Europe is not working

Citation

Brittan, S. (2002), "Europe is not working", European Business Review, Vol. 14 No. 2. https://doi.org/10.1108/ebr.2002.05414bab.005

Europe is not working

Samuel Brittan

What I have to say below is more like a series of extended notes than a unified thesis. Such loosely related notes have their value – they have always been a feature of the French press. But they are difficult to fit in to the format of UK serious journalism – as distinct from gossip columns concerned with trivia – and I welcome this opportunity to share a few thoughts.

The common thread running through my remarks is that Europe, in the sense of the EU institutions, is not working. At the time of the 1979 election in the UK there was a famous Conservative poster with the slogan "Labour is not working", illustrated by a dole queue. The slogan – is not working – could with more justice apply to the European Union today.

As anything that can be misunderstood will be misunderstood may I stress that I am not in favour of the UK or any other country leaving the EU. Nor do I accept the Conrad Black agenda for the UK to join the North American Free Trade Area, which is quite unfeasible, even if it were desirable.

The movement for European unity has important achievements to its credit. It brought together ancient enemies after the Second World War – an achievement we now take for granted. It has established a single market, which even though incomplete approaches far more nearly a zone of free competition subject to rules against distortion than anything that exists in the wider WTO world. Above all it has extended the principle of the rule of law – something that free market philosophers always emphasise except when they are talking about the European Union. Ideally one would like to have judges less committed to further integration than the present Court seems to be. But it is a good deal better than nothing.

The golden age of European Union was the Monnet period in the late 1940s and early 1950s. There was a silver age in the 1980s during the early period of the Delors presidency. The EU is now passing through a brass or leaden age; and we should look elsewhere for achievement and progress.

Migration policies

My original intention had been to say something about globalisation. But so many forests have been felled for the many tomes that have been written on the subject that I decided not to tackle it, at least directly. Instead I am going to dwell on some of the endemic weaknesses of the European Union, simply to avoid placing too many hopes on it and rely more, as we are doing, on co-operation between governments very often outside the network of EU institutions.

But a shadow of my original intention remains. For the one slightly novel thought I had about globalisation was that there is in fact much less of it than people imagine and much less than existed before the First World War. The missing element is of course the free movement of labour, which was a general feature of the late nineteenth and early twentieth centuries. Today nearly all countries try to impede it with controls, although the end result is often criminality and a brutalisation of millions who cross frontiers illegally. It is all reminiscent of anti-drugs policies where the results are the opposite of those intended.

My own heretical approach would be to abolish the distinction between asylum seekers and economic migrants and to allow people to move where they like. This will increase the incomes of both the recipient and the host countries and raise the earnings of workers in poorer countries, in a way that the most prejudiced critics of globalisation would find difficult to deny.

Migration policy is also one area where there is a prima facie case for a joint EU approach in view of the fact that the Union provides for virtually free movement of labour within its borders. But here one comes against an immediate difficulty. At least two key members of the EU – Germany and Italy – are terrified of further immigration, legal or illegal; and the only common policy to which they would subscribe is one much more restrictive than existing national policies. This may be a short-sighted attitude, as these countries face a serious decline in population, a much higher ratio of dependents to workers in the years to come and an almost impossible burden on their pension systems.

But for the time being we will not get very far with countries that have already experienced severe civil disorder between locals and new arrivals and fear that any further influx will bring calamity.

Their attitude is perhaps understandable in view of recent historical events; but it does mean that that if countries like Britain or Ireland want a more liberal immigration policy they will have to go it alone. Nor is this impossible. I doubt very much if new arrivals in these western islands would make great efforts to move to German cities where they would be greeted with smouldering resentment if they were allowed to find jobs at all.

Enlargement

There is a link between the immigration fears of some EU members and the reluctance and procrastination with which central and eastern European countries are being treated in their membership applications. In 1990 Poland was promised membership by 1995. Later the former German chancellor Helmut Kohl said it would be achieved by 2000. We will in fact be extremely lucky if many of the applicants are members this decade.

