An iconoclastic analysis of Europe's problems

By economic historian Martin Hutchinson

The 1957 Treaty of Rome bound the members of the EU’s forerunner to an “ever closer” union. Last week’s political developments and the previous disturbances in the market for Eurozone government bonds suggest that this aim may be a mirage, ever receding and never to be attained. Apart from considering Britain’s own position, it’s worth thinking about where the EU itself may end up.

Contrary to much euroskeptic opinion, the euro itself has not been a disaster. If the EU leadership had been wise enough to forbid Greece from entering the euro on false data (helpfully manipulated by the odious Goldman Sachs) it’s likely no “Eurozone crisis” would ever have occurred. Even had the leadership possessed the simple common sense to expel Greece from the euro in spring 2010, when it had become obvious that Greek public accounts were a tissue of lies and that the Greek people were paid about twice what they should be, it’s likely that no broader crisis would have occurred.

In reality, Ireland’s problem was one purely of obligations deriving from its banking crisis, now well on the way to being solved. Portugal and Spain had got in trouble because of years of dozy socialist governments, both now replaced. Only Italy presented a real problem, because of the debt accumulated in its sloppy socialist deficit years of 1970-96. However Italy until a month ago was competently if eccentrically run, by a government that had retained most of its popular standing, and without the atmosphere of Eurozone crisis brought about by the Greeks would probably have done just fine.

The EU authorities’ attempts to deal with the Eurozone crisis, and their proposed solution to it last week, demonstrates the real problem with EU governance. Far from examining a market-based solution to the crisis, they replaced not one but two democratically elected heads of government, in Greece and Italy. They then proposed a new treaty that, without proper legal basis (because it will not be signed by all 27 EU members) will impose another central bureaucracy on the unfortunate European people, taking yet more decision-making authority from anyone who has been elected by a democratic process.

The EU’s central problem is that its solution to everything is to impose an extra layer of government, generally unaccountable to the European people except in the most theoretical sense. It cannot be necessary to have two EU chiefs, neither of them properly elected: Jose Manuel Barroso, the President of the European Commission and Herman van Rompuy, the President of the European Council. Similarly, the diplomatic bureaucracy set up by High Representative Cathy Ashton duplicates not only the existing bureaucracies of the 27 EU governments, but also an existing EU diplomatic corps.

The downside of this approach were set out in a paper last month, “Economic Performance and Government Size” by none other than the European Central Bank. This finds a statistically significant negative correlation between government size and economic growth. If governments are grouped according to their institutional quality, then the negative correlation between government size and economic growth is greater for governments of low quality. In other words, it does not matter too much whether Scandinavian governments, efficient and non-corrupt, are oversized, but government bloat matters a great deal in places like Italy, Greece and the Balkans.

The negative correlation between government size and economic growth correlates with some less sophisticated analysis I did a few years ago using OECD data, in which I found that slightly over half the variance between annual growth rates was explained by two factors: the size of government and its rate of growth – so that governments that were large and growing rapidly usually plunged their people into a pit of stagnation or even prolonged economic decline. Still, it’s nice to have my work confirmed by so august an institution as the ECB, especially as the ECB’s masters are themselves one of the world’s most intractable oversized bureaucracies.

We can draw two conclusions from the ECB research. First, the EU bureaucracy has especially bad institutional quality, compared to other governments. Its top officials are duplicated three or four times, it has almost no democratic accountability, and its decision-making is both corrupt and ideological, with very little attempt to serve the interests of its citizens. Hence the inexorable growth of EU government can be expected to have an especially large negative effect on European economic performance.

Second, and this is a more positive point, the belief of the EU leadership and most commentators in “stimulus” is cockeyed. The 2009 worldwide burst of government stimulus spending achieved almost nothing other than destabilizing the finances of many world governments; by enlarging government at the expense of the private sector it retarded rather than accelerated growth. Conversely the reversal of stimulus by fiscal tightening will be generally beneficial to economic growth, provided that tightening takes the form of reducing public expenditure. This is why the Irish fiscal tightening appears to be working, as is that in Portugal, while the fiscal tightening in Britain, which so far has taken the form mostly of tax increases, has had a detrimental effect. In Spain, the advent of a center-right government, together with presence of easy fiscal tightening targets in the spending excesses and costly environmental boondoggles of the previous government, should allow fiscal health to be restored fairly easily, given time and freedom from Brussels meddling.

