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Further Steps Down The Primrose Path Towards Bankruptcy

Kitty Miv, Editor
02 June, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

In Russia, they dream in winter; but in Greece they dream in summer. Because it's too cold in the first case, and I suppose because it's too hot in the second. At all events, Prime Minister Antonis Samaras is promising to reduce all types of tax over the next few years, and predicts EUR55bn of incoming investment over the same period. There are a few inconvenient factlets standing in his way, however, and we won't even consider the fractured state of Greek politics. First, GDP has shrunk by more than 25 percent since recession hit in 2008, and continued to fall in the first quarter of 2014; second, the unemployment rate increased in the first quarter of 2014 to about 27 percent, and in the 15 - 24 year age group is running at 57 percent; third, Greece has been provided EUR240bn of assistance from the Troika, and now has national debt equal to 175 percent of GDP and rising, with debt service even at today's artificially low rates running at 5 percent of GDP annually. Net FDI in 2013 was under EUR2bn.

Now I hate to be a Cassandra, truly I do, but it is an existential impossibility for Greece to escape from this trap, this year, next year, or ever, unless it is bailed out once again by the Troika. The expectation of such a bail-out on the part of investors is what permitted Greece to raise EUR5bn on the international debt markets at "only" 5 percent interest late last year, a figure which is still double the average 2.5 percent rate Greece is paying on its debt. The EU cannot afford to rescue Greece again, even if there was willingness to do so; but they're mad enough in Brussels to try it, nonetheless, unless they're stopped by the recently elected eurosceptic body of MEPs. So the EU is between a rock and a hard place: either the Troika takes further steps down the primrose path towards bankruptcy for the euro-zone, or the eurosceptics force a halt to the endless creation of money to bail out already-bankrupt individal member states such as Greece. Either way, it looks as if the euro has had it! The government of any sane member of the eurozone should recognize this, and jump now; but they won't, because they are politicians, and they don't want to be the ones who "lost" the euro. So they'll continue dreaming until their rude awakening. It may be this year, or it may be next year, but it will come, and by now there is nothing that can stop it. Why then am I giving a bouquet to Mr Samaras? So that he can throw it on his country's coffin, that's why!

It's always nice when a country displays a sense of humor, and usually fairly rare, so a big welcome to the news that the UAE is moving forward smartly with plans to exchange tax information with up to 75 bilateral agreement partners. Oh, I hear you thinking, what do they mean? They are always going on about privacy and the ridiculous overkill that EOI represents. Yes, that is true, but the joke is that there isn't any tax to speak of in the UAE. Banks and oil companies do pay tax, but in a highly visible way, and even then not if they are in the free zones, where there is complete absence of income tax for individuals and corporates. So what information is it that is going to be exchanged? Effectively none in the case of UAE to "rest-of-world" tax authorities; and will the German Government (to pick an example) provide information on forty million German taxpayers to the UAE? What would the UAE do with that information if it received it? And if the German Government tries to be selective, how will it achieve that? How would it know which German taxpayers have a presence in the UAE? Always remembering that they don't pay tax there in any case. Puzzled, me, but I still think it is fairly hilarious.

Staying with EOI, there is something quite strange about the Indian Finance Minister's plea this week to Switzerland to expedite its ratification of the OECD's convention on mutual assistance in tax matters. This is the man who has palpably failed to deal with the Indian state's various tax spats with international companies, including the issue of retrospection, who has failed to make any progress with the new (OK, new-old) Direct Taxes Act or the GST dossier, and who has now left office, replaced in Jarendra Modi's new administration by Arun Jaitley. The latter is also to be Defence Minister, and it's not clear who in reality will run tax in the new India. Still, that doesn't help us to understand why Mukherjee was attacking the Swiss. Probably he has Indian oligarchs in his sights rather than MNEs, but it is a strange thing to do when one is just a day away from losing office. No doubt there is some underlying, obscure bargain which will never be revealed to us. Transparency is what India's administration badly needs, but probably isn't about to get, despite Mr Modi.

I don't apologize for returning to the long-running craziness of anti-dumping duties, which can have no result but to hurt consumers. This week, it is serial offender the US Department of Commerce that is in the spotlight over specialty steels. There are a lot of numbers and a lot of countries involved, but we'll just focus on one pair: the DoC is proposing an anti-dumping duty of 407 percent (no, there are no decimal points missing, it's four hundred plus percent) on non-oriented electrical steel (NOES), whatever that might be, from China. And in case you think this is just an anti-Chinese rant, there is a 200 percent duty on Swedish companies, for good measure. To be clear, that means that if a Chinese company sells NOES to a Chicago manufacturer for USD2,000 a tonne, it will actually cost the US importer more than USD10,000 a tonne, which is the "fair" price according to the DoC. Leaving aside the fact that the WTO provides ample means for the US to counter such unfair behavior, if it exists, I want to ask you a simple question: what Chinese company in its senses would want to sell NOES to a US competitor at less than a quarter of its real production cost? And before you say that the Chinese Government is setting out to ruin US producers of NOES (roughly speaking the DoC's argument), you need to be prepared to believe the same about the Swedish Government. It doesn't take a mastermind to work out that this is simply a protectionist ploy on the part of US NOES producers whose antiquated production methods (and in all probability whose unionist workers) render them hopelessly uncompetitive in world markets. This is not new behaviour on the part of the DoC, by the way; it has been singing the anti-dumping song for decades. And it is by no means only a US technique: the EU is just as bad. Ask the French! The solution to the problem is to move the authorization of anti-dumping duties (and their equally nasty cousin, countervailing duties) away from nation states and into an international body which would be able to resist producer capture. It's very hard to understand why this hasn't already happened at the WTO. Oh, OK, it's not hard to understand. Sigh!

Kitty's Encomiums and Execrations

Methodology: each week (this is the 107th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at neutral, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Dubai doesn't care

Greece will have jam tomorrow

And Kitty's Execrations:

India on the warpath




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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