Voxeurop: You co-direct the World Inequality Database. What impact will the pandemic have on inequality?
Thomas Piketty: The pandemic will increase inequality, and even if we don’t have all the data, we already see that low income and precarious workers have taken huge losses, while the more wealthy have reduced consumption and increased their savings capacity. Wealth inequality will be on the rise again.
In itself, the free movement of investments, goods and services is no bad thing — on the condition that there already exists a system of common rules, especially a common regulation and taxation system for capital income and corporate earnings. The mistake was to go ahead with free trade agreements without considering such things as information sharing or a fair tax rule for those unable to simply change location and evade any obligations. We’ve built a machine which allows only the most mobile and powerful economic actors to evade taxes at the push of a button, after they enrich themselves while enjoying a country’s infrastructure, healthcare, etc.
It’s a machine that ensures Europe — and globalisation more generally — is hated by the least mobile classes, the working and lower-middle classes. As a European and social-federalist, it is deeply saddening to see, poll after poll, referendum after referendum, that it’s the working classes who exhibit the strongest scepticism.
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The political consequences are terrible. The idea that it’s some unique folly of the British that led them to Brexit seems an illusion. The European institutional system was originally conceived as a free-trade area for goods and services. No real need for budgets or taxation. And therefore no real need to go any further in terms of political integration, especially not by a majority vote.
In relation to what you develop in your last two books, Capital and Ideology and Socialism at Last, how would you analyse those promises of equality broken by social democratic parties?
This brings us back to the European question. One limitation for the social democrats in Germany, France, Sweden, etc. is that from the 1950s up the 80s and 90s they managed to create welfare states — systems facilitating access to healthcare, pensions and education, among the most successful in the world, and still very robust — but since the 80s and 90s they’ve been hampered by a lack of any international vision beyond the nation state. In a globalised economy, it is very hard to maintain the social and fiscal consensus to finance such welfare states, while member countries engage in a tax competition, each fighting their corner. Nobody is going to join all these welfare states together. But when it comes to the global financial system, and new challenges, especially energy and climate change, and then funding the whole thing and imposing rules on the world’s most powerful economic actors — in order to redefine itself for the 21st century, social democracy absolutely needs this international focus.
If I talk in France about progressive wealth and inheritance taxes - which would finance a heritage or estate for all - or when I talk about corporate governance involving voting rights for employees, it would of course be preferable if all this could be realised at the European level, or in a large number of countries.
Of course it’s possible to go it alone. Germany and Sweden didn’t wait for the rest of Europe to develop joint management and voting rights for employees on company boards. France could join them right now. Lack of consensus at the European level cannot be used as an excuse to do nothing.
On the subject of more democratic corporate governance, from the 70s up to the mid-80s there was a European draft directive on corporate governance, proposed by Germany, who wanted to extend voting rights to employees across Europe. Nothing ever happened, mainly because France wasn’t too enthusiastic, and nor were many others.
Major social ambitions involving taxation, as well as corporate law, need to be in tune with the times if there is to be any chance at reconciling public opinion with Europe, as well as reconciling the social democratic project with the European project.
Does the European recovery plan seem ambitious enough to you — enough to beat the recession, the worst in EU history, and reorient the European development model?
This European recovery plan has not been adopted yet, and it’s rare to see such a delay between an official announcement and implementation. It’s now December and we still have no clear idea about when the decisive European Council votes will take place, nor decisions within national parliaments. Moreover, this plan has been inadequate from the start. The result is that, collectively, we’re relying far more on the European Central Bank than on a fiscal recovery plan.
And this despite the fact we went from 500 to 750 billion euro in July, with a common loan?
Indeed, the real novelty is the EU’s 390 billion euro common loan which will boost national budgets according to necessity, without requiring each member state to repay exactly what they received. The rest consists of repayable loans, not much different from what was proposed in the 2012 European Stability Mechanism, which member states aren’t really too keen on.
While there may be the notion of a European public good, with collective repayments, there are two limitations. While 390 billion euro may sound like a lot, it has to be compared to the EU’s GDP, currently 14,000 billion euro. This loan amounts to less than 3 percent of the European GDP, to be spent over the next four or five years, corresponding to about 0.5 percent of GDP in additional public spending. This is clearly nothing to be sniffed at, relative to the starting budget of the EU, going from 1 percent of GDP to 1.5 percent. But compared to national budgets, the sums are still very low.
