Quantitative Easing Kept Populism at Bay, but Now We Need a Common Fiscal PolicyMASSIMO MORELLI, IN A SUERF POLICY NOTE, UNDERLINES THE ROLE PLAYED BY THE ECB AND ADVOCATES A FISCAL UNION TO MAKE REDISTRIBUTIVE POLICIES POSSIBLE AGAIN
The European Central Bank (ECB) quantitative easing has been, so far, the only effective levee against the populist wave that threats to take over Europe, Massimo Morelli, Full Professor at Bocconi’s Department of Social and Political Sciences, argues in a SUERF Policy Note. A common fiscal policy must now kick in, though. “Monetary policy is not enough”, Professor Morelli says, “because populist waves are not the result of temporary shocks, but of structural problems”.
On the one hand, immigration, globalization, automation, debt servicing costs, and capital tax competition are working as a straight-jacket on governments’ chances to implement redistributive fiscal policies. On the other, a weak response to the crisis, perceived as due to the lack of national control on both fiscal and monetary policies, fans the populist fire and nationalist rhetoric.
The main difference between the Great Recession of the last decade and any other previous crisis is what Prof. Morelli calls “an empty fiscal space”. The tax rate has a lower boundary, determined by the minimum necessary to make the state function, and an upper boundary, determined by the willingness to participate of the less willing between firms and workers. When wages are high, firms are less willing to participate; when wages plummet, workers’ willingness decreases. When the lower and the upper bounds match, the fiscal space is empty.
In the last decade, capital tax competition let the labor base bear the brunt of taxation, in a time when immigration, globalization and automation were causing lower wages. Welfare expenses resulted, thus, very hard to cover. With no resources to negotiate, the traditional left-right cleavage makes no sense, in favor of a nationalism-globalism divide. Hence the populist nationalist rhetoric.
“Only the quantitative easing ECB policy, reducing debt servicing cost, allowed a temporarily larger fiscal space”, says Prof. Morelli, “and kept populism at bay”.
A fiscal union could reduce volatility, inequality and cultural clashes, as well as reducing competition in capital tax, but current EU fiscal rules make national fiscal policies pro-cyclical, with a political cost (populism) that has an economic cost (supernational policies made impossible by nationalist pressures).
“The trap”, Prof. Morelli writes, “goes as follows: structural shrinking of fiscal space → resentment and populism → protectionism and nationalism → more difficult European and global cooperation, where these would instead be the channels through which fiscal space could be recreated”.
Quantitative easing weakened the strength of the populist wave, but it covered the need to recreate structural fiscal space for welfare policies. “This can be done either through a more centralized countercyclical European level fiscal policy or, more generally, introducing new ideas about how to tax capital and asset earnings”, Prof. Morelli concludes. And suggests an idea: linking the participation to a supranational capital taxation scheme to WTO membership, something most countries can’t do without.
Massimo Morelli, The Paradox of Endogenous Nationalism and the Role of Quantitative Easing, SUERF Policy Note No 140.
by Fabio Todesco