EU Treaty Threatens Economic Freedom

By Roger Bootle
MOnday, October 22, 2007
London Telegraph

So he did what we all suspected he would. Gordon Brown agreed to the EU "reform treaty" without granting a referendum. This is, of course, a political matter, par excellence, on which a humble economist can have little to say. But there are economic aspects to our European future to which this matter most definitely relates.

Anyone who has observed the EU process over the years is bound to recognise that things to do with the EU are not quite what they seem.

Constitutional and legal niceties are observed at first but can then be over-ridden in pursuit of the ultimate goal, which is the creation of a European state, whether super or otherwise.

The Danes said no in their referendum on Maastricht but were then asked the question again. Where was it written that they should be compelled to go on voting until they said "yes"?

Why was Italy admitted to the euro even though its debt and deficits were well above the Maastricht reference criteria?

So forget the idea that this treaty is minor and forget the protection afforded by the so-called "red lines". That protection may well not survive the first onslaught in the European courts.

What matters is the political will across Europe to forge a European state. As many a European politician has been honest enough to admit, this treaty bears a striking resemblance to the recently abandoned Constitution and as such represents another major step along the road to surrendering national sovereignty altogether.

If that result were to emerge, quite apart from the political implications, it would have major economic consequences.

In particular, the danger is that, bit by bit, the considerable economic freedoms we in the UK still enjoy – to regulate the labour market, set taxes and set interest rates – would be eroded and we, along with the rest of the EU, would be governed by a single economic policy.

Mind you, it isn't always the case that throwing in your lot with a larger grouping has adverse economic consequences. It all depends upon who you are – and who is in the larger group with which you are merging.

This is why the Italians, for instance, have by and large been enthusiastic Europeans. Their state hasn't worked and its effective replacement by a more powerful EU offers hope of improvement.

But this is not our position. Why has the UK been a comparative success story over the last 20 years? It is difficult to escape the conclusion that this is because the state relinquished many of the levers of control over economic life, thus allowing a greater role for the market.

In short, because we have experienced pretty good economic government, not least because we have had less of it.

Some of the economic dangers facing Europe arise from the sheer size of the EU.

The world is full of large countries, in terms of both area and population, whose GDP per head, and growth rate, are low. By contrast, there are umpteen examples of small and even micro states which succeed economically.

Why is this?

The prime reason is that small states tend to enjoy good government. Because the countries are small and vulnerable the politicians are forced to recognise the limits to what they can do. With large states the elites can tilt at whatever windmills they like and the coffers will still overflow and they will still survive.

One major exception to this is the US – enormous yet also enormously successful economically. Yet it proves the rule. For its history and ideology have resulted in definite limitations on the powers of the state. To its very core it has been a market economy.

A second cause for worry is the recent history of the state's role in the European economy and the prevailing ideology about the role of the market among the EU's elites. The key issue is appreciating that governments do not create economic growth – but they can stop it. It is difficult indeed to imagine a government founding Microsoft, for instance.

But, as the German president once said, if it had been founded in Germany, in a garage as it was in America, it would have been promptly closed down by the health and safety inspectors.

Yet it must be easy to believe, as you swan from one gilded cocktail party to the next, that you, the barons of the eurocracy, are creating the prosperity Europe enjoys. After all, didn't you just sign a treaty concerning the promotion of workers' interests, the extension of pension rights, increased maternity pay, etc etc. Without these goodies bestowed by the Euro great and the good where would the poor European citizen be?

The one really big thing to get right is the labour market. People will naturally want to work to improve their lot. You actually have to try hard to stop them, but this is what some governments manage to achieve – especially in Europe.

In the economic sphere most European member states (as opposed to countries) are a massive failure:

they have stopped their labour markets from functioning effectively, presided over huge public debts which threaten to become unsustainable under the weight of unfunded pension policies, and are in thrall to aggressive, depredatory trade unions, as evidenced in France last week.

Out of this mishmash of incompetence can we envisage that what will emerge is an enlightened economic government of all Europe?

All the signs are that the EU elite has not the slightest conception of how wealth is generated, as opposed to taxed and redistributed.

Essentially the EU is living off capital – the history, the culture and the national institutions which history has bequeathed it. But it is laying down nothing new of value.

The EU is likely to continue to be an economic failure for years to come.

This is the institutional structure to which the European elites are so keen to grant increased power and to which we have chosen to become more closely attached politically – defended, of course, by our (thin) red lines.

Why? It's not easy to give a single, clear, logical answer.

Rather, several candidates suggest themselves:

because the euro-glitterati don't understand economics, but do understand their own self-interest; because they are slaves to some defunct economist or other; because they don't think the economics matter compared with the politics; because they think big is better.

I have come to believe it is best to think of the elites dragging us into ever closer union as like the soldiers in Tolstoy's War and Peace, drawn to march across Europe by some inexorable force, beyond thought or logic.

For our future we must hope, against all the evidence, they will learn their lesson – or that we will learn ours, before it is too late.