Envisioning Europe’s Economic Future from a Long-Run Historical Perspective

1.  Envisioning Europe’s Economic Future from a Long-Run Historical Perspective Thomas Piketty Paris School of Economics Council for European Studies, Paris, July 9 2015

2. This presentation: three points • 1. Inequality in the long-run: over the course of the 20thcentury, Europe has become more egalitarianthan the US institutions and policiesmatter • 2. But the European social state is fragile: lack of fiscal union, taxcompetition, public debtcrisis, unemployment, rise of nationalism • 3. EU institutions need to befundamentallytransformedin order to addressthis: Euro-chamber (see « Manifesto for a Euro political union »)

3. 1. Inequality in the long run • Here I willpresentsomeresultsbaseduponCapital in the 21stcentury(Harvard UniversityPress, March 2014) • This book studies the global dynamics of income and wealth distribution since 18c in 20+ countries; I use historical data collected over the past 15 yearswith Atkinson, Saez, Postel-Vinay, Rosenthal, Alvaredo, Zucman, and 30+ others; I try to shift attention fromrisingincomeinequality to risingwealthinequality • All data seriesare available in a technicalappendixavailable on line: seehttp://piketty.pse.ens.fr/capital21c

5. Threefacts about inequality in the long-run: incomeinequality, wealth-inequality, wealth-income ratios (Piketty-Saez, « Inequality in the long run », Science 2014) • Fact n°1: in 1900-1910, incomeinequalitywashigher in Europe than in the United States; in 2000-2010, itis a lot higher in the United States

10. The higherrise in US inequality in recentdecadesismostly due to risinginequality of laborincome • It is due to a mixture of reasons: changingsupply and demand for skills; race betweeneducation and technology; globalization; more unequal to access to skills in the US (risingtuitions, insufficient public investment); unprecedentedrise of top managerial compensation in the US (changingincentives, cuts in top incometax rates); falling minimum wage in the US institutions and policiesmatter ; Europe’s social model allows to spread the benefitsfromglobalization more evenly

13. Fact n°2: wealthinequalityisalways a lot higherthanincomeinequality; itisnowhigher in the US than in Europe (samereasons as before) • Fact n°3: wealthinequalityismuchlessextremetodaythan a centuryago in Europe, although the total capitalization of privatewealth relative to national income has nowrecoveredfrom the 1914-1945 shocks • There’snothingbadwithhighwealth-income ratio(as long as there’s a strong middle class share in total wealth), but thiscreates new policy challenges, particularly for Europe

16. 2. European social state is fragile • European social state relies on hightax/GDP ratio • Risingtaxcompetition and lack of fiscal union makeitdifficult to sustainhightaxlevels and to maintain fiscal consent: consensus about taxfairnessis fragile • Top personalincometax rates have fallen more in the US then in Europe, but corporatetax rates have fallen a lot more in Europe • Without a common euro-corporatetax, effective tax rates on large corporations are likely to 0%

20. Rise of European privatewealth-income ratios is not bad in itself (postwar reconstruction, growthslowdown), … exceptthatfinancial and real-estatebubblesneed to beproperlyregulated • new policy challenges (prudentialregulation, access to property for younggenerations, return of inheritance) multidimensionalapproach to the history and metamorphosisof capital and property relations

26. Rise of European privatewealth-income ratios is not bad in itself… exceptthatitispartly due to transfersfrom public to privatewealth: privatization of public assets at lowprices, rise of public debt to historicallyhighlevels • public debtcrisis, lack of confidence in Euro-zone institutions, recession, unemployment (GDP 2015 < GDP 2007 : Europe’slostdecade) • structural pb: a single currencywith 18 diff. public debt, 18 diff. interest rates, 18 diff. taxsystems = a verybad and unstable system

28. 3. Whatcan the EU do about this? • See« Manifesto for a Euro political union» • Common corporatetax, fightagainsttaxhavens, etc.: EU isperceived by lower social groups as being pro-capital; thisneeds to bereversed • Common fundfor all euro-zone public debts >60% GDP: separate country accounts, but commoninterest rate • Public-privateinvestment plan in universities, innovation, green technologies • Erasmus: 2 bil.€/y; pub. debtinterestpayments: 200bil.€/y. Is this the right way to prepare 21c? This looks more like 19c British strategy to reducelarge public debtthan post-WW2 pro-growthstrategy, when public debt over 200% GDP in Germany and France wasreduced to zeroveryfast (inflation, debtrestructuring) in order to invest in growth • Does Europe sufferfromhistoricalamnesia?

29. In order to adoptthesepolicies, one needs to fundamentallytransform the existing EU institutional architecture: withunanimityrule for fiscal issues, itis impossible to do anything; the system of automaticrules and sanctions for choice of deficitlevelis not working • In order to adoptthesepolicies (corporatetax base and rate, deficitlevel, euro-zone budget, etc.) undermajorityrule, one needs a euro-zone parliament • Best option: Euro-chamberbaseduponmembers of national parliaments (in proportion to eachcountry’s population: say, 40 national MPsfrom Germany, 30 national MPsfrom France, etc.)

30. Is the Euro-chamber the same as pre-1979 European Parliament? • No : Euro-chamberwould have substantiallegistativepowers (pre-1979 EP was a deliberativeassembly) • Europe has yet to inventitsown original form of bicameralism: even if one day all countries adopt € (thiswilltake time…), itmakessense to have 2 separatechambers: (1) a European Parliamentelecteddirectly by the citizens of all member countries (2) a Euro Chamberrepresenting the member countries throughtheir national parliaments → Euro-chamber replaces Council, not the EP • This is a way to force national MPs to become European lawmakers and to stop complaining about Europe

31. Should the EP feelthreatened by the Euro-chamber? • No : Euro-chamberis the way to bring more political union • National parliaments - e.g. Bundestag - alreadyhave a say (and willalways have) about all decisionsinvolving national taxpayers • The Euro-chamberis the way to force national parliaments to takedecisionstogetherundermajorityrule, sothat in effectindividual national parliamentscanbe put in a minority • This is a muchbetter solution than to give veto power to each national parliament = the current situation (= what the UK wouldlike to reinforce) • Council of finance ministerswillneverworklike a parliamentarychamber: youcannotrepresent a 80million or 60million country with 1 individual→ opacity, lack of public deliberation → the objective is to replace Eurogroupby Euro-chamber

32. Is the Euro-Chamberrealistic? • Yes. Weneed new solutions now. • Main pb: French governmentfearspolitical union, does not makeanyproposal, and prefers to complain about Germany… • Other main pb: Germany mightseriouslyfearto be put in a minorityregardingchoice of deficitlevel. But if France, Italy, Spain were putting the Euro-chamberproposal on the table, and accept to followmajorityrule, thenultimately a compromise wouldbeworked out with Germany. • All national governments have spent a lot of energytrying to pretendthat the new 2012 treaty (fiscal compact) wasworking, whileit’s not; in order to change theirdiscourse, maybeweneed a bigshock. Greekelectoralshock not enough? Do weneed to waituntilSpanishelections in late 2015? Or French regionalelectionswithFN victory? Or new financial panic? Or new Greek vote ? Or everythingtogether?