TCS Daily

The Constitution Europe Needs

By Daniel J. Mitchell - April 8, 2004 12:00 AM

Last month, representatives from Eastern European nations -- primarily EU accession countries -- met in Bratislava to discuss economic growth issues. The conference on "Economic Reforms for Europe" was sponsored by Slovakia's Institute for Economic and Social Reforms and featured high-level government officials -- including six finance ministers -- as well as leaders from the private sector and nongovernmental organizations.

The conference covered issues such as tax policy and pension reform, areas where Eastern European nations have made impressive strides. But perhaps the most noteworthy feature was the mindset of the participants. Even though many of the accession countries are relatively poor, there was no clamoring for "structural adjustment funds" from Brussels or other special handouts. Instead, the Eastern Europeans merely wanted a chance to compete in the EU's internal market.

This refreshing attitude is confirmed by the issuance of a "Declaration on future economic reform in Europe." Signed by representatives of nongovernmental organizations in Eastern Europe, this Declaration outlines the views of the reform community and it focuses on principles rather than specific policy recommendations.

Unlike the current draft of the European Constitution, the two-page Bratislava Declaration is very straightforward. It lists key guidelines for a fair and prosperous society. These guidelines are divided into three broad categories -- trust, competitiveness, and redistribution.

The "trust" section begins with the simple statement that an "Infrastructure of values supports long-term economic growth more than roads, pipelines and wires," and is followed by two bullets. First, it makes the point that breaking rules undermines trust and that the European Union should only have rules if they are to be followed. The Declaration cites the specific example of the so-called Stability and Growth Pact (under which nations pledge to keep budget deficits below 3 percent of economic output), a rule that has been flouted by Germany and France. The language does not say the Pact is good or bad. Instead, it simply notes that the rule should only exist if it is to be followed. Interestingly, the signers even state that they are willing to forego subsidies to their own countries if that is the price of having nations like France and Germany obey the rules.

The second point in the "trust" section is that language should be clear so that citizens understand the goals and policies of lawmakers. The Declaration notes that bureaucrats in Brussels frequently talk about better economic performance and correctly states that this goal is meaningless without accompanying language specifying how it is to be achieved. Does it mean more subsidies to prop up European companies? Or does it mean reducing the size of government? The Declaration does not highlight any examples, but the "Lisbon goals" (to make the EU the world's most competitive economy by 2010) would be a good example of vacuous language. European politicians frequently talk about meeting the Lisbon goals, but in the absence of specific policies to boost growth, this is nothing but empty rhetoric.

The "competitiveness" section focuses on "decreasing barriers to competition" and has four points. First, it notes that unfinished integration inside the EU is reducing prosperity and cites agricultural subsidies as an example. Second, it states that regulations should be subject to cost-benefit analysis to ensure that they improve overall conditions, particularly in a competitive global economy.

The third point is that governments should re-assess the definition of public goods. More specifically, the Declaration urges policy makers to consider whether there is a better way -- presumably the private sector -- to provide things like education and retirement. Finally, the fourth point is that the EU should be open to external competition, meaning that the benefits of competition in the internal market should be matched by the benefits of competition in the global market.

The final section is on "redistribution," and this portion of the Declaration explains that "globalization is redefining the optimal level of redistribution." The first bullet in this section explains that excessive transfers simultaneously undermine incentives to produce for those with higher income and undermine incentives to work for those with low incomes. The second point notes that the welfare state boosts the power of special interests because of the inevitable tendency of different constituencies to seek benefits when government has control over more of society's resources.

The Bratislava Declaration is an impressive document. It may not have any practical impact on decision-making in Brussels, but it demonstrates that there is a fundamentally different attitude in Eastern Europe. The non-governmental organizations there understand that capitalism is the key to growth, and many of the political leaders, such as Finance Minister Ivan Miklos of Slovakia, are pursuing dramatic free-market reforms.

In less than one month -- on May 1 -- the European Union will jump from 15 nations to 25 nations. At first glance, this does not seem that significant, especially since the 10 accession nations will add only 5 percent to the EU's GDP. But the real impact of EU enlargement may be to tip the scales away from the dying welfare states of Old Europe.

But this will require a concerted effort. Existing EU welfare states already are seeking to undermine competition from the east. The prime ministers of both Germany and Sweden, for instance, have recently threatened accession countries because their tax rates are "too low" and there are renewed calls for tax harmonization. Eastern European nations need to block these statist proposals, using the power of national veto (to the extent that this right is not stripped away be the new EU constitution) and building coalitions with more reasonable incumbent members like Ireland and Luxembourg.

Advocates of economic liberalization generally have been pessimistic about Europe's future, but EU enlargement may be the secret weapon in the battle against the welfare state. Friedrich Hayek doubtlessly will smile from above if free market reform is an unintended consequence of an expanded EU.


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