According to an informal road map agreed between the EU and the applicant countries, negotiations for entry should be completed by the end of 2002 with the eight most advanced central and eastern European countries plus Cyprus and Malta. On this basis the new members will have completed the process of ratification and actually joined by 2005. (See Global Economics Paper 64, by Goldman Sachs, 18 October 2001.)

There is many a slip between cup and lip. The institutions of the EU, in terms of voting rights, membership of the Commission and so on, were adjusted in the Treaty of Nice at the end of 2000 to make room for new members. But Ireland, of all countries, has rejected the Treaty in a referendum.

It takes a lot to make a country like Ireland, which has been a large past beneficiary from the EU and whose citizens used to be enthusiasts for it – if only as a counter-weight to the UK connection – to come out in such a sceptical direction. A contributory factor was the tactless way in which the EU Commission told the Irish government to increase taxes or cut spending, despite the fact that its growth rate, inflation rate and fiscal position were about the best in the whole Union.

The EU establishment assumes that after the election of 2002, the Irish will conveniently reverse their vote. But it does not do to take too much for granted. Accession could take place by means of a series of individual treaties incorporating institutional changes even without the formal ratification of the Nice Treaty itself; but this would be enormously complex and cumbersome and, in my view, unlikely.

There are also issues of substance that have been conveniently left to the end of negotiations. For instance, as things stand the newcomers will benefit from the cartelised fixing of farm prices by the EU but will not receive direct agricultural grants. And the redistribution of regional funds away from southern Europe has still to be negotiated.

If the informal timetable is to any degree to be followed, nearly all the concessions will have to be made by the newcomers. You might find this a bit hypocritical in view of all the talk about social justice in countries such as France and Germany. The applicant countries have been enjoying a growth rate two or three times as fast as the existing EU members, but they start from a productivity level only half as high.

Even then, so nervous are certain EU governments of enlargement that they are insisting on a seven year transitional period before freedom of movement of labour will apply. The special concessions are not being granted by the older members to the weaker applicants, but on the contrary are being demanded by the richer founders from the poorer new entrants from fear of their own marginal voters.

Little consideration looks like being given to a country like Hungary, which because of the injustices of the post-First World War Treaty of Trianon has many of its nationals living in Romania, Slovakia and Ukraine. The current visa-free entry for ethnic Hungarians will be brought to an end for most of those neighbouring countries.

It would be a rich irony (meaning that I would enjoy the spectacle) if in the end one or two of the applicant countries voted down membership. Opinion is already turning in a pretty sceptical direction in Poland and the Czech Republic.

Economic performance

But how well is the EU doing in economic policy, the one area in which I have a hope of being taken seriously? There is not much ground for optimism. These are, however, not my words, but come from a report group headed by Daniel Gros of the Centre for European Policy Studies in Brussels, Testing the Speed Limits for Europe. This is a group which has always tried to be a sympathetic critic and Gros, himself a German, was prepared in earlier days to cross swords with the Bundesbank on the side of Monetary Union.

But he now focuses on Europe's fundamental problems: the lack of progress in labour market reform and the deceleration in productivity. The European Central Bank (ECB) is given a relatively clean bill of health: the tightness of its policy is much exaggerated by looking at interest rates alone without taking into account the stimulus given by the depreciation of the euro.

Gros makes the usual criticisms of the ECB's communication strategy. But I doubt if this would be much improved by his proposal for jettisoning the money supply pillar of its policy, however difficult that pillar might be to interpret in practice. The British Conservative governments of the 1980s would have had a better press if they had muddled through with monetary targets for longer.

The report goes into some detail into the lack of progress in New Economy applications. Even allowing for the bubble element in the recent US growth spurt, overall productivity growth in the five years 1995-2000 turned down in the EU while it turned up in the USA. But this is not nearly as big a worry as the lack of opportunity of people in much of Europe to contribute their productive efforts to the general standard of living, because it does not suit producer interests, or so-called social partners, to allow them to do so.

