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Posted by: Doug Henwood | November 27, 2010

Radio commentary, November 27, 2010

Eurocrisis: bondholders need a haircut • how Ireland helps Google pay almost no taxes • Germany must screw periphery because it’s screwed its own workers

All Eurocrisis today. I never thought I’d be saying this, but it must be conceded that Angela Merkel has a point or two. Not the way the German chancellor and many of her fellow Germans want to drive Greece, Ireland, and the other troubled countries on the periphery of Europe through the austerity wringer. Not that. But this: Merkel thinks that bondholders should take a hit. And they should. Budgets are being savaged and millions thrown out of work on the outer edges of Europe so that bondholders can remain unscathed. Ireland is pouring enormous resources into saving its busted banks. An economy can’t survive the demise of its banking system, but pouring every euro into the effort and starving everything else to fund it is insane and cruel.

cut their damn hair

So far, bank investors have taken some “haircuts,” as they say in the trade, but not enough. Germany wants to see them take more, and why not? Whenever the subject comes up, investors panic, and dump bonds of risky countries, which causes worrywarts to predict doom. But austerity also causes investors to panic, because when economies implode, tax revenues wither, and budget deficits get wider. Austerity is a credit risk too.

coddling MNCs

Another point the Germans and other European countries have: the Irish corporate tax regime is a scandal. Taxes on corporations are very low, which has prompted a number of multinationals to set up shop there. That gives them access to an educated, English-speaking workforce inside the European Union, with a tax rate of 12.5%; most other First World countries have rates above 20%.

But Ireland isn’t just a great place for a multinational to set up a branch office: it can also be a very useful place to route money through. For (egregious) example, as Bloomberg reported the other day, Google (with the permission of our IRS) has assigned much of its intellectual property rights to its Bermuda subsidiary, to which it pays license fees—fees that it can deduct from its income in high-tax countries. That Bermuda subsidiary is officially set up as an Irish company—but since it claims that the company’s management is in Bermuda, it’s largely exempt from Irish taxes. Google also routes almost all its sales outside the U.S. through its Irish subsidirary, but thanks to that Bermuda trick, claims that the Irish subsidiary makes almost no profit. And it routes those payments through a Dutch subsidiary (with no employees), allowing it to avoid some Irish taxes.

As a result of all this trickery, Google reduced its foreign tax rate to 2.4%—meaning that just about everyone listening to this pays a higher share of his or her income in taxes than Google does. This probably adds about $100 to Google’s stock price, now around $600 a share. Many other tech companies, like Microsoft and Apple, perform similar maneuvers to reduce their taxes to a fraction of the rates that are on the U.S. law books.

Nice for the companies, but what does this do for Ireland? The multinationals do provide employment in Ireland, but it’s of a very shallow sort. (Listen to this interview with Michael Taft for more.) There’s little research and development done in Ireland, or procurement of goods and services, meaning that there are no spillover effects from the multinationals’ investment. So the boom Ireland saw in the late 1990s and early 2000s was of a very superficial sort—and one that was turbocharged with a crazy housing bubble. When that burst, there was little of substance beneath the froth.

It is true that the multinationals have Ireland over a barrel. If the country does raise corporate taxes, some of them will leave, costing the country jobs and revenues when it can little afford to lose either. So it’s almost certainly going to leave the corporate tax rate untouched, while the masses suffer budget cuts and tax increases. But for longer-term health, it’s got to get off this economic crack. You can read this is Ireland’s particular case of the pickle that many countries find themselves in: the neoliberal strategy of coddling capital has hit a wall, but no one has the imagination or political nerve to come up with a new strategy.

German motives

Concerning the austerity wringer, I should bring forward a point made by the Greek economist Yanis Varoufakis in our interview on last week’s show. Over the last decade, Germany has really put the squeeze to its working class. Over the last decade, prodcutivity is up almost twice as much as pay. (So too in the U.S., actually.) But that’s not true of a lot of the countries on the periphery of Europe: Italy, Portugal, and Spain have all seen wages outstrip productivity. So too Greece, probably, but there are no good statistics coming out of that country to confirm the impression. So it would be politically difficult for the German government to be seen as indulging the peripheral countries when it’s been so hard on its own population.

This sure has been a great era for the capitalists of the world.

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Responses

  1. –the neoliberal strategy of coddling capital has hit a wall, but no one has the imagination or political nerve to come up with a new strategy.–

    It seem pretty obvious the next strategy of the Western ruling class is to forcibly open up the Chinese market and in particular their banking/financial system. There’s a lot of credit-based demand to mine in the East, where things are usually paid for in cash (much like the U.S. before 1970 or so). For the most part, the typical Chinese citizen is not on the credit drip.

    One goal of QE is to flood China with a wall of hot money and destabilize things so much that the Chinese elite has no alternative but to buckle under.

    If that doesn’t work there are stronger measures possible, and no one should doubt they are under consideration, at least amongst factions of the U.S. ruling class.

  2. Hey Doug,

    Love your analysis!

    I can’t understand why govts bailed out so many banks and then expects the general populace to carry the load! Except the old maxim: He who has the gold makes the rules.

    Sometime ago I read The Sellout by Paul Gasparino

    http://www.cnbcfix.com/review-sellout-charles-gasparino-cnbc.html

    Shocking!

  3. Don’t be silly. QE is simply normal Fed behaviour, but applied to longer term bills because of the Zero percent floor on short term treasuries. And China has capital controls (as does most of SE Asia these days, AFAIK).

    The only mildly amusing thing about recent times has been western elites panicked realisation that China is too big, too powerful and too mistrustful to pay any attention to them. To think that a country might have its own agenda, and might have noticed what happened to Japan and S. Korea…


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