EU-Views: Cornel Ban
Name: Cornel Ban
Nationality: Romanian
Occupation(s): Frederick S. Pardee School of Global Studies Assistant Professor of International Relations, Co-Director of the Global Economic Governance Initiative;
Connection to Europe: European citizen; specializes in International Economic Organizations, Economic Ideas and Economic Policy, The Political Economy of Crises and Transitions, Varieties of Capitalism, Europe, Brazil
Date of interview: April 14, 2016
This episode is a conversation with Cornel Ban, Fredrick S. Pardee School of Global Studies Professor of International Political Economy, about the crisis of weak leverage of societal interests over economic interest. He talks about the varying financial situations across Europe, and the differences between tax mechanisms in each Member State. Ban also discusses some of the challenges of integration in Europe today, mentioning how continuing fiscal constraints have contributed to the death of social Europe.
Transcription of Interview:
OY: Olya Yordanyan
CB: Cornel Ban
OY: Could you please introduce yourself, say your name, current occupation, and country of residence?
CB: My name is Cornell Ban, and I am an Assistant Professor of International Political Economy at the Pardee School for Global Studies at Boston University. I am also the co-director of the Global Economic Governance initiative at BU.
OY: My first question is, what is the future emerging in the European Union, given all the social, political, economic transformations it’s currently undergoing?
CB: Well, as they say, making predictions as a social scientist is very risky business, so instead I will give a quick analysis of what’s going on, and what risks that entails, rather than predict anything. I think the primary issues stem from cases of failings in governance at the EU level, as well as the crisis of weak leverage of societal interests over economic interests. So, what do I mean by this? First, one is often dumbfounded by the fact there very few mainstream economists, let alone alone alternative critiques of the existing European governance in the the general populace, who understand why Europe has been unable to have a more expansionary policy that would reduce the absolutely tragic levels of unemployment, particularly among the youth, and to defend the competitiveness of the European economy in the global economy, alright? Of course, European institutions and the dominant governance, because they are not all equal, pretend that they have solutions to both these challenges. But, it’s 6 years into this crisis which has particularly effected Europe, and soon 8 years since the Leehman Crisis, and these conventional approaches have been tried and have been proven to be abysmal failures. Just take one example, of austerity, which was supposed to reduce public debt- it has achieved the opposite, it has increased public debt. Even from the perspective of a conservative economist, this doesn’t work. Conservative economists and policy makers are interested in reducing public debt, but it seems that cuts in public expenditures had huge social costs, and has not even achieved what conservative interests would like to have achieved in terms of getting their money back and reducing exposure to sovereign risks. After spending time in Europe doing research, it’s particularly dramatic to go to Italy and Spain and see such an educated population, particularly the young population, exposed to extremely long-term unemployment. It generates the so called ‘synterasis effects’, that makes it harder and harder to get employed, even if they are skilled, resulting in tens of millions of young people left out of work for years. That’s a huge waste. Public goods have been consumed, public education, infrastructure, and so on and so forth, but these individuals cannot work. So it has been a very self-defeating strategy, and although many significant Europeanists have argued against this, let’s not assume that all Europeanists think the same, because no, that’s actually not true. If you talk to, I don’t know, a Spanish conservative, you know they don’t like the current fiscal constraints. They try to negotiate their way out, and while there was some accommodation, especially in the Juncker Commission, but they are enabled to put together a coalition that will articulate interests, and the reasons are quite simple. One is the dominance of the creditors, or the creditor countries, who have very different interests. I mean, they are export led economies, and, as long as China consumes, they’re fine and they don’t really care about the implosion of the Spanish market. They also have important domestic constraints. For example, the German electorate has certain preferences, the German media articulates certain economic preferences that are not the preferences of the rest of Europe, and they manage to do the same with all of the economies that are basically part of the German supply chains – from Estonia to the Netherlands, right? They are part of the same coalition. While Spain is somewhat incorporated, countries such as Portugal and Greece are less integrated into the German supply chains. So that’s the first point. The second point is recognizing that this was a crisis of European governance, the crisis of societal leverage over economic interests. Let me be more specific. What I mean by economic interests is the very bare fact of being able to collect taxes from people who have money. The people who have money are people who have large amounts of money, what we call high net worth individuals, and corporates. Both of those are categories of factors of extremely well off individuals who protect their wealth by placing their money in offshore accounts. So, we are looking at $76 billion a year, which is the number of tax optimization, at the level of rich individuals—we’ll leave the corporates aside—per year in Europe. If you put that together, over 6 years of crisis, if you calculate the numbers you get close to half a trillion. Imagine having half a trillion dollars to spend on employment projects in Europe, and what would that mean. And this is just money funneled away through tax havens ,and some of those tax haven are in Europe. So, the European Union has been unable to act against them, but hopefully now that Margrethe Vestager [Commissioner for Competition] at the DG is in charge of this new initiative, perhaps something will happen, but this is an extremely difficult situation as we go back to governance issue. There’s the unanimity in, say the Netherlands, which benefits from a tax haven status, that can always object and raise its veto, and the same can be done by Ireland, and so on and so forth. So there is very little leverage, not just against these wealthy individuals and very powerful companies, but also against the countries that benefit from it. I mean a lot of the Dutch prosperity based on the, basically, laundering of money in legal ways, as technically what they are doing is not illegal. So, if it’s not illegal, but it’s harmful and makes austerity for everyone else except those at the top, then the laws have to be changed. I think that’s the real question of leverage that we have to address in Europe. And, if we are looking at around $76 billion a year, not even looking at the corporate, on average in tax optimization, which is money taken away from societies and moved to tax havens, I mean, that’s where the big story is, right? If you put these two together then you’d have a massive reduction in the levels of public debt in Europe, which would mean greater economic optimism, more employment, and so on and so forth, and governments would have more firepower to stand when they are in dire straits.