The heart of the criticism is that so little has been done to fulfil the goal of increasing employment rates from 64 per cent to 70 per cent in line with the Lisbon target formulated last year. Until a few months ago it looked as if employment was at long last improving throughout the EU. It says something for the prescience of the authors that, writing well before the extent of the current international slowdown became clear, and long before the shock of 11 September, they recognised that the apparent earlier improvement was mostly due to cyclical forces and unlikely to have much enduring impact.

There have been some gains from opening a second tier of temporary jobs, which on average pay 10 per cent less and which have therefore provided some employment opportunities. But as the authors observe this cannot be a substitute for fundamental reforms across the entire spectrum of regulations that affect the cost of employing labour and the incentives to accept a job. The main areas that need to be addressed concern the cost of firing, the duration of employment benefits and the regulation of collective bargaining. Successful policies will need to lower taxes on labour, reform collective bargaining (shorthand for reducing the union veto), cut the duration of unemployment benefits and reduce firing costs for insiders on regular contract.

But unlike the Brussels authors I do not find any of this surprising. Structural economic policy is a matter for national governments. The more liberal minded EU leaders such as Tony Blair and Jose Maria Aznar might feel satisfaction from drawing up high sounding principles on which their officials can work, but without any prospect of follow-up. It is difficult enough to get EU action in those areas such as trade or agricultural policy where the Union is the principal actor without investing false hopes in areas where it has no competence. Indeed the more important task is to make sure that the Brussels institutions have as little influence as possible over labour market policies and that the potentially job destroying so-called Social Charter remains as nearly a dead letter as possible.

Arms control

Let me take advantage of the informality of the occasion to move to a different example. I was at a private study meeting to focus on some of the issues raised by Paul Ingram's excellent booklet The Subsidy Trap published by the Oxford Research Group. One of its conclusions was that very large sums, amounting to over £3bn per annum, could be saved if the UK were to pursue wholeheartedly the international division of labour and either buy its arms off the shelf, or if there were a European Union arms agency. Either of these would be more sensible than the present attempt at partial self-sufficiency based on an outdated fear of the UK having to go it alone in some great war. The savings might be even greater if the UK has to step up its military budget as part of the war against murderous fundamentalism.

But there was a subtle difference even among those whom I would call our own side – that is those who wanted the UK government to reduce its subsidy for the domestic arms industry. This was between those of us who placed more hope on the European approach and those who favoured the more purely free trade buying-off-the-shelf. Fortunately the official establishment was too preoccupied with supporting the arms industry to exploit this potential difference among us.

A few years ago I might have been in a dilemma about which course to go for. But by now, I had none. A European arms agency would take so long to establish and would be so full of exemptions and distortions to protect national industries that it might take a very long time – if ever – to fulfil the hopes raised. On the other hand buying off the shelf could be done relatively quickly and without bargaining with French, German, or Italian protectionists.

And while we are on the foreign affairs and military side, may I say that the kindest remark I have heard about the Rapid Reaction European Defence Force is that its very title is a contradiction in terms.

Weaknesses of confederation

The formal weakness of the EU is that it is neither a league of nation states (Europe des Patries), nor a federation with its own government like the USA. It is that hybrid properly known as a confederation.

There is no agreed definition of this animal. The guiding principle is that separate national governments remain, but that they agree that certain decisions will be taken in concert, whether unanimously or by some agreed majority rule, with or without some central staff back-up. The possibilities of delay, obstruction, log-rolling, pork-barrelling and going at the pace of the slowest are all too obvious.

Historical precedents are not very hopeful. The leading example is probably the Holy Roman Empire, which was said to be neither holy, nor Roman nor an empire. About the only matter on which members could agree – and even then after much bickering and delay – was the election at Mainz of a titular Holy Roman emperor whose effective power did not run beyond the Hapsburg lands.

