FRANKFURT (MNI) – As taxpayers benefited from looser fiscal policy
for their financial sectors before the crisis, they must now bear the
consequences following the crisis, according to European Central Bank
Executive Board member Lorenzo Bini Smaghi.
“The principle of ‘no taxation without representation’ should work
both ways,” the central banker said in an opinion piece published in
Wednesday’s edition of the Financial Times.
“If taxpayers have the right the share in decision making, they
must also accept the consequences,” Bini Smaghi said. “But in Europe,
this relationship between taxpayers and the financial system is not
working.”
In his piece, Bini Smaghi highlighted how taxpayers in countries
like Ireland and UK had, before the crisis, benefited from lower taxes
on banks. As the sector grew larger, bank profits filled state coffers,
public spending rose and the pressure on taxpayers eased.
However, after the crisis, the financial sector became a “heavy
burden”, he said. “Irish taxpayers, for instance, now find themselves
faced with both the collapse of tax revenues and the losses incurred by
the banks themselves.”
Bini Smaghi said that, in principle, shareholders and managers, and
subsequently bondholders, should bear the costs of their banks being
restructured.
“Only in a systemic crisis should taxpayers be involved,” he
continued. “The question is, how should we judge if a crisis is truly
systemic, and therefore whether taxpayers should rightly bear some of
the costs of resolving the situation?”
“If the decision on whether a crisis is systemic or not is in the
hands of the authorities of the country where the troubled banks are
located, their authorities will have an incentive to underestimate the
system dimension of the crisis, and thus shift the burden to other
European taxpayers,” Bini Smaghi said.
“However, those other countries will rightly consider that, as long
as supervision remains national and accountable to the taxpayers of the
country with indebted banks, those taxpayers should, in the first
instance, assume responsibility for any failures.”
The central banker conceded that, in a single market like the
Eurozone, resolving situations like the current banking crisis is
complicated when such conflicts of interest exist. “They also intensify
the correlation between banking risk and sovereign risk, thus
undermining financial stability, especially in the euro area,” he added.
— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —
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