H. Eichel: Green tax reforms offer possible exit to crisis

The introduction of ecological tax reforms offers opportunities for fixing public finances and generating growth, says former German finance minister, Hans Eichel. In an interview with StockWatch, Mr Eichel discusses the German experience with economic and tax reforms during his tenure in the Schroder government, from 1999 to 2005. The German politician acknowledges that increases in energy taxes generate public protest but points out the efficiency and employment gains they help create. With regards to the economic reforms undertaken in southern Europe, Mr Eichel says that they were necessary and that, given the fiscal situation, there was no better alternative. In light of the results of the European elections, he rejects the idea that economic reforms were a political failure. He points out that politicians need to better communicate the need for reform to their publics.

The interview in full:

Q: What do you make of the results of the European elections?

A: On the one hand Europeans showed a lot of interest in the EU, on the other hand we observe a trend for more skepticism against the EU. And I am particularly worried about the right wing parties’ successes in several countries and thus now also in the European Parliament. It is thus necessary to emphasise much more the advantages of the EU and its further development whilst also taking people’s concerns into account and addressing them by appropriate means.

Q: In what direction, if any, will the electoral advance of Germany’s Eurosceptics change its capacity to deal with Eurozone-related problems?

A: I do not see that the German Eurosceptics have the capacity to come up with reasonable alternative proposals how to deal with the problems we have been discussing and mainly solving over the past few years.

Q: Do the results indicate the political failure of the economic reforms the Eurozone and the IMF pushed for in the past few years?

A: I do not quite share this view. However, it was and partly still is a great challenge for many politicians to sell these reforms to the public. We have seen mass demonstrations in the streets. But polls also showed that many people understand the rationale behind the reforms and accept them, though they may not like them very much.

Q: Politics aside, do you believe that the reform drive has been economically successful?

A: The reforms were generally necessary; I can hardly imagine a better alternative development without such reforms. Savings were a reasonable response to unbalanced public budgets. And the recent success of Greece reentering the capital market can be considered as indication for the success of the reforms. This will eventually make them also a political success.

Q: You have a reputation here of a reformer that pushed through changes during difficult times. What does it take to push for reforms amidst really adverse macroeconomic conditions?

A: It requires strong will and political leadership, a clear concept with convincing arguments and good communication skills. Given severe economic challenges it was also clear that only substantial reforms would be able to change the situation.

Q: Given that reformers are often out of office by the time they can electorally or politically reap the benefits of reform, are reforms a thankless task?

A: No, they are not at all a thankless task. Politicians are not supposed to be rewarded mainly for their personal efforts, but it is society that should benefit most from reform. Indeed, I strongly believe that it is exactly the task of politicians to initiate successful reforms, independent of whether they benefit personally or not. Maybe reformers are the type of policy makers who really create public value added without benefiting themselves. Maybe good old-fashioned values can be considered therein.

Q: If Southern European countries were looking for tax reforms that would be beneficial to their economies and to economic recovery, what kind of reforms should they be looking at?

A: Basic rules are to broaden the tax bases i.a. by reducing exemptions and lower than normal tax rates, to fight tax fraud, evasion and avoidance, and to tax ‘bads’ such as resource and energy consumption and pollution instead of ‘goods’ such as labour and income. Along these principles, it is equally important to phase out environmentally harmful subsidies, hence dealing with the expenditure side, too.

Q: You are visiting Cyprus in order to talk about your experience from the environmental tax reform in Germany. This has probably received less attention than other tax reforms that you introduced while serving as a Finance Minister. Can you explain what this policy was about?

A: Of course, other reforms like the income and also the corporate tax reforms received great attention, but please do not underestimate public interest in the Ecological Tax Reform (ETR).

We wanted to increase employment and hence lowered labour costs by reducing social security contributions to the pensions fund for both employers and employees. The missing revenues were compensated for by increasing energy taxes whilst also broadening their tax base. In order to respect social and economic impacts, we increased these stepwise and in an announced manner, so that all could take these increases, but also the reductions of labour costs into account in their forthcoming consumption and investment decisions without devaluing the capital stock.

According to several studies, up to 250,000 jobs were created additionally. Furthermore CO2-emissions were reduced by 2-3%, hence a very attractive political “double dividend” for employment and the environment was achieved.

I am grateful to see that the current German Finance Minister, Wolfgang Schauble, also shares this approach and principles such as broadening the tax base and thus introduced further elements such as taxation of nuclear fuels and of air tickets.

However, given the quadrupling of world oil prices at the same time from around 9 USD per barrel to 35 USD between 1998 and 2000, the public became quite concerned about rising energy prices. We thus started several communication campaigns to even better explain the concept of that ETR and the differences to simple world energy price increases. In fact, only a quarter of the gasoline price increase was due to the ETR. We had quite some protests, but Gerhard Schroder, Chancellor at the time, and I stood firm and wanted to lower unemployment as our primary objective. Hence, we continued the ETR between 1999 and its then final stage 2003 though some protests arose.

Coming back to your question on reaping the political benefits of reform, reforms often also pay off for politicians. Last year, my then State Secretary in the Finance Ministry, Barbara Hendricks, was made Environment Minister, indicating also the strong linkage between both subjects. I am convinced that the Environment Ministry strongly benefits from her experiences.

Q: What is the relevance of an environmental tax reform in today's economic and fiscal circumstances? Is it just a more palatable way to introduce new taxes needed for fiscal consolidation, or can it serve as a pro-growth policy as well?

A: It could actually serve both purposes. Taking environmental damages into account in the fiscal system is very important and thus taxes should reflect them.

Analysis showed that energy taxes are the best means – compared with income or value added taxation – to stimulate growth and to create jobs, mainly because they help to drive efficiency up as energy saving potentials are large. But they are also easy to administer and are thus an important element in the fiscal systems which potentials are by far not yet fully exploited. Hence, a well-designed ETR is the best option for countries looking for additional revenues.

Hans Eichel was former Minister of Finance in Germany (1999-2005), http://hans-eichel.de/.