Mario Monti, a member of the Atlantic Council’s Business and Economic Advisors Group is president of Bocconi University and the former EU Commissioner for the Internal Market, Tax Policy (1995-1999) and Competiton (1999-2005). I had the opportunity to get his thoughts on some key issues of interest to the Atlantic Council community.
1. Do you consider last week’s G-20 summit a success? What were the essential elements that you were looking for for a successful summit?
It was a success in the sense that really for the first time, the governments of 20 key countries got together to make decisions. This is probably not enough, but an unprecedented step in effective coordination. Two aspects of the summit contributed to this success: the attempt at coordinating national recovery plans, even though one might have wished to see a greater, fully-fledged coordination; and definition of a new global regulatory framework for financial activities. Both of these will require time to deliver actual results to cope with the financial and economic crisis, but we should not neglect a third component, which is very relevant. That is the enhancement of the role of, and the provision of additional financing for, the multilateral financial institutions, especially the IMF.
2. Following that point, do you feel that the amount of money that has been pledged to the IMF will be sufficient going forward as more and more countries face acute financial distress?
It will probably not be sufficient. The need for this assistance coming from the IMF, however, will be less large than it might otherwise need to be, if the key countries are really serious in implementing their recovery plans to the extent announced. On this there may still be some doubts about the timeliness and the manner of implementation of these plans – it is not clear yet that every dollar, euro, and other currencies flagged out in the G-20 communiqué in terms of recovery plans – will actually find its way into the real economy. I link the two aspects because, of course, the more effective the fiscal stimuli, the more we can expect a recovery in the aggregate demand of the G-20, which, of course, would also bring relief by increasing demand for imports from the poorest countries.
3. To address inequality both within countries and in the global economy, you proposed getting “the best out of competing economic models.” In your opinion, what might this new economic model look like and how would it address current and future economic downturns?
Concerning economic models, my observation is that the so-called Anglo-Saxon countries are now, because of the crisis, reconsidering a bit and entertaining the idea of more developed social welfare systems, be it in the United States, the UK, or for that matter, China. On the other hand, the social market economy countries of continental Europe, most typically France and Germany, have had to move in the last several years in the “Anglo-Saxon” direction in order to become more competitive – the Lisbon Agenda, for example typifies this, and they must continue on structural reforms. But the point I see, at least within Europe, is greater convergence between economic visions. That may open up a space for a compromise. The single market, which is, of course, the pillar of European integration, is under serious threat and the more a process of unlimited tax competition goes on and on, the more each country finds its hands tied and has greater difficulty using the budget for redistribution policies to cope with inequalities. The natural reaction, which is extremely dangerous for integration, is to try and break the single market through some sort of protectionist measures, some sort of stimulus priority given to domestic producers.
So my view, as somebody who has worked for ten years on European integration, is that if the “Anglo-Saxons” were prepared to move one step towards tax coordination and the social market countries to move one step towards taking the single market really very seriously, we could have a system which takes care of social objectives while not undermining the single market. To some extent, this could be conceivable also in the context of the G-20.
4. You mentioned the propensity for tax competition to lead to a kind of race to the bottom where, particularly in the European Union, capital, corporations and skilled professionals are very highly mobile, countries are able to somewhat distort the single market through tax policy. What aspects of tax codes may be most in need of coordination? And what agreements in these areas might be possible at the European level?
Well, first of all, excessively bold ambitions should be avoided. Full tax harmonization, even within Europe, is neither feasible nor really necessary. Some tax coordination, however, should be achieved, to the extent needed for a smooth functioning of the single market, so it is not disturbed simply by tax advantages. My answer would be that we don’t necessarily need coordination in the area of personal taxation or the degree of progressivity of personal taxation. Nor do we need it in the area of taxation on wealth, which is there in some countries, or inheritance taxes. On the other hand, coordination of taxation of the most mobile bases would indeed be necessary.
For the taxation of income from capital, there is already the building block of the savings tax in Europe. Efforts could be made to achieve some progress, along similar lines, as regards corporate taxes. Concerning tax rates on corporate profits, there is no need for a single common tax rate. Maybe there is a need for a floor, for a minimum rate within the common market. Some countries in Central and Eastern Europe have found it useful for their initial economic development to have even a zero corporate tax rate. Now, they, too, may find problems of lack of budgetary resources to cope with the consequences of the crisis.
Even before the crisis, many in France, Germany and other countries which contribute quite a lot to the community budget, were saying vis-à-vis the new member states – or vis-à-vis Ireland, for that matter – that these countries could afford having zero or very low corporate tax rates mainly because they were sustained through the community budget, structural funds, cohesion funds, et cetera. To the extent that this is the case, is it entirely fair, is it sustainable? These are legitimate questions. I would hate to see a breakdown of the single market, but we must realize that we have come close to that, for example when, under the crisis, certain governments grant state aid to their automotive industry with a string attached, in legal terms or in terms of “moral suasion”, that the money should be spent in that nation state and not in factories in new member states, for example. These are the serious risks that the single market is running and, relative to that, I think that some tax coordination would lead to greater cohesion.
We all know the famous expression “no taxation without representation”, which is a principle of democracy. I wonder whether we are not moving to a situation where we will have to realize, as tax competition goes on and on, that there can be “no taxation without coordination”.
5. Speaking of coordination and cohesion, how well do you think the G-20 leaders have stood up to fight protectionist pressures as they have agreed to do? Leaders at both the November and April G-20 summits have committed to maintaining free and open markets, yet we had the report from the WTO that 17 of the 20 countries have instituted some type of protectionist policy, how can we make these commitments more binding, both in Europe and in the G-20 as a whole?
On this hangs the whole credibility of the G-20 because if 17 out of 20 go against the commitment, it becomes slightly ironic, if not openly ridiculous. I believe that at any rate it is laudable to condemn protectionism, but I think it’s more productive to try and go to the root of why there are the pressures towards protectionism. Here we go back to the big issue with ignoring inequality, this time both across countries and within countries. The more you have, in any given country, an enormous increase in the ratio between the income of the highest paid business leaders and the income of the middle class, let alone of the lowest paid, the more difficult it becomes for the political process to resist pressures for protectionism coming from groups of those that are less well off in society.
Concerning inequalities within countries, I believe that one legacy of the era of market fundamentalism of the last 20 years or so – by which I mean the excesses that have accompanied the otherwise welcome respect for a governed market economy – has been the top priority attached to the objective of reducing taxes in general, and progressivity in particular.
This has brought about an intellectual and political disarmament of the most classical and, I would say, physiological instrument to cope with inequalities, the government budget. If one believes in the social benefits of a well-functioning market, he or she should prefer a rehabilitation of the budget as an instrument for distribution policy, rather than having governments interfere more and more with the markets.
James O’Connor is assistant director of the Atlantic Council’s Global Business Program.
Editor’s Note: Mario Monti became Italy’s prime minister on November 13, 2011.