TCS Daily

Economic Life Support

By Sally McNamara - March 6, 2006 12:00 AM

Just before assuming the presidency of the European Union in summer 2005, British Prime Minister Tony Blair delivered a stunning speech before the European Parliament, telling Europe that it must change or fail. In a stinging speech, he said,

...tell me: what type of social model is it that has 20 million unemployed in Europe, productivity rates falling behind those of the USA; that is allowing more science graduates to be produced by India than by Europe...The purpose of our social model should be to enhance our ability to compete.

For most observers, Blair's speech was seen as a direct challenge to finally undertake the difficult reforms that Europe has been struggling with - high taxes, over-regulation, structural unemployment, extensive welfare states, agricultural subsidies, lack of competitiveness, and lack of growth. As part of facing up to that challenge, a $600 million "globalization fund" has been proposed to compensate workers who lose their jobs under pressure of competition from countries such as China and India.

Since then, little has been done to enhance Europe's competitiveness, and the Lisbon Agenda is almost totally lifeless (Lisbon proposed to make Europe the most competitive, dynamic, knowledge-based economy in world by 2010). However, with relative speed and much vigor, the European Commission has presented details of its new Globalization Adjustment Fund, which will give an average of $10,500 each to approximately 50,000 workers a year who lose their jobs because of competition. Funny how subsidies are proposed a lot quicker than reform.

The very concept of a ring-fenced "compensation" fund is economically illiterate for Europe's struggling economies, because it is not tied to education, research and development, and the other preconditions necessary for the creation of job growth. The picture looks even more confusing when you consider the hostility of the French and Germans to the so-called "Polish plumber" - the mythical Eastern European who would steal jobs after EU enlargement. What about compensation when a member state loses jobs because of competition from a neighboring member state? With corporate tax rates ranging from single figures to nearly 50 percent within the EU25, competition among EU member states may prove more dangerous than China or India.

In fact, the Commission has been very honest insofar as the intentions behind this fund aren't economic but a battle for the hearts and minds of Europe's citizenry. At a press conference launching the proposal, President José Manuel Barroso said, "We want to show the European Union cares." The Commission is battling with itself about how to bring back to life the draft European Constitution, devastatingly rejected by French and Dutch voters last summer. This fund is seen as a way to offset the (apparent) fears that French "No" voters showed to the corporatist elements of the Constitution. For the EU, the added value of this fund is not about compensating the unemployed; its value will be counted in "Yes" votes.

Neither has it occurred to the Commission that globalization might actually have benefits, rather than costs. The United States has faced the same economic pressures as the rest of the world, and its tax-cutting, low-regulating, high-tech investment strategies have thus reaped the rewards of global growth. It is easier to get fired in the United States, but it is also a lot easier to find another job relatively quickly.

And this economic mobility has seen unprecedented social mobility in all quarters of society, most notably among immigrants and young people. The social problems that Europe has faced in recent times - with race-riots in France and uproar in Denmark - is largely down to economic problems; it is impossible to integrate immigrants into a society that does not have any jobs for them. Europe needs a giant dose of entrepreneurship, innovation and dynamism, not protectionism. They should look jealously to the U.S. model, not critically.

It is also highly questionable whether there is a legal basis for the EU to undertake this type of activity, since social security is exclusively a member state competence. European Employment Commissioner Vladimír Špidla (perhaps we should call him unemployment commissioner) said, "This fund is about people. As the EU takes external trade decisions, it is logical that it takes ensure workers who lose their jobs due to such trade changes are neither forgotten nor ignored." Apart from being somewhat legally suspicious, and even more worrisome considering the EU's lack of ability to get its accounts signed off by its own Court of Auditors for the past decade, it apparently has not occurred to Spidla that creating more jobs might be a better answer.

It is doubtful how effective this fund will be in mitigating the negative effects that Europe is experiencing as a result of globalization; as British MEP Roger Helmer said, "EU cost-benefit analyses are done on the basis of benefits assumed and costs ignored." It is precisely because of its rigid, inflexible, inward-looking economy that Europe is reaping the negatives of global growth rather than the benefits. The globalization fund represents yet another life support for Europe's stagnant and failing economies, rather than the wake-up call that is really needed.

The author is the International Relations Project Director, American Legislative Exchange Council.


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