Big government, high taxes, massive debt, political polarization and social crises have become the norm throughout Western Europe and North America. But it is high time for leaders and citizens to take a look at the lessons history has to offer. Only then could the region avoid going down the same path as Rome and other fallen empires
Western governments appear to have thrown caution to the wind. Higher taxes are financing massive spending campaigns that have no clear implementation strategy (source: GIS)
Both the Biden administration and the European Union have announced unprecedented spending programs, $1.9 trillion and 1.8 trillion euros respectively, to fight Covid-19 and kickstart the green economy. There is no clear concept on how these funds will be spent or financed. But this kind of spending could serve as a pretext for a sharp tax increase in Washington. It appears that on both sides of the Atlantic, governments see the pandemic and the green economy as ideal excuses to keep overspending and increasing the role of the state and the administration.
This is alarming, given what took place in past societies and states that resorted to overspending and degrading the worth of their currency.
In ancient Rome, during the late years of the empire, internal turmoil had disturbed trade flows and the government had become bloated and inefficient. Rulers had to find ways to appease rising discontent. So they tried to buy off the population with gifts. To find the necessary funds, they increased taxes, implemented aggressive tax controls and began debasing silver coins by adding copper (a method strikingly reminiscent of today’s quantitative easing).
« So-called liberal democracies have become crippled by huge debts »
With these new measures came a tangle of laws that opened the door to corruption. The people of Rome began demanding panem et circenses as their due. The regime had to feed and entertain the population to survive, to the detriment of a sustainable common good. These welfare handouts from the state created rivalry between different social groups who felt they were disadvantaged compared to others, further poisoning the political situation. As a result, the formidable Roman Empire, once an efficient and well-functioning system, decayed and collapsed. Still, the principle of redistribution by taxing the rich to feed the poor remained popular. But this created the wrong incentives, punishing the hardworking on one side and encouraging idleness on the other.
Likewise, Spain was once the dominating power in Europe. In the 16th century, its European territories included not only the Iberian peninsula, but also large parts of Italy and the Netherlands. Its overseas lands stretched from the southern tip of Tierra del Fuego up to modern-day Colorado and California in the Americas, and also included the Philippines in Asia and territories in Africa. But the Spanish state expanded so much that it required higher taxes, which in turn led to inflation. The defeat of the Armada around the British Isles was not the cause of this decline, but a symptom.
There are several such instances in history, as the disintegration of the Ottoman Empire in the 19th century and the ebb of British power in the late 19th and 20th centuries. And we could soon witness yet another example.
The fall of Western democracy
In the last 20 years, Western democracies have entered a similar phase of decay. So-called liberal democracies have become crippled by huge debts. Tax systems have become byzantine, opaque and contradictory, allowing arbitrary decision-making. Tax collection is increasingly aggressive. The right to personal privacy is undermined under the pretext of tax justice. The productive spheres of the economy decline while the administration and auditing sectors grow.
Under the pretext of political correctness, public debate is being narrowly restricted. Established politicians and NGOs, for the sake of redressing inequalities – some of which are inevitable – have created new forms of discrimination. It has become customary to ban words, rename streets, remove monuments, curb traditions and marginalize the role of the family, all for fear of offending. This results in heightened polarization, making citizens more vulnerable to propaganda and manipulation.
« Lately, the spending spree to fight Covid-19 and climate change has gone into overdrive »
More and more financial information on private persons is being exchanged between authorities under the pretext of tax collection and the fight against money laundering and terrorism. Sensitive data is shared with highly corrupt countries, including some that sponsor terrorism. It is necessary to fight financial crimes, but it is highly doubtful that cooperating with untrustworthy and subversive countries will serve this purpose.The best way to fight fraud would be to drastically simplify tax systems and limit the size of public administration. But there will always be those who answer that this is not realistic.
Accepting the end?
Lately, the spending spree to fight Covid-19 and climate change has gone into overdrive. All limitations on spending were removed. Quantitative easing, i.e. money printing, has reached unprecedented levels – much like when Romans mixed copper with silver to keep the people happy. And like in ancient Rome and other empires, the liabilities resulting from this strategy will burden future generations.
Fighting Covid-19 and environmental damage are worthy causes. But there is no transparent plan to use the money that is now earmarked for these purposes. The only certainty is that the influence of the state and the size of the administration will grow. The quest for sustainability needs to include not only ecological concerns, but also economic and social ones.
The United States is in a situation similar to that of Europe. In order to allow additional spending, Washington is now sharply raising taxes and, like European countries, has joined the OECD’s campaign for minimum tax rates worldwide. This would allow the creation of a global cartel that could impose excessive taxation at will. Within the G20, democratic countries are in agreement with authoritarian ones on this matter. Like in the Roman empire, the wrong incentives are applied and taxes are being used as a way to pursue equality. The real winner here is the privileged bureaucracy.
The control that parliaments exert over budgetary matters is being eroded even in liberal democracies. Most MPs are dependent on the state for employment, and loyally follow their party leaders who sit in government – a vicious circle.
Looking at history and the present fiasco, we can conclude that real democracies are in danger. They are threatened not by the so-called populist movements, but rather by overspending and the disproportionate power given to administrations.
