TCS Daily

The Blob?

By Kevin Hassett - July 10, 2002 12:00 AM

In the old horror movie "The Blob" a gelatinous mass of goo expands to enormous size consuming everything in its path. For many Americans, the Blob provides an effective conceptual model of the European Union. To them, it is a nondemocratic governmental body that is seeping into every crack and crevice of international economic life. Many Europeans, however, have a much rosier view of the impact of the EU.

Who is right? Important recent research by an Italian born Harvard professor and two colleagues at the European Central Bank suggests that there may be something to both views.

In an important recent paper, Alberto Alesina, Ignazio Angeloni and Ludger Schuknecht apply the economic theory of community formation to the EU. They subsequently investigate the extent to which the EU is focusing its activities in the proper areas.

Economists have studied the theory of community formation for decades. Contrary to extreme conservative thinking, there are often good reasons for centralization. If a certain type of service or good is most efficiently provided by a collective of smaller communities, than it makes great sense for a larger community to form. The United States troops in Afghanistan, for example, are doing just as good a job protecting the interests of those in Ohio as they are the interests of those in North Dakota. Why shouldn't the states all pitch in to some federal body that provides for defense to all?

Such logic suggests that there are likely very good reasons for Europeans to gather together and think carefully about the benefits of coordination. There is the potential for enormous gains from the community. Indeed, a number of significant victories have already been won. The Euro has certainly lowered transaction costs for operating in the community, and provided a stable currency for weaker countries to rely on. Trade is mostly free between European nations, and the benefits of free trade are indisputable.

The decision to enter, however, is hardly a no-brainer. The problem really is a classic one of community formation. On the one hand, an individual might feel eager to join a community that provides important public services such as schools, roads and fire protection, but on the other hand, he is likely fearful that after he enters the community, new regulations and standards that he does not desire will be forced upon him. (Such an event just occurred in my own life, where our neighborhood pool decided to adopt a new regulation prohibiting the use of baby strollers in the pool area, making a trip to the pool with my infant quite a bit more complicated.) Each potential entrant must weigh the benefits of collectivizing those services that should be collectivized against the costs of creating an organization that may rapidly become powerful enough to regulate whatever it wants to.

In the case of the EU, a new entrant might desire to have access to the large and relatively frictionless common market, but be wary of having EU regulations festoon their own industries. That entrant must judge, how bad will it get after I join?

One good sign for the EU is that nations are certainly lining up to join. This suggests that real economic benefits available from clever cooperation are being provided. But are the costs of membership climbing as well?

Professor Alesina and his coauthors present evidence suggesting that a Blob is forming. Their evidence suggests this in two ways. First, the raw numbers of new regulations introduced by the EU are climbing at a striking rate. Between 1996 and 2000, for example, the number of legislative acts and court rulings increased nearly seven fold since the early 1970s, with a typical year providing European nations with 2000 new regulations. Such a dramatic increase is troubling, because an efficient community usually has much rule making to engage in at the beginning of its life. The fact that the community is writing regulations at a faster pace than it did as it was first formed is astonishing.

It is possible, however, that all of these new regulations could be sensible. After all, if a collection of countries with differing automotive exhaust regulations decide to coordinate so that autos made in each country can be sold in each country, the EU is the natural place for such coordination to occur. Alesina et al. then set out to explore the extent to which these new regulations pertained to areas that were logically the domain of a central governing body.

Here their findings are even more troubling. The EU appears to be increasing its influence in many areas that logically should not be centralized. The most dramatic of these is coordination of citizen and social protection (crime, regional aid, unemployment policies), but there are many other examples as well.

So at the present, the EU can be thought of as a Blob with some attractive characteristics, but it is growing nonetheless. Whether it ultimately consumes everything is up to its citizens.



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