[Skybird]

Corona economics:

https://www.manager-magazin.de/polit...a-1306445.html

In an interview with the Süddeutsche Zeitung on Monday, Italy's Prime Minister Giuseppe Conte criticized the position of the German and Dutch governments. Their perspective "must change now". European solidarity in the corona crisis is needed and common bonds are now needed.

This Thursday the EU heads of government meet to decide on a reconstruction fund. Meanwhile, there is talk of a volume of 1500 billion euros and it all boils down to the fact that joint repayments are agreed depending on the economic strength. Translated this means: Germany would have to pay 29 percent of the repayments, even if we do not receive anything from the reconstruction fund. We would then have to raise 435 billion euros in the coming decades and actually give them to our partners in Europe.

Apart from the fact that I prefer to help Italy intelligently and to mobilize our ever increasing TARGET2 demands, as explained here, there is also the question of justice. Not only are the Italian households, according to all available data, significantly richer than we are, they are also less indebted.

Last weekend, I pointed out on Twitter that Italy could solve its debt problem on its own. A one-time levy of 20 percent would be enough to reduce Italian public debt by 100 percent of GDP - to a level below the German one. Even after such a cut, Italian households would have more assets than the German ones.

This thesis sparked fierce discussions and culminated in the statement of a leading German economist that it was a dubious calculation and would inevitably lead to a severe depression in Italy, an attempt was made in this way to reduce the Italian government debt. That is why it is not a viable option and one has to help Italy by means of joint bonds.

Let's do the math

Reason enough for me to take a closer look at the numbers. Because if one vehemently rejects taxing private wealth in the country that is asking for solidarity, and at the same time sees no problem in imposing additional burdens on local taxpayers, it really must be impossible.

But the opposite is the case.

The starting point for my considerations are the following facts (all numbers rounded):

The Italians have private assets of 9,900 billion euros.
The debt of the Italian state is 2500 billion euros.
Italian GDP before Corona was 1,800 billion euros.
A 20 percent tax on private wealth would result in 1980 billion euros: the state would then have debts of 520 billion euros, which corresponds to less than 30 percent of GDP. If you wanted to reduce the debt to 60 percent of GDP, a tax of 14 percent on private wealth was sufficient to reduce the public debt.

Since this rough calculation met with criticism, we take a closer look at the data. The table provides an overview of the debt levels of the various sectors - government, non-financial corporations and households - as a percentage of the gross domestic product of the respective countries, sorted in ascending order by total debt:

Sector debt levels



Country State Enterprise Private households Total private sector Total
Germany 61.0 59 54 114 175
Austria 71.1 90 49 139 210
Italy 137.3 69 41 111 248
Spain 97.9 95 57 152 250
Portugal 120.5 100 65 164 285
Netherlands 49.3 163 101 264 313
Belgium 102.2 150 61 212 314
France 100.4 155 61 216 317
Source: Bank for International Settlements, as of Q3 / 2019, in% of GDP

This representation is extremely interesting:

France is at the forefront of debt, with 316.8 percent non-financial debt relative to GDP. No one should therefore be surprised that France in particular places so much value on joint debts at EU / Eurozone level.
The Netherlands has the least public debt, but its very high level of private debt.
In no country is the private sector as indebted as it is in Italy! Nowhere are private households so indebted and only in Germany do companies have less debt relative to GDP.

So it is obvious - as I have done - to raise the question of why Italy does not help itself. Obviously, it is not a problem of excessive debt, but of an incorrect distribution between the state and the private sector. If the Italian government shifted part of its debt to the private sector, it would still be less indebted than the private sector in most other countries.

So it's definitely not the numbers. This is why the critics have put forward such a consideration that it cannot be implemented to burden the private sector in this way.

The advocated alternative of my critics is that the other states of the EU - above all Germany - should assume the debts. But this is nothing more than a repayment based on economic strength, which is why this idea only satisfies me to a limited extent. As I underlined several times, here too, I am in favor of helping Italy. But the country should and could do something for itself.