Look at the history of the USA’s federal budget, which was barely 2 percent of GDP until the 1920s, soared to almost ten percent during the crisis of the 1930s, and rose to 20 percent during the second world war. Since then the federal budget has remained between 15 and 20 percent of GDP, becoming twice as large as that of the federal states. This is not to say that we have to copy this model. But seen in this light, the recovery plan does not represent a significant federal leap forward, and relies on budgets that are tiny in proportion to national budgets. So much for the first point.
Second point: the democratic institutional mechanism still has not been put in place that would allow it to be adopted for real, or allow varying the amount according to necessity. What I really fear, if this recovery plan is adopted, with unanimity dragged out kicking and screaming, is that after three to six months it will be realised that it’s just not enough. After that, how would we obtain unanimity for another plan?
Remember that we’re dealing with a totally imbalanced institutional framework: between budgetary and fiscal capacity on the one hand, and monetary capacity on the other. The budgetary and fiscal capacity is governed by rule of unanimity, giving each member state a veto – including those with proportionally tiny populations. As for the monetary capacity, this is governed by majority rule and can involve central bank governors who don’t necessarily agree with each other. But it’s the majority that decides. The result is that everyone relies on the monetary side, because it's the only way to find a timely response.
It must be realised that in 2020 the ECB began buying member states’ public debt at a rate still greater than anything seen during the 2008 crisis. And we may very well say “all the better”, since the ECB is the only federal European institution that can make decisions quickly, and allow member states to cushion the blow by guaranteeing their debt is taken up at a low interest rate. But this just demonstrates the institutional and political imbalance. We can’t rely this much on a central bank.
Is this why a larger loan wasn’t suggested at the outset?
Yes. If we had an assembly of national parliaments where decisions were made by majority, in proportion to population size, I’m convinced that we’d adopt – and that we could adopt in the future – a stronger recovery plan. If we look at the state of public opinion in Italy, Spain, France and Germany – four countries representing 75 percent of the population and GDP of the eurozone – there is a clear majority in favour of a more ambitious recovery plan, as well as more fiscal, economic and social justice – which would involve a fairer system when it comes to the most powerful economic players, big business, and wealthy, high-income households.
Under the present system of heightened tax competition, these powerful players are often given a tax rate lower than small and medium-sized businesses, which lack the ability to simply sneak off and evade taxes.
So there’s a majority in Europe who would vote for such measures: a stronger recovery plan, plus more economic and tax justice. And it’s precisely this system blocked by the rule of unanimity that obstructs any way forward. I think at this point, rather than insisting on moving forward only as 27 (notice we’ve already stopped saying 28...), persisting in this fiction that we all have to stick together along with the existing institutions, it would be better to advance in smaller numbers, beginning with agreement between the largest eurozone countries, particularly the four I’ve mentioned.
If these four countries proposed, for those interested, a new democratic mechanism to create a borrowing capacity and a recovery plan where decisions are made by majority vote, I think that most countries would sign up. Those who don’t join immediately will perhaps end up joining eventually. But we cannot wait indefinitely. It’s time to move forward, further and stronger, with a small number of countries.
Will this require backing out of the European treaties?
Yes, but at the same time it’s extremely important to propose new treaties, even if only for a smaller portion of countries. Currently, the problem is that the European debate on inequality is a little up in the air. There are two main positions: one, that even if it’s a pity, there’s nothing we can do to change the existing rules and treaties; and two, that we have to send them all packing without even saying what we should replace them with. Obviously, neither option is particularly satisfying.
I try to develop a middle way, in the sense that sometimes we do need to back out of the existing rules, and we can’t wait for a unanimous vote to change the rule of unanimity. But it’s extremely important that we make constructive proposals for other rules, other treaties, because our problems with inequality, climate change, the pandemic, cannot be resolved all alone, by turning to the nation state.
I’m a strong federalist, but I think we need to make an effort to reflect anew on how to organise a form of European social-federalism. That is to say, a federalism which would serve social objectives and convince a sufficient number of countries to join this vision. We cannot convince all 27 member states immediately: countries such as Ireland and the Netherlands are used to acting as tax havens, and this development strategy has been sold to the public for so many years already. For such countries, a change of approach will be painful.
Thomas Piketty is the author of several essays on the economy and society. The latest one is Capital and Ideology (Harvard University Press, 2020).
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