I believe the following news story confirms my suspicion that we’re about to enter a period of hyperinflation in human stupidity. According to Bloomberg the EU Commission are seriously considering to put a tax on bonds issued by member states with large deficits on their national budgets, high levels of private borrowing and a rapidly aging workforce. Oh, yeah – that will certainly help…
“This levy rather seems to be a train of thought from some officials without checking on its feasibility.”
Countries that flout debt-reduction pledges could face “a levy in the form of a predefined percentage (number of basis points) on any issuance of government debt,” according to a European Commission’s proposal obtained by Bloomberg News.
The extra interest would be paid into a blocked account and confiscated if the debt doesn’t come back into line.
The proposal, to be discussed by economic officials from the 27 European Union nations today and by finance ministers on July 12, adds sanctions on debt to the bloc’s deficit penalties, which no country has suffered in the euro’s 11½-year history.
Finance ministers are under pressure to tighten the coordination of budgets to prevent a repeat of the debt shock that prompted European governments to pledge as much as 860 billion euros ($1.1 trillion) to defend the euro.
While the ministers agreed in principle on June 7 to introduce a wider range of sanctions on fiscal misbehavior, it may take months to map out the details.
The debt penalties could be passed as EU law, without an amendment to EU treaties, Bloomberg reports.
Ideas Gone Wild
Carsten Brzeski, an economist at ING Group in Brussels, doubts whether a debt levy will be an effective sanction, saying it might encourage speculation against countries subjected to it.
“Putting more emphasis on debt is a good thing and is necessary, but this levy rather seems to be a train of thought from some officials without checking on its feasibility,” Brzeski says.
Other punishments floated by the commission in the draft include; forcing debt-laden governments to issue additional information in bond prospectuses, or cutting their access to lending by the European Investment Bank, the EU’s infrastructure-financing arm.
European Central Bank President Jean-Claude Trichet said two days ago that governments in breach of EU fiscal rules could face tougher punishment including the withdrawal of voting rights.
“A wider spectrum of financial sanctions needs to be considered, along with non-financial and procedural sanctions, such as more stringent reporting requirements or even a limitation or suspension of voting rights,” Trichet told lawmakers in Brussels on June 21.
In the draft paper on debt-related sanctions, the Brussels- based commission, the EU’s economic watchdog, says the euro region’s limit on debt of 60 percent of gross domestic product requires a “considerable degree of judgment” to be policed.
The group under the debt limit included Spain at 53.2 percent, which fell prey to speculation last month that it might need to tap the EU’s bailout fund.
Spain’s bonds now yield 180 basis points more than Germany’s, more than double a year ago.
Echoing language of the 1991 Maastricht Treaty, that laid out the path to the euro, the commission’s paper says sanctions could kick in for countries that fail to cut debt at a “satisfactory pace.”
Defining “satisfactory” is difficult, the commission says in the draft.
It also propose starting disciplinary action against countries under the 60 percent limit if they are on “an inadequate debt trajectory.”
Ten of the 16 euro countries were over the limit in 2009, topped by Italy at 115.8 percent of GDP.
The excessive-debt group included Germany at 66 percent of GDP, the country with the lowest 10-year bond yields in Europe, now at 2.68 percent.
Taxing Old People
This is not a joke!
The proposals also includes factors such as private borrowing as well as accumulated reserves and the costs of aging when analyzing each country’s debt burden, Bloomberg writes.
The commission draft also spelled out a proposed time-line for coordinating the annual budget-setting process across Europe, starting with an economic assessment by the commission to be published each January.
EU leaders would issue budget guidelines in March, to be followed by each country announcing its economic forecasts and rough fiscal outline by mid-April.
Applying The Principles
There is obviously a race going on among the EU leaders to come up with the most crazy ideas for pro-cyclical policies.
Applying the principles above, I now expect a letter from my bank around Christmas-time, saying something like this:
“Dear Mr. Econotwist”
“As of January 1th 2011 new tax regulations will be effective according to EU directive 536b of October 2010. Our records show that you have failed to reduce your debt in a satisfactory pace and are still on an inadequate debt trajectory. We therefore have to raise the interest rate on your mortgage by 1,5%, and the interests on your outstanding credit card debt by 5,2%. In addition you will soon turn 50 years of age, and your income will be subject to a 2,0% aging fee to cover potential reduction in your working capacity. Unfortunately this will weaken your ability to cover your credit related expenses, and a further rate increase must be expected.”
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