EDITORIAL
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EDITORIAL |
| European Economic Integration: A Conflict of Visions. (Part II) |
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Liberalization Versus Economic Integration Does the evidence support the notion that high-tax, high-benefit economies fare worse than freer economies? A comparison of Europe and the United States sheds light on this question. Over the past two decades, the U.S. economy has grown at an annual rate of 3.2 percent, while the French economy has grown by barely 2 percent per year (Chart 2). Except for a brief spike following reunification in the early 1990s, the German economy has fared even worse.
Unemployment is a good indicator of labor market flexibility, and here, too, the evidence is clear. U.S. unemployment has fallen from 8 percent to 5 percent over the past two decades, while the French and German rates have averaged about 10 percent (Chart 3). Although observers commonly point to the current economic performances of France and Germany as proof of the "Eurosclerosis" that besets Old Europe, it is this sustained difference that suggests something more fundamental is at work here. That fundamental "something" boils down to competitiveness.
The various organizations that evaluate the extent to which countries are economically free uniformly conclude that the United States is freer than all or most European nations. Perhaps the most well known of these evaluations is published jointly by the Fraser Institute and the National Center for Policy Analysis. It ranks the United States as the world's third freest economy, with Germany 22nd and France 44th. Rankings published by the Heritage Foundation and IMD International reach similar conclusions. Why does the U.S. fare so well in these surveys? Simply put, America offers a lower tax burden and a more flexible labor market than France and Germany. The United States has fewer regulations governing the hiring and firing of workers and fewer governing the number of hours an employee can work. This increases the value of workers in the eyes of firms and thereby helps keep unemployment low—and production high. Low tax rates have a similarly laudable effect on the U.S. economy by facilitating business creation and fostering business growth. If it is well understood that inflexible labor markets and high taxes cost jobs and retard growth, why do some EU member states seek to impose them at the European level? The answer may lie in the distributional consequences of this choice. If it's assumed that France and Germany will not abandon the policies that encourage businesses and workers to flee those countries, the consequences of those policies can be mitigated by compelling nearby states that would otherwise attract those disgruntled workers and businesses to adopt the same policies. Businesses and workers for whom the economic climate is particularly oppressive might leave the EU entirely, but that is a much more costly decision than simply slipping from one European state to another. On net, the more highly regulated European economies may gain, even though the EU as a whole loses. Recent evidence points to the same conclusion. Last year the European Union considered a proposal to introduce free trade in services across its member states.[1] With free trade having been a core idea behind the EU's formation, and with the service sector having grown to the point where it now accounts for 70 percent of European output, free trade in services would seem like an almost automatic extension of the ever-closer union that EU policymakers say they seek. Yet the proposal was rejected. In arguing against it, one European head of state decreed that the continent "must not become a free trade zone," a statement consistent with the vision that Europe must achieve economic integration without further economic liberalization. But it is not consistent with the agenda to which a unanimous EU agreed in Lisbon, where Europe committed to having the world's most dynamic and fastest-growing economy by 2010.[2] French Prime Minister Dominique de Villepin opined in late June that European leaders must either lead the charge to protect social Europe or else "we resign ourselves to making our continent a vast free-trade area governed by the rules of competition." Whether to accept or resist the "rules of competition," and the prosperity those rules bring, is indeed the choice Europe now confronts. The Conflict of Visions These facts by no means imply that European integration to date has been a mistake. As mentioned elsewhere in this article, European integration has facilitated a remarkable rise in Europe's standard of living. Nor do they shed light on whether Europe should or should not voluntarily sacrifice economic growth to achieve social goals it deems important. If Europeans wish to be less prosperous in the future so they can be more equal today, economics cannot call the wisdom of that decision into question. But economics can reveal its consequences.
Consider Singapore and the Soviet Union, and the conflict of visions becomes clear. Singapore is generally considered the freest economy on the planet (even more so than the United States), and its economic growth has been consistently strong. Yet the country has no formal structure anchoring it to the world economy beyond a strong business climate and membership in organizations like the World Trade Organization that promote business activity. On the other hand, the Soviet Union is generally considered to have been one of the least free economies, and it exhibited weak economic growth for most of its history. Yet its member states were linked with a high degree of economic integration. The point is that economic integration does not promote economic growth in and of itself. Only economic liberalization can do that. If the 25 members of the EU were to agree to integrate along French or German norms, the fact that the federation had achieved further economic integration would not save its economy from sliding into the night. From an economic perspective, then, the ultimate fate of the European constitution is less important than the competing visions of the European future the ratification debate has exposed. On one side are countries, led by France and Germany, that believe the European economy should become more highly regulated. On the other are countries, led by Britain and the Netherlands, that believe the European economy should become less highly regulated. How can further economic integration simultaneously satisfy these two competing visions? The simple answer is that it can't. As British Prime Minister Tony Blair put it, "Should Europe embrace globalization and try and make it work for us, or should we try and ward it off?" That is the question on which the economic future of the EU now rests.
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