OY: Can you break it down into how these tax mechanisms work so that it’s clearer for our audience?
CB: Well, I mean, it’s very complex. There’s a lot of transfer pricing that we use in the corporate sector, and there are a lot of wealth management products that are being moved around. So, in places like Luxembourg, for example, you can negotiate your own tax rate, alright? Now, this doesn’t sound very European to me, and, particularly, doesn’t sound much like ‘social Europe’. There was a piece in the Wall St. Journal, not exactly your typical leftist piece of media, but two years ago there was an article showing how you can negotiate tax rates between 1 and 4% as a large corporation if you book your incomes through Luxembourg. So, you can have shell companies established, and charge for copyright or whatever other services, thus reducing your tax burden, that if you were established in, say France, where your tax burden rate would be higher. Now, this has been done a lot, for example, by American companies in Ireland, in the so called ‘Irish sandwich’. There’s also a ‘Dutch sandwich’, but one of the less explored avenues that some researchers are looking at is what we call the shadow banking sector, which is, of course, very legal, as well. I mean, the shadow doesn’t mean its shadowing or weird, it means that it shadows the conventional banking sector, providing massive opportunities for wealth to be recirculated in various financial instruments that contribute to reducing your tax burden, your taxable income. So, effectively, while you have quite high taxes on say middle class or lower class individuals in Europe, the closer you get to the top the more opportunities you have to reduce your tax burden. And that’s extremely unfair, and it’s unfair from the perspective of both left and right ideologies as I don’t think anyone on the right would say that paying 4% effective corporate tax is fair—no one will agree with that. Or that somebody who is a billionaire should pay 5% tax while we pay closer to 38% when we put together social contributions and all that. I think that’s a more specific way of talking about it.
OY: There is an increase in nationalism and populism in Europe. Why do you think this is happening?
CB: I am actually a little bit scared by this development, but we should not generalize. Spain doesn’t have foreign nationalism, and, interestingly, although traditionally Spain has been for about 20 years one of the biggest transit points for immigrants and refugees, we didn’t really have a backlash there, politically. It is really spectacular, and hats off to the Spanish people for having such a political culture that doesn’t enable a far right movement. Because, if you look south, at some of Mediterranean countries that are on the trail, if you look at Italy or Greece, you do have such reactions. But you know, Spain had been exposed to this for decades. So I think that the refugee question has to be understood in more of a comparative perspective. Some countries reacted with very little solidarity, even before the Cologne scandal. I’m talking about last fall, when there was a pretty humanitarian reaction from a lot Western European leaders and peoples, while Eastern Europeans have not reacted the same way, so there was this kind of East and Western divide. However, since things became more complicated, and the influx increased, we have seen that a lot of West European countries became more like Hungary, including countries with very strong democratic traditions, the Northern Europeans. For example, in the UK, where the far right now has extremely strong positions in the parliament. As a political economist, and a reader of Polanyi, I, of course, enjoy looking at the economic dislocation as an important course of extremist politics. But we shouldn’t forget that Polanyi, who was basically thrown out of Vienna by the fascists, also lived in the Vienna of the first social democratic experiment, which was a form of radical democracy in Vienna during the ‘20s. And he said that economic dislocations can produce both progressive and extremely regressive outcomes. So, it doesn’t mean that if there’s high unemployment and economic uncertainty in daily life people will demand deeper democracy and bigger leverage over the forces of the market. No, it might actually mean that they are going to say ‘we are going to articulate our very genuine economic grievances against scapegoats’. Right now it’s the refugees, and I think that’s the single biggest political cleavage emerging, and it’s Muslim refugees. This is a very particular sort of civilizational dimension that I hoped was dead in Europe, but it has reemerged with a vengeance. First over the Greek crisis, there was a lot of stereotyping of southern nations, and now with a vengeance over issues of religious identity and so on and so forth. The problem is very complex, because there is women’s rights involved, and there are extensive achievements of European liberalism that are often deployed by the far right in defense of their agenda. So we have to be careful with how we formulate this, but I think that a combination of the economic crisis, the issue of Muslim refugees, a number of unsettled European identity questions, and problems of economic distribution, such as the massive downward mobility of the youth for example, and the destruction of public services, all of this together is a toxic mix. And some countries have the resources to react on the left, and Greece and Spain in particular have articulated this on the left. But, most European countries, the overwhelming majority in fact, have not seen this left wing revival against these dislocations, and instead have gone for sort of of a critique of the status quo through the right.
