Saturday, 23 July 2011

Greece: bailouts vs investment

I was asked by my local paper to comment on what additional income from business rates should be spent on locally if local government was allowed to keep the revenue rather than seeing it redistributed across the country.

Of course, my first answer was that this would increase inequalities across the country as poorer areas attract less business and removing more of their income would make them even poorer. On the other hand, the overheating in richer areas would see even more of a boom in house prices and house building as people move to where the work and money is. It would create a lose - lose situation.

One of the advantages of a single currency and single government is that can provide a buffering mechanism for areas that are not doing so well. Government need to protect its citizens from the ebb and flow of market forces (which generally seem to be more ebb than flow).

Following the news across the Mediterranean parts of the Eurozone, mostly Greece and Italy,this situation is actually being played out on a continental scale. Areas operating under a far wider single currency are having to raise their own taxes to pay for public services and to support local economies.

Having a low maufacturing, service industry and financial industry bases puts any country in the realm of a weak economy, but having to comply with the implications of a single currency and the therefore the inability to quantatively ease without external borrowing is a recipe for disaster.

Should the Eurozone work more redistributively so that rather than bailouts with repayment requirements, there is a more simply process of country taxation and redistribution that mirrors UK local councils? Of course this would be far more unpopular than not allowing the richest councils in the UK to keep all of the rates and taxes and so won't happen, but investing in poorer countries through significant redistribution would be the ultimate economic cooperation.

As that level of cooperation is unlikely to be achieved, I suspect that the situation will rumble for a few more years with countries finally being expelled from the Eurozone to prevent its overall collapse. Of course this means that Greece could revalue and quantatively ease which may not bring drastic rewards but would help maintain some public services at least.

No comments: