A blog on the political, economic and social causes and implications of the crisis in the Southern periphery of the Eurozone.

I'm a political scientist working on political parties and elections, social and economic policy and political corruption, with a particular focus on Italy and Spain. For more details on my work, see CV here, and LSE homepage here. For media or consultancy enquiries, please email J.R.Hopkin@lse.ac.uk.

Monday, January 23, 2012

Blogging the Italian Crisis

Not much action on these pages in the last few days, largely because I've been writing a piece on Monti and the Italian crisis. And you lucky readers get to see the draft first. Here goes:

Italy has long been seen as a weak link in the Euro. Back in the 1980s, when plans for monetary union first began to take shape, fears that Italy’s political instability and fiscal indiscipline might derail the project were a serious obstacle to progress. The stringent criteria laid down by the Maastricht Treaty for participation in the Euro were designed with Italy and its large public debt in mind, and the Growth and Stability Pact which unsuccessfully governed the Eurozone’s public finances through the 2000s was principally aimed at curbing deficit spending south of the Alps. The current scenario, in which Italy’s creditworthiness is doubted by the financial markets and its debt problems are beginning to seem unsustainable, is the nightmare European policymakers have long dreaded. With Italy in trouble, the once apocalyptic danger of a Greek default is now seen as no more than a little local difficulty. 

Thursday, January 5, 2012

Tax evasion on ice

Looks like the Italian revenue services are taking tax evasion a bit more seriously (did they read this?). Repubblica.it reports that the Venetian tax inspection office "raided" Cortina d'Ampezzo, an emblematic ski resort for the wealthy, and ran a series of inspections of bars and restaurants, with the result that their declared takings since New Year's Day have increased by several hundred per cent compared with the same period last year. A parallel investigation of over 200 luxury automobiles revealed that dozens of them were owned by people whose tax returns reported gross incomes of less than €30,000 per year.

Similar raids have happened before, and they are never sustained over time. Let's see if things change under Monti. If they do, we can be sure that Berlusconi's Pdl party will be ready to bring the government down: the only reactions from the Pdl to the Cortina operation were critical of the 'police state' tactics deployed.

Monday, January 2, 2012

Make them pay

Reflecting on the notion of collective moral hazard, I have been thinking about ways of disaggregating the responsibility for the budget crises facing most advanced democracies. Of course, I don't buy the austerity argument, and I am totally unconvinced that deficit reduction serves any useful purpose in the current climate. But if sacrifices have to be made, how are we supposed to allocate the pain?

In the Italian case, there is a pretty clear line of responsibility. In periods of centre-left rule (1995-2001, 2006-7), the deficit went down, whilst in periods of centre-right rule (up to 1995, and then from 2001 to the present, save the short-lived Prodi II government) deficits have remained stable or increased. The picture is made clear enough here:

So, we can attribute a chunk of the responsibility to the Berlusconi-led centre-right coalition for Italy's failure to reduce its debt substantially over the past two decades (an argument I made here in a piece for Foreign Affairs). We can make a case that citizens who voted for these administrations should therefore be first in line to pay the costs of their mistakes, particularly in view of the fact that the failure to reduce the deficit was also motivated by the need to distribute favours to this very electorate.

In fact, what seems to have happened is that centre-right voters got most of the benefit of deficit spending (in the form of distributive spending and tax concessions, including a light touch for tax evasion) whilst centre-left voters got little direct benefit from the briefer periods of centre-left government, in which the focus was on repairing the damage made by their opponents (as is indeed the case for the Monti government, so far robustly supported by the centre-left).

So as a matter of social justice, centre-right voters should pay more to get the deficit down. They tend to be wealthier, are more likely to have evaded tax, and are more likely to have received material benefit from the deficit-inducing policies of their governments. But more than all of this, they are directly responsible for the policies followed, in much the same way that drivers of gas-guzzling cars should pay more of the cost for addressing global warming.

Of course, a policy like this is difficult to apply, since voting in Italy, as in all democracies, is by secret ballot. Arguments have been made for changing this, to encourage voters to exercise moral responsibility for their choices (eg here). I propose a further refinement: tax liabilities should be adjusted according to the degree of voter responsibility for good and bad fiscal outcomes: so a 100% Berlusconi voting record could imply a 100% increase in the differential tax burden for deficit reduction, whilst a 100% Prodi/centre-left record could imply a 50% discount.

This is merely an extension of the notions of liability will already apply to other activities with the potential for negative externalities. And it is also consistent with the notion of applying a stricter correspondence of duties and rights in democratic societies. It won't solve Italy's problems, because the people I would target already evade much of their tax liabilities - just getting them to comply with the law would be a start. But the fact that the burden of deficit reduction in most countries is falling on those who did least to create the problem in the first place offends any notion of social justice I can think of.