Had Silvio Berlusconi been allowed to remain in power in Italy, fiscal tightening would also have taken the form primarily of reduction in public spending. Under the center-left career bureaucrat Mario Monti, it is taking the form primarily of tax surcharges on millionaires, both on income and on capital, Naturally, the principal effect of these will be capital flight and economic decline. That’s why apart from the hopeless Greece, Italy is now the country in most danger of default.

The bottom line on all this clear. Most of the peoples of Europe genuinely support the European ideal (this is less true in Britain.) However as Europe’s union has grown “ever closer” the Brussels bureaucracy has metastasized, duplicating its functions and becoming ever more Byzantine, corrupt and unaccountable. This in turn has put an ever growing burden on European economies, not simply from the cost of the bureaucrats themselves, but from the wasteful and economically counterproductive programs and regulations they devise. The EU public, asked to pay more and more in taxes to support a bureaucracy that is more and more corrupt and unaccountable and less and less in touch with their wishes, is nearing the point of open rebellion.

The new legislation, which will increase central bureaucratic control over budgets, taxation and fiscal policy and reduce still further the ability of European electorates to remove governments whose policies have failed or are contrary to their wishes, will cause unrest and dissension in most EU countries. Those with referendum provisions will attempt to circumvent those provisions, while those with parliamentary ratification procedures will find ratification of anything substantial very difficult, because of popular opposition. Already two governments, in Greece and Italy, have been removed by the EU bureaucracy and a third, the admirable Radičova government in Slovakia, has been destroyed by the need to fund the Greek bailout. That casualty list will be much longer before meaningful legislation providing for EU budgetary control is in place. Needless to say, it’s unlikely that markets will wait around for the snail-like pace of the EU legislative process, accompanied as it will be by successive government collapses throughout the EU.

In the months and years to come therefore, Britain, far from being isolated, may well find that the European Union, far from drawing “ever closer” is being pulled inexorably apart by the disconnect between an expansive bureaucratic Leviathan and the natural wishes of the European people to live in reasonable local autonomy, without excessive taxation and regulation. The EU was sold to its members as bringing prosperity, but in its current form it brings only economic decline. If we are lucky, Britain will find itself leading a pan-European movement to liberate the peoples of Europe from an EU bureaucracy grown monstrous. If we are not, the monster will win, and Europe will subside into a decline similar to that of the last years of the Soviet Union, with the magnificent economies of Germany and Scandinavia dragged down by endless cross-subsidization of a failure elsewhere that was not inevitable and by a bureaucratic monster whose appetite can never be assuaged.

For Britain, apart from encouraging fissiparous and anti-bureaucrat tendencies elsewhere in the EU, the main objective should be to tiptoe non-confrontationally towards membership of the European Economic Area (currently comprising Norway, Liechtenstein, Iceland and unofficially Switzerland). In such a status, Britain, while remaining in the Single European Market, would be bound by legislation over which it had no influence – but experience has surely by now shown that it has very little influence over EU legislation anyway. However EU control over British domestic institutions would be greatly lessened and the costs of membership reduced. Such a status would also give Britain flexibility. If the remaining countries of the EU succeeded in throwing off the Brussels bureaucracy, Britain would remain a member of an un-bureaucratic, low-cost Single Market. If on the other hand bureaucrat control tightened and the remaining EU become protectionist, impoverished and hostile, Britain could seek other relationships [NAFTA!] and would be not be dragged down by European failure.

The new EU treaty process, and the attempt to assert central fiscal control, has crystallized the position of both Britain and the EU as a whole. We should devoutly wish for its failure, and hope that both Britain and its EU friends and neighbors can gain greater freedom and prosperity thereby.


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