European Parliament photostream on Flickr

The chairmen and chairwomen of the committees of the new European Parliament have recently been decided and one new position has struck my attention in particular. I am sorry to start this blog with a critical entry, but I simply don’t think it’s a good idea that a member of the German liberal party FDP – which is economically as neoliberal as it gets in German politics – heads the Parliament’s temporary Committee on the Economic Crisis.

I have never heard of Wolf Klinz before but statements on his homepage (in German) suggest the policy orthodoxy I expected. He seems to oppose the general direction taken by virtually every European government and the European Commission as he dismisses public stimulus packages. He argues they sooner or later always lead to higher taxes. This is probably even true but his policies would have a similar result and be less effective.

His solution to the crisis is unsurprising: tax cuts! Klinz’ point is that such a move would stimulate private demand and thus create the necessary impulse for the economy.

There are two major problems with this: First, if governments lose tax revenue by granting tax cuts they will also have to run up debts – especially in times of increasing costs because of crisis related expenditure (rising unemployment, bail-outs, …). This would also necessarily push up taxes down the road.

The only alternative would be to cut public expenditure significantly. If this is what Mr Klinz has in mind I’d like to hear his suggestions for where these cuts should be made. ‘Efficiency savings’ are mythical but never a big saving opportunity. Significant expenditure reductions can only be realised by cutting back public services or investments.

Second, trying to stimulate private expenditure by cutting taxes might work in some countries (to a degree), but certainly not in all. In the UK for instance private debt is already so high that any personal tax saving is unlikely to be spent in the economy but used to pay back debts. So there wouldn’t be a big stimulus here as a result of tax cuts.

Against this background it seems to me that Mr Klinz – who I do not want to attack personally (just to make this clear) – is the wrong choice to head the crisis committee. A German liberal is very unlikely to push for the policies that are needed!

But let me finish this post by agreeing with something. If Mr Klinz has Germany in mind when talking about the need for more private demand I completely agree with him. But the right policy to achieve this is making sure decent wages are paid, not introducing tax cuts!

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