27 January 2014

Bundesbank calls for capital levy to avert government bankruptcies

"(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government's obligations before solidarity of other states is required", the Bundesbank said in its monthly report. It warned that such a levy carried significant risks and its implementation would not be easy, adding it should only be considered in absolute exceptional cases, for example to avert a looming sovereign insolvency.

The International Monetary Fund (IMF) discussed the option in a report in October and said that reducing debt ratios to end-2007 levels for a sample of 15 euro area countries, a tax rate of about 10 per cent on households with positive net wealth would be required.

In Germany, however, the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth. Recent reforms and adjustments in the eurozone's struggling countries - Ireland, Greece, Spain, Italy, Cyprus and Portugal - have improved conditions for sustainable growth, the Bundesbank said, but remained concerned about high debt levels. It was still a key challenge to drive down public as well as private debt and the ECB's upcoming bank health checks could help to address current problems in the banking sector.

"It is not the purpose of European monetary policy to ensure solvency of national banking systems or governments and it cannot replace necessary economic adjustments or bank balance sheet clean ups", the Bundesbank said.

Full article

Press release on Bundsbank monthly report (in German)

The Financial Times (subscription required) quoted the Bundesbank report further, proposing that the levy would have to be a one-off "imposed in conditions of extraordinary national crisis", in order to limit negative consequences for investment, and potential capital outflows. It acknowledged, however, that a nation in crisis would have difficulty making a convincing case to depositors and investors that any such levy would be a one-time measure.

These proposals are probably primarily aimed at Greece, Spain and Italy with their writes the German edition of Wall Street Journal (subscription required), saying that the realisation that Germans were (for different reasons) privately actually much poorer than most southern Europeans had caused some consternation in Germany in the past year. The Süddeutsche Zeitung endorsed the Bundesbank's idea not only for justice but also economic reasons: each state bailout also saves private wealth and assests from destructions - and hence it was reasonable to expect a contribution from the well-off. 

© Reuters