OY: Taking into account all the difficulties and challenges that now face the European Union, where does the European integration go?
CB: Well, right now we see the beginning of this EU integration being put on hold, if the Brexit succeeds, and we may even see attempts roll back some of its achievements. I think the critical thing here is that the big social contract at the core of the EU is not the early social contract between France and Germany. They are the engines of integration, but it is the social contract between the more liberal economies and the more coordinated economies which has led to an uneasy status quo between Britain and the new member states who share sort of liberal economic values. And this is not just about values but interests. And while the values can articulate those interests, you traditionally have the more coordinated economies on the continent. But now that is falling apart because Britain seemingly wants out, I do hope it doesn’t happen, for their sake, and the sake of their East European allies, who went from being very strong advocates of integration, to now becoming the biggest challengers to the European status quo. I mean, you can see this increasingly in Poland, Hungary, Slovakia, and while not everybody in Eastern Europe is turning against integration, but some of the larger countries are following the lead of Poland who, to a significant extent, has acted as the organizer of the East European group. And, if Jeanne Marie La Penn wins in France, that will break down the big social contract between France and Germany. So, we have these two forces that are ripping apart 50 years, half a century, of social integration, and I think the consequences will be pretty devastating. But I believe that the current policies of the EU, through the crisis, have to invite a little bit of social change, because this is not a question of the evil far right versus the good European managers of the crisis. The European managers of the crisis have done quite badly and have not really taken to heart the absolutely massive social dislocations produced by their decisions, as well as by market dynamics, that don’t have much to do with their decisions, but they could have fixed this crisis of the aspects of this crisis were avoidable and were the result of bad European governance, bad institutional design in the Eurozone, and this incredible political parochialism that dominants in some of the greater countries.
OY: What is your vision of Europe, the ideal European Union, that you can imagine?
CB: I mean, ideally, again, I come from a Polanyian perspective, so I don’t think that market economies stabilize themselves, and that they always produce social costs. Those social costs in democracies, liberal democracies, will find a political voice. And right now, that political voice is, as I said, mostly on the right and it is anti-integrationist. So, I think that we must look toward the post-war Social Democrats and Christian Democrats, who figured out that the best way to stabilize the sort of liberal democratic order is to have a social contract between labor and capital. You have to have things institutionalized at the EU level. Right now, social Europe is dead. It was promised at Maastricht, but the promise was buried, in the name of European integration, and we had pretty massive destruction of labor institutions throughout much of Europe. Not as much in Northern Europe, but on the continent and in the East it is pretty bad as well. That was done in the name of structural reforms and EU ideas about integration and efficiency, and I think this has to be revisited. In order for the EU to have significant coalitions of support, among European peoples, they have to deliver. They have to stop thinking that if they deliver the markets that will be what is going to take them down—that has been defeated over and over and over again, it’s even boring to talk about it. So my vision of Europe is that there is going to be no stable Europe without social Europe.
OY: Thank you. Is there anything I didn’t ask you about that you want to touch upon or talk about?
CB: There is a lot to talk about, but that the one issue I would perhaps like to touch upon is the fact that here in the US there is very little planning around the elections, and I think it is quite justified considering the some of the figures there. The US faces very similar problems, in terms of my students having a hard time finding jobs. That didn’t happen before. And if they do find jobs, the incomes are not significant enough to pay for student loans or to start a family, and so on and so forth. It really is a problem of, ultimately, distribution of the various centers of the global economy, and both the US and Europe have lost out in this competition from the perspective of generating enough economic benefits for the largest portions of their populations. And they have done this successfully for 60 years, but a number of factors, such as the rising competition from emerging markets, technology, and so on, is changing that. And I am convinced—I am not uncertain, I am convinced—that the current political and economic reactions to this competition and technological shocks and so on and so forth is not producing enough consensus to maintain the liberal democratic order as we know it. So, I guess, we need less economists, and more political economists to think about how to fix it. That will be my last point.
OY: Thank you very much.