Union of Debt and Solidarity


Union of Debt and Solidarity

By Maikel de Leeuw

Recently, the Bundesbank was called out by the constitutional court of Germany. They tested the policy of the European Central Bank to the German constitution and asked for clarification of the Bundesbank. The ECB has been buying government bonds for years, but they are prohibited to do that directly from a state. That would be money creation. Instead through a loophole in the law, If the Italian government needs money, they will sell a bond to a pension fund, and afterwards the ECB buys it immediately from the pension fund. That is to give the impression that bonds are not immediately bought from governments by the independent ECB. That is why the Constitutional Court of Germany ruled this policy unconstitutional and asked why they support this policy in the ECB meetings.  

The constitutional court has a point. If the ECB is buying government bonds this leads to a shrinkage of the pension funds. This is due to low interests and high inflation. But who receives this freshly printed money? That is Greece (177% debt-to-gdp), Italy (138%) and France (101%). In the Netherlands the average coverage ratio of the pension funds have decreased from 98% to 93%. You can see it in the annual report. The 5 biggest investments of ABP, the pension fund for government and education, are France at number one and Italy at five (1).   

Some economic characteristics of the Netherlands are it has a relatively big government (~40% of GDP), very large pension funds and low private wealth or savings. The low savings are a consequence of our tax structure. Debt is encouraged due to being deductible of your taxable income and savings are discouraged in box 3. That the average person in the Netherlands lack savings became clear during the corona crisis, where the government is paying most of the private wages through financial support. The receiver Italy, in contrast, has a poor government with 2300 billion euro in debt. Furthermore, the average Italian (median) has three times as much private wealth as the average person in the Netherlands (2). This wealth consists mainly of real estate. Unfortunately, tax evasion is a major problem in Italy. Estimates say that around 200 billion euro is evaded every year, 10% of GDP. The real problem is that the Italian Government has a problem collecting taxes. Which is also why they have poor maintenance of infrastructure and have failed to pay out their financial support to business during this crisis.  

Due to these problems the Italian government lacks money to finance their corona crisis. Thus the idea of the European parliament is to create an emergency fund worth 750 billion euro. No country is able to pay this amount, so in order to finance this fund they created the Eurobond. Eurobonds are government bonds that are sold on behalf of the whole Eurozone. This is favorable for countries with a low credit rating, like Italy and Greece, because they can now loan money at a lower interest due to Germany and the Netherlands being partly responsible. Furthermore, it is also favorable for investors who can now buy bonds with interests at 1 to 2 precent instead of 0 percent on a Dutch government bond.  

This emergency fund is necessary for the economic recovery of this crisis because the south is unable to finance their problems themselves. It is a sign of solidarity for the Netherlands to collaborate in this emergency fund. It keeps the peace and improves European continuity. But the real problem is the massive tax evasion in Italy. It is not fair to let the Netherlands pay for the tax evaders in Italy.