If you act like Europe, you get growth rates like Europe

Europe's solution is, and always has been, to attract capital, not reject it

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The eurozone needs putting upright
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Daniel Lacalle
On 8 February 2013 16:08

Defending decadent sectors to "sustain employment" and keep alive zombie companies through subsidies, only to remove them, achieving neither a strengthened "national champion" nor wealth and employment. This creates a problem of managers that are "private-sector civil servants" and cronyism.

When the money flows, states spend in low-productivity sectors and forget to invest in R & D. When the fund flow stops, they also forget. See the chart. Better not to subsidize, just give tax incentives.

All this would not be so serious if it wasn't financed with debt, or if the tax policy and costs for businesses were bearable. However, when countries spend amounts exceeding five to 10 percent of Europe's GDP per annum in subsidies and wasteful spending, the tax burden and costs escalate.

"Growth Plans" do not create jobs, they subsidize them for a very short period of time, leaving behind a load of debt. Remember the Plan E, the green initiative, the 20-20-20 plan... For every euro spent, according to estimates, there has been 1.25 euros of debt since 2006 and virtually no net job creation. "It would have been worse otherwise", we hear. No, not when we have created such a debt problem. Not at all.

A system that in recession increases the tax burden by five percentage points and makes energy tariffs (Germany, Spain) rocket 30 percent above any commodity, is unacceptable for a company, especially small and medium enterprises, which account for 70 percent of value added in the periphery. They close or emigrate.

A parasitic European Union, where there are too many "supervisors" and too little "doers", makes the "silent Depardieu" more and more common, as the assault on the entrepreneur deepens. Think of the recent examples of threats to nationalize Arcelor-Mittal's operations in France, or how public administrations don't pay suppliers but demand them to pay VAT of the unpaid bills in time.

It's not just the money spent on maintaining declining sectors, it is the accumulated debt and the cost of losing the opportunity to pursue innovation.

That is why they have to lower taxes, ensure legal certainty, and reduce the size of the public sector. These three problems are engulfing any real recovery option and long-term productive investment.

We have proven for decades that "stimulating" – giving the State a check-book with debt – does not work. We now know that the "internal devaluation" only brings more taxes, less disposable income, and less consumption; debt is not reduced, which leads to structural unemployment.

The solution is, and always has been, to attract capital, not reject it.

The new production model is not going to be created in a committee or a summit. Private investors will do it. The State should facilitate the transition, not through intervention, but by investing in education, lowering taxes for entrepreneurs, reducing bureaucratic obstacles and, above all, not subsidizing the expensive and inefficient sectors. 

At the end of my talk in London, a student asked me, "Why does Spain not create a Spotify, or a Core Labs?" He is an Engineering Technology student and is preparing a start-up. 

I asked: "Where are you opening your business, here or in Spain?" 

He said: "In Westminster. I’ve been told that I might not pay taxes during the first three years, so probably here. Why?"

"You've just answered yourself"

Daniel Lacalle is a Fund manager. Voted Number 1 Pan-European Buyside Individual in General and Oil & Gas categories in Thomson Reuters' Extel Survey 2011. He is a contributor to El Confidencial, where this article was originally published in Spanish

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