Left Bank, Right?

If you are rich in so many European nations, where statutory tax rates at exceptionally high, you operate much of your financial life in off-shore tax havens. Apparently, being rich and paying your fair share of taxes in places like Greece or Italy is a conclusive sign of mental illness. In France, if you are a rich actor, you might consider moving to Belgium or Russia instead.

The United States has accorded the wealthy with tax breaks so they can avoid taxes legally: if you make your money out of asset sales (as an investor or fund manager), you pay a fraction of the tax rate a working class type pays, and if you want to build your cash reserves from overseas earnings without paying U.S. taxes, with a little corporate planning, voila! It is done. Europeans prefer moving to tax havens or simply ignoring (violating) the law. Tax evasion is a European pastime for many in those monetarily-impaired and need-to-be-bailed-out southern Eurozone members… and even in a few in northern climes.

So when governments have to respond to the Teutonic mandate – the German requirements that accompany bailout rescue funds – the local officials only have the money that they can get their hands on to meet compliance obligations. They can cut government payments and subsidies, reduce the size of their governments by massive layoffs and they can reach into the pockets of those working individuals who don’t have the “resources of the rich” to create tax evasion schemes that really work. In short, these ill-governed governments can only respond to orders from Deutschland (the country that calls the bailout shots in the EU) by imposing those burdens on the only folks within their immediate grasp. They can accomplish their goals only by imposing suffering on the masses, effecting staggering unemployment rates and decimating governmental services. The wealthy have simply “left the building.”

The rich have proven too powerful to deal with, so with snickers abundant, they soak themselves in their off-shore wealth like Scrooge McDuck, leaving those poor suckers who earn a living from companies where withholding taxes is routine to shoulder the bailout burden. Austerity is nothing these big boyz and girlz need concern themselves with. If life gets too miserable in the motherland, they have so many homes around the world with the power to operate their businesses from a laptop, they climb aboard yacht or jet and vamoose.

And so this press for austerity falls squarely on the shoulders of local wage earners and those who own small businesses that cannot fly away. It is primarily a burden for anyone other than the wealthy. No wonder then, as governments begin to impose these austerity mandates, there is a strong push-back from those forced to carry the weight of those decisions.

Tax haven Cyprus added a new variable into the mix, one sure to force off-shore even more money across all over Europe, by proposing a one-time “tax” on local bank accounts (9.9% for account over EU100,000, and 6.75% for lesser accounts). Some say the edict was an attempt to siphon money from local bank accounts from rich Russians (read: tax cheats and money launderers), and Germany was quick to point out that while they required austerity (for a $13 billion rescue package for this small island nation), the notion of taxing bank accounts was purely a Cypriot decision. Germany just wanted to see a quick path to $5.8 billion of that bailout fund, because Cyprus was unable to sustain a higher public debt load without the threat of default. Thoughts from some were simply to tax those EU100,000+ accounts at 15% and leave the little guys alone, but whatever the solution, their parliament has rejected this solution… for now. Failure to draw extrinsic support to Cypriot banks, slammed heavily in the Greek debt crisis, would probably lead to a catastrophic bank collapse, which in turn would take down the entire southern Cyprus economy.

Global markets plunged at the news. Cyprus had just presented an entirely new and financially terrifying mechanism to enforce austerity. Confiscation. Attempts to drain bank accounts over the weekend were blocked, but needless to say tapping the locals’ life savings was an immensely unpopular idea. A roiling storm ripped across Cyprus. And even though the government then blinked and postponed implementing the tax (rejecting the current proposal) – noting that imposing the tax solely on the bigger accounts would be insufficient to accomplish the goal – the mere fact that an EU government had proposed this solution was enough to remind the world of the true cost of dealing with the European debt crisis that to date had defied any logical and tolerable proposal to solve.

Where would this plan be implemented at some level? Where would such a plan be suggested next, the financial markets wondered? Italy? Spain? France? Would depositors in troubled countries rush to withdraw money from their local accounts to push them to more stable countries? If this resulted in a run on local banks, would the ripple turn into an economy-crushing tsunami?

Miguel Arias Cañete, Spain’s agriculture minister, instantly assured the markets that his country would most certainly not follow suit. Cyprus government spokesman, Christos Stylianides noted to the press that things could have been much worse, “that the International Monetary Fund, during the negotiations, had even gone so far as to suggest a 40 percent haircut on certain deposits or to freeze deposits for up to five to 10 years.

“Analysts said the move to confiscate money from depositors had opened a Pandora’s box… Moody’s Investors Service warned that the decision to impose losses on depositors was ‘a significant departure from past instances of support’ by European officials. It ‘signals euro area policymakers’ willingness to risk triggering wider financial market disruptions in pursuit of other policy goals,’ Moody’s said in a note.” New York Times, March 18^th. Defaulting on government bondholders was another suggestion. The European Central Bank has suggested it might curtail some of the austerity requests as a result.

The European Union, particularly the Eurozone, has failed its first big test. The grade has to be a pure “F.” Their economic structure, with profound and conflicting cultural and structural issues surrounding debt and money, simply does not have the underlying values and financial imperatives to make this Union work in deeply troubled financial times. The ability to inflate or deflate regional currencies in response to economic realities is simply impossible under a unitary currency, so the only alternative if uniform structural compliance is required is to impose suffering on those over whom jurisdiction can be enforced. And that is the middle and working class of the affected nations, leaving the rich to gloat quietly at the success of their clever financial planning efforts. And you wonder why they scream, yell… oh… and riot so much. It just won’t work.

I’m Peter Dekom, and pain reserved only for “other than wealthy” begets anger and national collapse… a lesson I hope American politicians are watching carefully.