When Pedro Sánchez defended the creation of an extraordinary tax on the large energy companies and, subsequently, on the banking sector, the response was immediate. For his critics, it implied an attack on investment and a new display of government intervention. Among his supporters, by contrast, it was a fundamental matter of justice: if certain companies were obtaining exceptional profits thanks to extraordinary circumstances that were also impoverishing millions of citizens, it was reasonable that a portion of those gains returned to society.
Once again, the debate seemed to mirror the Spanish political polarization. However, reducing it to a clash between the PSOE and the opposition risks overlooking a phenomenon that is particularly interesting. The question about the so-called ‘windfall profits’ —the profits that fall from the sky— is present in Europe and has already reached the main economic debates of the countries. It is, therefore, a matter that goes beyond taxes. It addresses something much more ambitious by questioning who has the right to appropriate economic value in contexts like the Middle East, which no company has caused, but whose costs are borne collectively.
The market economy promotes a simple logic: companies assume risks, invest capital, innovate and compete. In this case, if they succeed, they reap profits, but if they fail, they must bear the losses. At the same time, the State sets the rules of the game, corrects certain market failures, and is also responsible for collecting general taxes to fund public services. In other words, the benefit and the risk are part of the same social contract. Or they were, because with these dynamics the balance is beginning to crack today.
“In cases like the war in the Middle East, the origin of the extraordinary profit was not a business decision, but an external shock that affected society as a whole”
The major crises of recent years have shown that a growing portion of corporate profits no longer stems exclusively from business merit. The examples are several. To begin with, the pandemic disrupted entire markets in unpredictable ways. Then, Russia’s invasion of Ukraine drove up energy prices without electricity or oil companies having innovated more than the day before. Also as a consequence of the war, the rapid increases in interest rates multiplied banks’ margins while making mortgages more expensive for millions of households. In all these cases, the origin of the extraordinary profit was not a business decision, but an external shock that affected society as a whole.
There arises, therefore, the question that an increasing number of European governments are asking themselves. If the extraordinary profit does not arise solely from private effort, but, quite clearly, from collective circumstances, should a portion of those gains be returned to the community?
The prime minister, Pedro Sánchez, answered affirmatively to the question. Spain has been one of the first European countries to put extraordinary levies on the energy sector and on banking on the table. The president repeatedly argued that it was not reasonable for some companies to accumulate historic profits while households and businesses suffered unprecedented inflation. His argument, although political, also appealed to the moral dimension.
The interesting thing is that Spain was not alone in proposing this line. Italy approved a similar tax on the energy sector. The United Kingdom, under Rishi Sunak’s Conservative government, introduced an extraordinary levy on North Sea oil and gas companies. Likewise, Greece, Romania and other member states adopted similar measures. Even the European Union itself promoted mechanisms to capture part of the extraordinary profits obtained by certain energy companies after price spikes triggered by the war in Ukraine.
In other words, the debate broke through ideological frames — at least those of left-right. The discussion took on a European dimension about how to distribute the incomes derived from extraordinary events. And this question is not simple, as the arguments on both sides are solid.
“Extraordinary profits are not the usual reward for investment or innovation, but unexpected gains derived from exceptional circumstances”
Advocates of these taxes argue that extraordinary profits are, precisely, extraordinary. They do not constitute the usual reward for investment or innovation, but unexpected gains derived from exceptional circumstances. If a company earns billions more because a war artificially raises the price of a raw material, or because a central bank decision automatically increases its financial margins, it seems reasonable that a portion of that profit could be used to compensate those bearing the cost of that same crisis.
From this perspective there is also a democratic argument. In many strategic sectors — primarily energy, banking, defense or infrastructure — business activity depends on an intensely regulated framework. The government’s role is to grant licenses, set rules and regulate the market. If the public power contributes decisively to creating the conditions for those profits to exist, it is legitimate to ask whether it also has the right to participate in them when they reach exceptional dimensions.
What responses exist on the other side? Critics warn that the concept of “extraordinary profit” is extremely difficult to define. When does a high return stop being the reward for risk and become an unforeseen rent subject to taxation? Energy companies, for example, invest billions in projects with multi-decade horizons. Years of exceptional profits are often followed by periods of much lower returns. Taxing only the favorable moments can deeply alter investment incentives.
There is also a problem of legal certainty. If governments can decide, depending on the political context, when a profit is excessive, this directly affects regulatory predictability. And in sectors requiring gigantic investments, from power grids to data centers or new technologies, regulatory stability is one of the most valuable assets.
In synthesis, both arguments contain a portion of truth. Perhaps because the real debate is not about whether the State should intervene more or less in the economy, but about recognizing that the very nature of European capitalism is changing.
For much of the 20th century, the idea prevailed that the State corrected the market. Today, instead, the State actively helps to create it. The energy transition depends on enormous public subsidies. European strategic autonomy, as much as we talk about it, mobilizes hundreds of billions in industrial aid. The defense industry is driven by public contracts. And what about pharmaceutical companies? They grew during the pandemic thanks, in part, to massive purchases financed by governments. Not to mention the technologies related to artificial intelligence, which depend on energy infrastructures, regulation and public funding that deeply condition their development. In all these areas it is increasingly difficult to separate private value creation from the public action that makes that value possible.
“To redistribution is added the task of deciding how to share the incomes generated by a permanent collaboration between public and private sectors”
Economist Mariana Mazzucato has long defended precisely this idea. The state’s role goes beyond correcting market failures because it is also capable of creating entire markets through public investment, research, regulation or procurement. If we accept that premise, the discussion about extraordinary profits takes on a different dimension. To redistribution is added the task of deciding how the incomes generated by a permanent public-private collaboration are shared.
Naturally, this vision also poses risks. If every time profits rise, they can become the subject of political negotiation, there may be more obstacles to attracting investment and to innovation. And, as we know, these are areas where Europe needs to continue working given the competition with the United States and China. That is probably the real European dilemma.
Europe needs more private investment to finance the energy transition, digitalization and defense. But it also faces growing social pressure to ensure that the enormous rents derived from these processes do not end up concentrated in a few companies while the costs fall on citizens. As the saying goes, there is no simple answer.
What seems evident is that the concept of “windfall profit” has arrived to stay. Each new crisis —a war, a pandemic, a technological revolution, or even a monetary policy decision— will raise the same question again: should the State limit itself to collecting general taxes or can it claim a share of those profits that would not have existed without circumstances shared by all of society?
Pedro Sánchez has been one of the European leaders who has answered affirmatively with particular clarity. Other governments, even of different political persuasions, have come to similar conclusions. His critics continue warning of risks to investment and legal certainty. And yet, both sides perhaps are discussing an even deeper issue without stating it explicitly.
“One should not ask merely who ‘generates’ the profits, but who has the legitimacy to ‘claim them'”
In European capitalism, more and more strategic sectors operate as a coproduction that combines private initiative with the State’s regulatory role. When public power assumes such a large role in the economy as it does today —funding innovation, protecting markets, guaranteeing infrastructure and absorbing much of the systemic risk—, one should not ask merely who “generates” the profits, but who has the legitimacy to “claim them.” This, probably, will be one of the economic debates that will shape the next decade in Europe.
