TCS Daily

The Shock of the New

By Johnny Munkhammar - June 20, 2005 12:00 AM

EU leaders met in Brussels not only during a crisis for the Union, but also at the crest of the biggest protectionist wave Europe has seen for decades. This is a problem that once again threatens the opportunities for Europe. As in the past, it is based on false assumptions and its principles would be extremely harmful if they were to become reality.

The no vote in France was more of a rejection of the single European market than the proposed Constitution. The voters seemed to want to stop companies from moving out of Western Europe and stop people from moving in. But free mobility, a cornerstone of the global economy, is the promise of a better future -- not a threat.

There is a protectionist wave in the US as well, especially in the Democratic Party, but it is stronger in Western Europe. And this is largely due to the so-called European Social Model. The Model is often regarded as sacred and the desire to keep it is strong. But it strengthens protectionism; the system creates its own support. Companies are seen as milk-cows for the state. They must pay their taxes, obey and accept criticism from politicians. When they decide to relocate, the reaction is even more criticism and threats of more regulations.

A big state can't create anything. It can only redistribute what others create. The larger the state, the more resources in society that go to non-creative activities. We get used to demanding money from others instead of working. Of course every society can have a growing economy, more jobs and companies and thus an increasing living standard. But the European Social Model prevents that through the imposition of high taxes and regulations that hinder creative forces.

The labor market is one issue. In Sweden, protectionist trade unions stop companies from the new EU member states from offering their services. And the government supports this. In Britain and France, there is talk of Polish plumbers taking jobs. In Sweden, the most famous example is Latvian construction workers. An interesting case took place in Waxholm, a small society north of Stockholm. The town council did a tender for the construction of a new school and a Latvian company won.

They started building, but were soon under blockade from the Swedish construction worker's union, Byggnads. The Latvian company had not signed a collective deal with Byggnads and now their employees were subjected to shouts of "go home" at the workplace. The case is now in the EU Court of Justice because it's a matter of whether a union can demand non-members to sign their deal. It is one sign of battles to come. Swedish trade unions, traditionally free-trade supporters, are turning protectionist.

Many in Europe seem to have an irrational fear of jobs moving out and foreigners moving in. They consider it as a doomsday scenario. In a recent opinion poll, Swedes put this as their main fear of the future. They believe that the alternative to lower wages and unemployment is protectionism. But isn't there something wrong with the idea that Europe has reached the end of history? That we should freeze everything as it is and forever have the same companies and the same jobs as we have today?

About 150 years ago, 80 percent of the Swedish people worked in agriculture. Today, it is less than 3 percent and they actually produce more. But the other 77 percent did not become unemployed. They actually got better jobs than before, in the expanding industry. Today, the average Swede is more than ten times wealthier than at that time. Would anyone have wanted to stop development then? They didn't know then either what was going to replace agriculture and there was fear -- and protectionism.

In recent decades, the manufacturing industry has been decreasing its number of employees in Western Europe. What emerges instead is the service sector. About 70 percent of the workforce in the EU-15 is employed in the service sector. In Ireland, for example, employment in manufacturing industry has decreased by 10 percent since 2000. But total employment has risen by 10 percent. For every job lost, two new ones have been created. And as before, the new jobs are better. Wages are higher. And the larger the share of services is in the economy, the higher is GDP per capita and the unemployment is lower.

We have every reason to welcome the new. That means the old must disappear. If we lock up productive resources in the old, the new will not expand. This is always a painful process in the short run for those who are affected. What is a metal worker going to do when his job vanishes - either leaves the country or is taken by a foreigner? We still don't have a society that makes gaining new competence and change profitable enough. People in Western Europe don't have enough opportunities. If we stopped focusing on how to protect the old, we could think more about that.

We already live with one horrific example of where we end up if we try to keep the old: Europe's Common Agricultural Policy. Enormous sums of the taxpayer money go to farmers -- close to half the EU budget. Consumer prices are higher, poor countries are kept from exporting and resources are locked up. The plain truth is that if the European farmers can't produce without tax subsidies, there should be no farmers in Europe, since consumers would obviously choose such products from other countries.

The same goes for traditional manufacturing. Today, about 18 percent of the Swedish work-force is employed in industry, and if the present trend continues, the share will be some 10-12 percent in ten years' time. Industry is the agriculture of our time. And that is the point; if we lose plumbing and construction jobs, we should lose them. If we are not competitive in that field, we should not do such work. Those jobs should disappear and we must do something else. Not even the worst protectionists could possibly imagine having a Common Industry Policy.

Believing in the future and learning from history is the opposite of protectionism. We should do everything to welcome the new -- and say farewell to the old. With a free economy, there are many ways to smooth the transition to a better future.

The author is director of Timbro, a Swedish Free-Market Institute.


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