Eurogroup Solidarity and Household Wealth: the ´Rich North´ Caricature

The Eurogroup recalls Tonio Kröger, Thomas Mann´s early novella. The son of a Hanseatic merchant and a "Southern" mother, Tonio Kröger inherited qualities from both sides of his family. But he experienced conflicting sentiments, feeling both superior to the Bourgeois due to his artistic talents and envious of their vitality. This conflict continues to imprint on the Eurogroup, with finance ministers rooting from Northern Hanse and Eastern Habsburg preaching austerity, and their counterparts from the (Latin) South vulnerable to financial crises and weaker public finances.

Importantly, the Hanse-Habsburg countries are barring the mutualisation of debt (Eurobonds), for a variety of reasons such as the fear of free rider problems (via asymmetric transfers paid from Northern taxes) or fear of their own taxpayer constituencies. Brexit adds another element of caution that EU cohesion may not only be unwound from the South through rising anti-EU (or anti-Euro) sentiment, but equally from lack of voters´ support from the North (and the East). The endemic deficiency of the EU to this day is that a solid European public sphere hardly exists[1]. The proliferation of EU-friendly think tanks cannot make up for this shortcoming.

Late March 2020, EU leaders faced a proposal co-signed by nine different eurozone governments: the “coronabond”, a new type of public debt instrument to be backed by all the 19 (!) member states of the currency union as they come together to combat the escalating COVID-19 crisis. However, the eurobond motion came up against the eurozone’s “frugal four” – Germany, the Netherlands, Austria and Finland – who avoided their inclusion in the emergency rescue package to make available more than half a trillion euros to cushion the impact of the coronavirus pandemic across Europe. Italy and Spain, badly hit by the virus, would have benefitted most – not least via an immediate drop in the interest burden on their public debts.

Table:  Mean net wealth per adult (USD), wealth inequality and taxation

in selected Eurozone countries

Countries	2019 Median Wealth/Adult, k	2019 Mean Wealth/Adult, k	Wealth Inequality (Gini)	Inheritance tax, % GDP
“Frugal”
Germany	35.3	216.7	81.6	0.2
Netherlands	31.1	279.1	90.2	0.3
“Vulnerable”
Italy	91.9	234.1	66.9	0.0
Spain	95.4	207.5	69.4	0.2
Europe	24.7	154.0	82.4	n.a.

Sources: Credit Suisse (2019),  Global Wealth Databook;  Ifo Institute (2018), “Wealth and Inheritance Taxation: An Overview and Country Comparison”, Ifo DICE Report, 02/2018.

Notes: Wealth is net household wealth composed of financial (liquid assets; equities; other, including funded pension and life insurance assets) plus non-financial (housing, land and small business) assets minus debt. Inheritance tax refers to revenues from taxes on inheritance, bequest and gifts.

Sure, to wither the human and economic coronavirus desaster, solidarity is called for across EU nations. But it is easy to cast the recurring Euro conflicts in terms of the selfish rich against he vulnerable poor. The table shows that the reality is more complicated. It is based on the Credit Suisse Global Wealth Report, which has been the leading reference on global household wealth since more than a decade. Wealth is defined as net household wealth, composed of financial (retail or institutional holdings of cash, deposits, stocks and funded pension or insurance assets) plus non-financial (housing, land and small business) assets minus debt (for more details, consult Davies, Lluberas and Shorrocks (2016)^[2]). Unfunded pension claims, for example, do not enter the Credit Suisse Global Wealth Report.

Obviously, the evidence shown here is not intended to feed a normative judgement on the pros and cons of Eurobonds or Coronabonds. I personally take an agnostic view on them, even though the recent PR glibber in favour of Coronabonds does awake my iconoclast instincts. I rather want to simply derive two points from the table:

·       First, the terms ´rich´ and ´poor´ should refer to wealth stocks, not to annual income flows. The frugal leaders Germany and Netherlands have very low median wealth/adult (real estate and financial assets), in fact roughly a third(!) of the median wealth/adult level recorded for Italy or Spain. Consequently, common talk about the ´rich´ North and the ´´poor´ South is misleading.

·       Second, wealth inequality is very high in the frugal leaders Netherlands and Germany, indicated by the stark divergence of their median and mean wealth/adult level. Household wealth seems distributed more equally in vulnerable Italy and Spain. This is confirmed by the displayed Gini coefficients (Corrado Gini´s measure ranges from 0 to 100%, with 0 representing perfect equality and 100 representing perfect inequality). As the mean wealth/adult of the “frugals” roughly equals that of Italy and Spain, common talk about the ´rich´ North or the ´poor´ South is still misleading even when mean wealth is compared.

 I draw two tentative conclusions that may have garnered insufficient attention in the Eurobond debate. First, Germany and the Netherlands may well remain stingy as long as household wealth isn´t distributed more equally inside their countries; higher median household wealth might lower the political backlash from mutualising public liabilities on the Eurozone level. Second, there is also scope in the vulnerable countries to engage their wealthy in bearing more of the cost of COVID-19. A reintroduction of these progressive taxes in Italy may be called for to have the local rich contribute to the extraordinary cost of the Corona crisis in the country. Estate, inheritance and gift tax revenue in % of GDP is low throughout Europe, and zero in Italy. Europe leads the world in inherited wealth: The richest Florentine families in 1427 still are^[3].

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[1] H.M. Enzensberger (2011), Brussels the Gentle Monster - or the Disenfranchisement of Europe, Seagull Books.

[2] Davies, J., R. Lluberas and A. Shorrocks (2016), “Estimating the level and distribution of global wealth, 2000-14”, WIDER Working Paper, No. 2016/3, UNU-Wider, Helsinki.

[3] A. Speciale and C. Vasarri (2016), “How to Stay Rich in Europe: Inherit Money for 700 Years”, Bloomberg, 26. August. Special thanks to special Twitter mate Stephan Ewald aka “I bims. Der #MAGA#Ottakringer” for pointing me to this article.