If Not Budget Cuts, What Is Troubling Europe?

My previous blog post concluded that the widely reported budget cuts as part of  “austerity measures” that are supposedly being implemented across Europe are really not all they are being trumped up to be. Nonetheless, it seems we keep hearing about how times are tough for many Europeans. Rising crime rates and sharp increases in (youth) unemployment are just some of the problems facing several nations on the Old Continent as we speak.

But one might wonder: if governments are still running huge budget deficits (which are detrimental in the long run, of course, but keep the alleged “economy recovery” going for now) because spending is not going down much or at all, why do we see so many reports of people suffering? If it is not the slashing of government budgets, what is hampering a return to prosperity in Europe?

The answer is plain and simple: higher taxes. Francois Hollande, president of France, implemented a now infamous 75% tax on the highest tax bracket while also raising corporate tax and sales tax. On the other side of the Canal, the British government has raised taxes to record levels, with the amount of tax paid in Britain projected to soar by 15 percent in real terms by 2015-16.  “Kabinett Merkel II”, the second coalition government under Chancellor Angela Merkel, has brought German citizens the largest increase in taxes and social security contributions of the last 17 years. In The Netherlands tax hikes were introduced in the form of a redistributive overhaul of the income tax system and VAT going from 19 percent to 21 percent, among other things. In Ireland taxes (such as VAT and property taxes) already began to go up in 2010, when the country suffered a major blow as a result of the global financial crisis.

Spain introduced its set of tax hikes last year when Prime Minister Mariano Rajoy came to power; VAT went up by three percentage points to 21 percent while Spanish income tax rates were elevated to the point where they got to be among the highest in Europe. Italians face a similar fate with the sales tax now at 21 percent, a newly introduced housing tax (yes, you read that right) and an additional 3 percent levy on high incomes. Greece and Portugal were forced to jack up taxes in order to qualify for the EU-IMF bailouts. .

It doesn’t take an economist to figure out that such measures will wreak havoc and cause serious economic and societal upheaval. So next time somebody raises the argument that cutting government spending is bad for economic growth – because “look at what’s going on in Europe right now!” – you might want to kindly advise him or her to stop parroting the talking heads on TV and do some old-fashioned research before bothering you with such nonsense.