« In a functioning state, taxes are never used as a political tool »
This all results in a switch from a decentralized democracy to a centralized technocratic bureaucracy. The benefits of digitization will be overshadowed by its misuse as a tool to control citizens.Liberal democracy is legitimized by individual freedom. And now the only way to restore it would be to radically reduce the size of the administration, simplify systems and return to a reasonable, pragmatic and equitable taxation by focusing on common sense and the long-term public good. In a functioning state, taxes are meant to cover the necessary expenses of the administration and are never used as a political tool.
If we believe that reducing the size of public administration – and therefore expenses – is impossible, then we also implicitly accept the end of true liberal democracies based on freedom and the rule of law.
Prince Michael of Liechtenstein
29 April 2021
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PARIS – Finance is evolving in a more sustainable direction, and just in time. Pension funds, insurance companies, and sovereign wealth funds have made multiple commitments on climate change, biodiversity, and economic inclusion. In each case, the aim is to treat finance as a tool, not an end in itself, and to adopt objectives that go well beyond financial returns.
Today, more than $40.5 trillion globally is invested according to environmental, social, and governance principles. But who defines what constitutes an ESG investment, and how far can we trust ESG statements issued by corporations? We need a set of genuinely global ESG standards – and Europe can, and should, play a leading role in formulating and implementing them.
Far from being a purely technical matter, assessing firms’ non-financial performance is a deeply political issue. The first step is the choice of indicators to measure a company’s environmental or social performance. Then there is the question of establishing baseline ESG standards that Europe, the United States, or China will require from all firms that want to do business in their market, as well as a frame of reference that will directly influence financial and investment flows.
Designing such indicators is an invaluable instrument for building sovereignty. Europe, in many respects a global leader in the environmental and social domains, should therefore seize the opportunity, and advance the case for a different kind of sovereignty that serves as a launchpad for global initiatives.
Since French President Emmanuel Macron advocated building European sovereignty in a 2017 speech, the European Union’s view on the issue has evolved significantly. Nowadays, member states are far less ambivalent about defending European sovereignty, whether in response to emerging digital monopolies, the economic risks of Brexit, or the public-health threat posed by COVID-19.
To safeguard its model and values, Europe can no longer just respond to events, but needs to be proactive in identifying and initiating measures that will spread beyond its borders. Assessing corporations’ non-financial performance can form part of a more assertive sovereignty that also enables Europe to address equally urgent issues such as climate change, social problems, and shifting geopolitical alignments.
For example, the EU has set itself far-reaching environmental goals, starting with achieving carbon neutrality no later than 2050. To that end, it recently developed a so-called green taxonomy, a standardized classification that enables assessment of the sustainability of 70 economic activities that together account for 93% of the EU’s greenhouse-gas emissions.
On the social front, the EU established the Charter of Fundamental Rights in 2000, and in 2017 proclaimed the European Pillar of Social Rights – granting its citizens new and more effective means of ensuring equal access to the labor market, fair working conditions, and increased social protection. And in October 2020, the European Commission proposed an EU directive to ensure adequate minimum wages for workers in member states.
But here, too, Europe is trapping itself in a defensive situation. Although Europe is protecting its sovereignty by building such an environmental and social framework, it has no desire to introduce these ideas elsewhere. But in a global economy where each country is trying to shape standards to its own advantage, the key is not merely to defend a model, but to present it to the world as a basis for further discussion.
Since its inception, the EU has frequently been criticized for its sluggishness and bureaucratic red tape. But in a union of 27 sovereign states, every decision is necessarily the result of negotiation and compromise. Moreover, decisions about what constitutes good or bad behavior relative to a norm should not be made lightly. Ironically, therefore, Europe’s inclusive governance model may give it a competitive edge in shaping global ESG standards.
With its large and prosperous single market, high savings rate, and powerful financial sector, Europe can potentially influence these standards through what Zaki Laïdi calls “norms over force.” This is the exact opposite of traditional political and military power, or, as Laïdi puts it, the “ability to produce and set up a worldwide mechanism of norms able to structure the world, to curb unruly behavior from entering players, to offer those who abide by the rules, particularly the less powerful, ample opportunity to make the norms stand against all, including the powerful.”
Furthermore, because measuring non-financial performance goes well beyond simple accounting, the transition to a more ecologically and socially sustainable capitalism through participants’ transparency and shared responsibility may become the polestar of a new European identity.
At a time when Europe is seeking to outgrow its internal political divisions, the EU has an opportunity to reiterate its environmental and social values without requiring member states to support a particular economic model, but rather by simply sticking to a results-based approach. Despite their historical and cultural differences, member states have many shared values that enable them to agree on the basics on issues such as gender equality or environmental protection.
One of the founding fathers of European integration, Jean Monnet, believed that sovereignty declines when it is entrenched in old patterns. Having designed a sovereignty that differs fundamentally from previously tested governance models, the EU must now demonstrate its vitality by extending its power beyond its single market.
More than any other jurisdiction, the EU should embrace new norms, not fear them. By requiring an evaluation of a firm’s environmental and social impact before granting access to its market, the EU would have a unique opportunity to assert both the singularity and the extent of its sovereignty.
In doing so, Europe would contribute to a necessarily global debate regarding the transition toward a sustainable, resilient, and inclusive capitalist economic model. This goal was implicit in the Sustainable Development Goals and Paris climate agreement that the world adopted in 2015. We now have a duty to make it overt.