Its equally ineffective successor was the nineteenth century German Confederation which again achieved little beyond the establishment of a customs union (or Zollverein) to the accompaniment of many complaints – which have a familiar ring – about the absence of a true political dimension. German unification, when it came, was by blood and iron from Bismarck's Prussia.

The American Confederation lasted from the end of the war with Britain to the coming into force of the modern US Constitution in 1789. Because it was so ineffective its members decided with varying degrees of enthusiasm to establish the present federal government, which was originally supposed to have a minimum of centralised power with decisions in cases of doubt to remain with the individual states.

Need I labour the point that there is not the degree of common background and heritage or indeed common language in Europe today, which enabled the American Confederation to transform itself into the USA?

A radical reform project

An attractive blueprint for reform, Europe Simple, Europe Strong, by Frank Vibert, has recently been published by the European Policy Forum in conjunction with Polity. Vibert is committed to the European project, but is deeply critical of existing institutions and would like to make a fresh start.

He would like the EU to abandon any attempt to establish, or make itself the guardian of, the traditional welfare state. He argues that taxation and redistribution of incomes has already hit its limits in most European countries and would quickly run into the buffers if tried on an EU scale.

Vibert is particularly wary of the new kind of so-called social rights. Traditional human rights, such as freedom of speech, freedom of the person and the ban on cruel and unjust punishments can be applied across the Union and be made a condition of membership (Turkey beware!). The newer so-called social rights are claims on the public purse which are likely to provoke ferocious clashes between recipients who want more and taxpayers who believe that they are already paying too much. Pushed too far, a social Europe could produce just that nationalist backlash from groups who claim they are not getting their fair share of the cake.

Vibert argues: The Union needs no revenue or taxing powers of its own. It will need only an administrative budget provided by the member states as well as provision that allows member states to make payments for common purposes such as policing and cross-border co-operation.

He would like to put rule making and the regulatory role of government at the centre of Brussels activities. But even here he wants radical change. For already the Union has compounded the problem of excessive domestic regulation by attempting to regulate in detail itself and exclude alternative standards. He would like to see general rules to provide a framework under which national local governments would develop their own standards in competition with each other. He talks about the McDonald standard. Presumably he has in mind the policy of McDonalds and other food and restaurant chains of laying down minimum standards and conditions, but then allowing the individual franchise holders to develop their own methods.

When it comes to the minimum necessary Continent-wide rules, the present subjective/objective judgments should be replaced by the presumption that the EU will not act unless it can demonstrate the public benefit of rules which reach across the union.

The model is clearly that of the European single market where countries continue to make their own rules about standards, and companies choose which of the competing systems they prefer.

Two opposite dangers are often stressed. The first is the California effect. Because automobile manufacturers have to meet higher environmental standards than imposed federally, many buyers will prefer to have their vehicles tested under California jurisdiction. The opposite fear is based on the better known Delaware effect under which corporations from all parts of the USA tend to register in Delaware because the costs of incorporation are believed to be lower.

This is what Eurocrats call a race to the bottom but, as Vibert explains, Delaware's achievement is not that simple. Its initial advantage was an historical accident but its success in maintaining its position involves substantial investment. Corporations registered there are making use of the state's administrative expertise, a body of corporate case law and judicial expertise related to that law.

Vibert is deliberately provocative when he says that the present treaties – which were a product of post-Second World War circumstances – should be torn up and replaced by a new system. The new framework should remove all references to harmonisation as an objective and specifically allow for co-existing and the competing rules.

Before you dismiss this sentiment as academic rabble-rousing listen to the explanation: present treaties are unintelligible and will become even less comprehensible when all the adjustments are made to accommodate new members and a total of over 30 states.

You do not have to tell me that there is a zero chance of anything like these proposals being considered at the intergovernmental conference planned in 2004 to discuss the constitution of the enlarged European Union. The time for such radical reform will come either after enlargement has shown that the present structure is unworkable, or before that if the enlargement process fails in part or as a whole and there is a threat of breakdown of the whole system.