Eurozone Tax Burden Increases
Eurostat has published it’s Taxation to GDP report for the both the wider EU and the Eurozone. Headlining this report is the creep higher in the tax burden on EU individuals and corporations. The Eurozone ratio is up from 39.5% in 2011 to 40.4% in 2012 and estimates expect this burden to continue to rise as many European countries continue with their austerity packages.
Despite sales taxes pushing up the price of goods, headline Consumer Price Index (CPI) readings across the Eurozone countries have all been coming in lower over the past year, the latest indicator was a further fall in this morning’s overall Euro inflation rate.
The European Central Bank (ECB) took the opportunity to reduce interest rates at it’s recent Governing Council meeting. The reductions were minor and are unlikely to result in any noticeable pick up in economic activity, rather the moderate rate cuts were designed to prove to the markets that the ECB is prepared to act when necessary, the Bank had been under considerable international pressure to take some definitive action in the face of a slowing in both economic growth and general price rises.
The introduction of the €400Bn Targeted Long Term Refinance Operation (TLTRO) at the same Governing Council meeting has largely gone under the radar. This move was designed to directly address the ability of both companies and households to access credit, lending to these two groups has fallen 2% over the past year. In effect the TLTRO is a de facto asset purchase program, the €400Bn will be made available in return for a form of Asset Backed Securities (ABS) and is now being considered a front runner for the full scale purchase of Sovereign Bonds or in other words quantitative easing.
The TLTRO is a much easier liquidity enhancing option for the ECB to undertake than quantitative easing, although the latter operation would ultimately be more effective. Distribution of the €400Bn is done on the basis of a fixed 7% of a lenders existing corporate and personal loan books, this circumvents the major block to quantitative easing which is the question of which Government’s bonds to purchase.
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