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uni'wissen 01-2012_ENG

they aren’t, they will not be taken seriously. On the other hand, they should not be too strong, in order to not put off anybody. A system of sover­ eign states only functions when everyone pulls ­together. The EU, at any rate, has not yet succeeded in installing an effective mechanism for sanctions. Countries that break the rules are generally in good company. In addition to Spain and Greece, for example, Germany has also breached the European Stability and Growth Pact multiple times in the past years and deregulated its ­financial markets. That makes it difficult to ­enforce sanctions. After all, who would want to punish himself? However, economists can stand by the side of policy makers as advisors in such dilemmas by explaining why countries abide by agreements or why they break them. descend into a spiral of tax-cutting, in the end they will hardly be able to provide any public goods at all. In theory, tax competition should bring about the most favorable result, but in ­reality it leads to the opposite. Another possibility would be for the countries to cooperate by agreeing on a common tax rate, thus preventing investors from leaving. “But ­deviation is always worth it,” says Eggert, because a county that lowers taxes more than agreed upon puts itself in a better position – at least as long as the other country abides by the agree­ ment. The tragedy of the situation is that both countries thus have an incentive to deviate from cooperative behavior. “The politicians in both countries want the best for their own country and citizens and then find themselves in the worst situation for everyone,” explains Eggert. What does this teach us about the EU? “From an academic perspective, it is a great achievement that the EU is a partially supranational confed­ eration,” says Eggert. “In any case it’s not a bad sign that institutions like the European Parlia­ ment exist and are criticized for not acting in the national interest of the voters of individual member states alone.” Countries Should Abstain from Tax Competition The public finance professor is looking for mechanisms that encourage countries to abstain from tax cuts and mutually detrimental competi­ tion of their own accord. An example of one of them could be: “Deviations will be punished.” If a country that does not abide by agreements has to fear sanctions, it is usually more cost-­ effective to abide by the agreements. But a look at the debt-ridden countries of the eurozone shows that states often do not abide by rules that they have set up for themselves – and still do not have to reckon with sanctions. “Finding the right balance is difficult for economists and politicians alike,” says Eggert. On the one hand, the threats must be made to seem credible. If Prof. Dr. Wolfgang Eggert studied economics in Con- stance, where he then went on to complete his PhD ­under the tutelage of Prof. Dr. Bernd Genser in 1999. Following stints in Japan, Norway, and Denmark, he earned his habilitation in Constance in 2003. He then accepted a post as a re- search professor at the Ifo Institute for Economic Re- search, where he is still ­employed today. From 2005 to 2010 Eggert lived and worked in Paderborn. Since 2010 he has taught and ­researched at the Institute of Public Finance and ­Monetary Economics in his ­adopted home Freiburg. His research focuses on public finance. Further Reading Eggert, W./Itaya, J.-I./Mino, K. (2011): A dy­ namic model of conflict and appropriation. In: Journal of Economic Behavior & Organization 78, pp. 167–182. Eggert, W./Itaya, J.-I. (2011): Tax rate harmoni­ zation, renegotiation and asymmetric tax com­ petition for profits with repeated interaction. (= CESifo Working Paper 3437). Eggert, W. (2010): Frameworks for negotiating tax reforms: What can we learn from the ­economic literature. Brussels Tax Forum 2010. “From an academic perspective, it is a great ­achievement that the EU is a partially supranational confederation” 15