It is completely easy to enforce such a one-off property levy. According to Credit Suisse data, Italian households have the largest wealth relative to the GDP of all countries.

The Banca d'Italia reports regularly on the development of private wealth.

In 2017, it was 9743 billion and these were the most important positions (in billions each):

Private wealth

The most important positions in billion euros

Residential real estate 5,247
Cash / bank deposits 1,361
Shares 1,038
Insurance / pensions 995
Commercial property 679
Investment fund 524
Bonds 314

Incidentally, Italian households directly hold only 100 billion government bonds. The main creditors are the Italian banks and foreign institutions and - of course - the ECB. A taxation of wealth would therefore not be a haircut, as another critic of my considerations on the Italian wealth tax noted.

Let's go on: Let's assume that the Italian state wants to organize a new start and drastically reduce its debt by the 100 percent of GDP that I put in the room. That would be 1,800 billion euros or around 18.5 percent of the wealth of Italian households. Assuming an allowance to protect smaller assets could correspond to a 25 percent rate.

Assuming a more moderate debt repayment of 50 percent - a step that would lower Italian public debt below the level of most euro area countries - we speak of 12.5 percent of assets. By the way: the burden equalization that was introduced in Germany after the Second World War was 50 percent of the ascertained assets and had to be paid in 120 quarterly installments.

Obviously, Italians don't have that much cash. This reflects the better investment compared to us Germans. Real estate is the most important asset position. On the other hand, the debt is very low. The Italians could easily borrow the money needed to pay the tax. If we assume that the owners of cash and cash equivalents make the payment directly from the portfolio and that above all the smaller assets are invested - and therefore the exemption limit applies accordingly - this would already result (assuming a rate of ten percent) around 300 Billion euro. The remaining 1,500 billion euros in the maximum scenario correspond to around 25 percent of Italian property assets.

As early as 2017, the French think tank France Stratégie suggested that the state become co-owner of all properties and could levy an annual tax in return. If an owner does not want or cannot pay annually, the discount would be deducted from a sale or inheritance. The French government distanced itself from the proposals. But that does not change the fact that states could make use of this option in financial difficulties.

In the specific case of Italy, it makes sense that the state levies compulsory mortgages on the real estate. Payments would go directly to the state, and repayments would be made over the longest possible period, for example, as in German load balancing over 30 years, and at very favorable rates given the ECB's monetary policy.

If we assume a volume of 1,500 billion euros, this would correspond to an annual burden on private households of 67 billion euros with two percent interest and a term of thirty years. That is around 3.5 percent of the annual economic output. If the government is satisfied with a lower burden than in the maximum scenario, we are talking about an annual burden of around one percent of GDP.

In return, the Italian government could significantly reduce other taxes and duties once the debt has been reduced. There would no longer be a need to achieve a so-called primary surplus, i.e. a surplus in the household before interest payments. The state would release the country's growth forces instead of slowing them down as in recent years. This would give Italy the chance to overcome the stagnation of the past 20 years.

What speaks against suggesting that the Italians solve their problems in this way? It would be the key to an economic upswing. If you instead rely on the significantly poorer German households to take the burden off the Italians' debt, in whatever way, packed and veiled - not only promotes the Euro-critical forces here, they also deny Italy a unique opportunity!

It would definitely not be a rescue of the EU and Euro project. Friendship cannot be bought. Given the heated debate in Europe, we can experience the validity of this saying on a daily basis. If local economists and politicians think that the solution lies in moving assets towards the wealthiest private households in Europe, they overestimate the performance of the German economy. Given demographic change, structural change and the disappointing development of productivity, we are facing difficult years.

Germany should still help, as I appealed here two weeks ago, namely with direct investments, loans and targeted support for the health system. In return, we should press for the participation of the Italian private sector.

By the way: Spain, Portugal, Belgium and even France could also help themselves, as a look at the numbers shows.