Unemployment in Europe is now like a spectator sport. Massive layoffs happen so often these days that one could grab a couple of mates together, flip on the BBC, and have a lovely afternoon placing bets on today's hits.

IBM is laying off 10,000. General Motors has canned 12,000. France’s unemployment rate is approaching 10%, Germany’s has soared to the mid-12s.

And in response to all of this, what are the nation states doing with one of their last completely independent fiscal tools? Raise taxes of course! Mais bien sûr!

Germany, now dubbed the “sick child” of Europe, is expected to raise VAT (similar to sales tax) from 16% to 18%. Delinquent Greece is raising theirs to 19%. And the once-promising Portugal has disappointed many by following the pack and slapping a whopping 21% tax on consumer goods.

Don’t these politicians realize that tax hikes like these will discourage spending, which will limit consumption and carve into revenue growth even further? Why shouldn’t multinationals jump ship over to the Pacific where China’s GDP is racing at a fiery hot 9%, compared to Europe’s measly 1.3%?

One big driver of these increases is the political pressure those in charge are feeling regarding European’s budget balances. Western Europe’s budgets are wildly off track and the Maastricht Treaty, which once represented the steadfast commitment to low inflation and limited deficits now serves less as a beacon of hope than a symbolic substitute for toilet paper. What’s worse, the population is aging and swarms of baby-boomers are warming up their shuffleboards in anticipation of a fast-approaching retirement. This will make the original targets that form the links between countries even more brittle than they already are.

With cutting welfare costs still equating to political death, finance ministers choose to boost the top line (tax revenues) to get things back in balance. This is a Band-Aid approach that will inevitably fail.

Politicians must understand that this world has changed. Gone is the era when the tag “Made in Germany” added value to a wash machine. Consumers don’t care about the sourcing of products anymore. They just want low prices. Raising taxes to pay plump unemployment benefits simply accelerates a vicious cycle toward stagnation. Those in power need to think on a longer term than their current job title and break this path.

Until then, better get a subscription to the BBC. Because this game’s stakes are getting higher by the day.

Posted by Michelle Smith on August 1, 2005 08:23 PM