Tue, Feb 03, 2015 - Page 9 News List

The eurozone cannot rely only on quantitative easing

Different conditions in the EU mean that the program will not have the breadth of effect that it did in the US

By Martin Feldstein

Fortunately, QE is not the only tool at policymakers’ disposal. Any eurozone nation can modify its tax rules to stimulate business investment, home building and consumer spending without increasing its fiscal deficit, and without requiring permission from the European Commission.

Consider the goal of stimulating business investment. Tax credits or accelerated depreciation lower firms’ cost of investing and therefore raise the after-tax return on investment. The resulting revenue loss could be offset by raising the corporate tax rate.

Similarly, demand for new homes could be increased by allowing homeowners to deduct mortgage interest payments (as they do in the US), or by giving a tax credit for mortgage interest payments. A temporary tax credit for home purchases would accelerate home building, encouraging more in the near term and less in the future. Here, the revenue loss could be offset by an increase in the personal tax rate.

A commitment to raise the rate of value-added tax by two percentage points annually for the next five years would encourage earlier buying to get ahead of future price increases. The reduction in real incomes caused by the VAT increase could be offset by a combination of reduced personal income taxes, reduced payroll taxes and increased transfers.

Although eurozone members cannot adjust their interest rates or their exchange rates, they can alter their tax rules to stimulate spending and demand, with the appropriate policy possibly differing from country to country. It is now up to national political leaders to recognize that QE is not enough — and to start thinking about what else should be done to stimulate spending and demand.

Martin Feldstein is a professor of economics at Harvard University and president emeritus of the US-based National Bureau of Economic Research. He chaired former US president Ronald Reagan’s Council of Economic Advisers from 1982 to 1984.

Copyright: Project Syndicate

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