TCS Daily

EU Perestroika?

By Hans H.J. Labohm - June 13, 2005 12:00 AM

The recent referendums on the European Constitution in France and the Netherlands mark a historic turning point. The document, actually a constitutional treaty, is now probably moribund, since it requires approval by all 25 EU member states, either by referendum or parliament, in order to take effect. In France 55 percent of the voters rejected the Constitution and in the Netherlands the figure was 62 percent -- results that have left the EU in disarray over what steps to take next. This is all the more remarkable because both countries are among the founding members of the European Union.

So far, nine countries have ratified the constitution: Austria, Hungary, Italy, Germany, Greece, Lithuania, Slovakia, and Slovenia by votes of their parliaments; and Spain by a referendum. The no votes in the Netherlands and France are largely attributed to the result of poor economies, concerns about immigration, EU expansion (especially the possible admission of Turkey), and the loss of national identity. In the Netherlands, there were also fears that, with just 16.4 million people, the country would be subsumed by a superstate headquartered in Brussels and dominated by Germany, France and Britain. Moreover, many Dutch people are still angry that the euro became Europe's currency.

More generally, the outcomes of the referendums have also revealed a serious confidence gap between the citizen and the political classes, of which a vast majority was favor of the Constitution.

It is somewhat puzzling that President Jacques Chirac has concluded that the French "non" should, above all, be explained by the ardent desire of the electorate for more jobs and that he called a special cabinet meeting (on Sunday!) to discuss it. Why the hurry? After all, French unemployment has hovered around 10 percent for some two decades now. It is somewhat difficult to follow the logic that a referendum on the European Constitution should be interpreted as an expression by the French voter of dissatisfaction with the employment situation.

Nevertheless, in their bilateral meeting in the weekend of 4-5 June, Chirac and German Chancellor Gerhard Schröder announced their intention to continue the referendum "process". As far as the French position is concerned it seems to signal the traditional knee-jerk reaction that a major part of the political elite prefers to disregard the wishes of the electorate. Moreover, the wording they used was remarkable. Of course, "process" means a particular course of action intended to achieve a result. But one can hardly avoid the impression that in Eurospeak "process" has acquired another meaning. Experience with other "processes" (such as that of Lisbon, Cardiff, Bonn etc. - some of which have meaning only for those who are intimately acquainted with the intricacies of European decision-making) teaches that it is more often than not synonymous with "lack of progress", if not outright "paralysis". The cancellation of the British referendum on the Constitution seems to be a confirmation that in this particular case the latter qualification applies.

In this context the attempts by Mikhail Gorbachev to modernize the political and economic system in the former Soviet Union may offer interesting parallels. Gorbachev wanted to give a face-lift to the command economy. In other words he wanted to turn it into central planning mark II, preserving the basic tenets of the old version but eliminating its flaws. Catchwords were "glasnost" (openness) and "perestroika" (restructuring). However, it proved to be "kurieren am Symptom", and it could not prevent the collapse of the communist economic model. As a matter of fact, there was no need for Gorbachev to reinvent the wheel, because the diagnosis of what was wrong with the Russian political and economic system had already been made in 1922, by Ludwig von Mises. But censorship had deprived the Russians from access to Mises' brilliant analysis of the basic flaws of the central planning model. (Ironically, much of Mises' papers from his life and work in Vienna, from 1900 to the mid-1930s, were within arm's reach because they were kept in a secret Soviet archive in Moscow.)

It is tempting to compare today's attachment by a majority of the European political elites to the EU's "distinct" social and economic model with Gorbachev's predilection for the communist model. Its sudden collapse may have taken the former Soviet leader by surprise. In the same vein, many European political leaders seem unaware that the "distinct" European model -- viz. an overgenerous nanny state and de facto political power sharing with all kinds of special interest groups, including trade unions, at the expense of the general interest -- might suffer the same fate.

The current quasi-stagnation of the European economy is usually attributed to a temporary dip in the business cycle, after which the economy will recover as it used to do in the past. The business cycle is an inextricable part of mainstream economic thinking. It is perceived as a kind of natural phenomenon, such as ebb and flow. However, over the last few years more optimistic European growth forecasts often had to be adjusted downward. And there are no signs of an early recovery. Could it just be that over the years Europe has accumulated so may structural rigidities that it has finally succeeded where King Canute had failed: in stemming the rising tide? Could it be that, thinking of Milton Friedman's warning in his famous Encounter article in 1976, that we have finally reached the line we were supposed not to cross?

"The longer [Europe] puts off the inevitable reforms - economic, social and political - the harder it will get," wrote Gerard Bekker in The Times of London. "And if it chooses to defer a real response for ever, the greatest civilization in the history of the planet will simply continue to sink beneath the waves of its own economic irrelevance and moral ennui."

And even some European "old hands" share these views. "There was a time when the Bonn-Paris axis moved the EU forward," wrote Frits Bolkestein, the former European Commissioner, in an unusually candid Financial Times op-ed. "The present couple, Mr. Schröder and Mr. Chirac, are a drag. The true heirs of the capitalist revolution now live in Asia. We must meet their challenge. Corporatism is no answer. Nationalism is no answer. Protectionism is no answer. The only way forward is to improve our competitiveness by letting in competition and making markets more flexible. Will the governments of Italy, Germany and France come out in favor? Probably not. 'Old Europe' really does exist, desperately clinging to outmoded economic thinking."

So, more market and less government? Unfortunately however, the in-depth analysis of the motives of the electorate behind the rejection in France and the Netherlands, seems to indicate that this is the last thing they want.

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