The Ethics of Capitalism - Social Europe Journal

sequences for individuals and
households, workers and businesses,
including small and
medium enterprises, the linchpin
of local economies, as well
as all levels of government.
Local and regional authorities
have been doubly affected: As
borrowers, they have suffered
the repercussions of credit
becoming less available and
more expensive; as credit
providers, they have been called
to take part in large bailout
plans to salvage national and
even regional financial institutions
on the brink of bankruptcy.
It is worth noting that the situation
has been exacerbated in
some member states where
banks that traditionally provided
loans to the municipal sector,
have been affected by the crisis
(e.g. Kommunalkredit in Austria,
Kommunekreditt in Norway,
Dexia in Belgium, France and
Luxembourg). This situation has
jeopardised the very solvency of
local and regional governments.
As a result, it is the provision of
essential public services that is
put at risk. Not surprisingly, a
major effect of the crisis has
been greater demand for social
and welfare services. This has
put local and regional authorities
in the EU under significant
financial pressure as they have
to provide for citizens who have
seen their income curtailed or
have lost their jobs. What is
more, payments on tax levied
forward in 2008 now need to be
reimbursed to tax payers who
report losses and claim back the
excess tax paid. It is self-evident
that severe economic downturns
such as the one we are currently
experiencing engender loss on
tax revenues. The volume of the
actual loss very much depends
upon the type of tax levied or
The Way forward
The lesson we should have
learned from the financial and
economic crisis is that financial
markets are unable to operate
smoothly in a poorly regulated
environment. The ‘Efficient
Market Theory’ has proved to be
a fairy tale and the expectation
that markets best regulate themselves
when left to their own
devices and without interfershared
by the local or regional
government in a given member
state (personal income tax, company
income tax, etc.), and the
proportion of this income in
total budget revenues.
Local and regional authorities
have also suffered losses on
investments. Although this has
not been a widespread trend in
the EU, it has had a devastating
impact where it occurred. Take
for instance the UK where the
bankruptcy of Icelandic banks
cost local governments €1 billion
in financial investments, with
further losses in unrealised
income from interests. Likewise,
local governments in Belgium
were hit by the crisis of Dexia
because they were shareholders
of the bank through the
Communal Holding. It is worth
reminding that the Belgian Dexia
SA received support worth €3
billion from the Belgian federal
government, the three regions
(Flemish, Walloon and Brussels-
Capital) and the three institutional
shareholders. For local governments,
this translated into a
decrease of share market value,
weakening of their share in the
bank and the loss of unrealised
income from dividends. For those
municipalities that had heavily
invested in Dexia, the losses have
been very substantial.
Moreover, as public and private
investments in infrastructure
and development projects
have slowed down because of
the crisis, local and regional
development has also
ineluctably slowed down. Last
but not least, cuts in the staff of
local and regional authorities
have had a negative impact on
local job markets, aggravating
the social repercussions of the
crisis.
Local and regional authorities
in my country, Germany, have
not been spared from the effects
of financial engineering and the
bankruptcy of this incredibly
'innovative' financial industry.
With most Landesbanken
(German regional banks) close
to collapse without the injection
of billions of public subsidies
and with the value of financial
assets all too often tumbling
down, it has been hard for those
banks to withstand the additional
losses resulting from the
decline in economic output. As
unemployment figures rise and
more people depend on social
benefits, German regional and
local authorities are put under
considerable financial pressure
since social support for the poor
is one of their key responsibilities.
Despite the fact that the
German federal government's
economic stimulus package has
earmarked around €10 billion
for education and infrastructure
expenditure at local level, there
are even harder times to come
for German local and regional
authorities.
Amidst the crisis, the challenge
for all EU member states
lies in ensuring that central governments
guarantee the provision
of public services to their
citizens and do not curtail public
expenditure earmarked for
local and regional authorities.
34 Social Europe Journal Summer 2009