapid growth and low national debt, and do not pay into the European Financial Stability Facility or the European Stability Mechanism – and decide that eurozone membership costs too much and is no longer worthwhile.

Italy and Spain have enough resources to rescue themselves, and to secure the time needed to restructure their economies. Indeed, even after taking on the entire national debt, their private wealth/GDP ratios would still be higher than they are in some northern European countries.

Escaping the euro crisis is less a matter of economics than of political will. By calling upon citizens to finance their own countries’ national debts, southern Europe’s leaders can fix their own economies and strengthen the European principles of solidarity and subsidiarity.