TCS Daily

Europe's Patriot Games

By Johnny Munkhammar - April 6, 2006 12:00 AM

For the last several weeks, French cities have seen their biggest demonstrations in decades as millions of mainly young people take to the streets. This uprising against (a very minor) French labor market reform is happening at the same time that the European single market is under unprecedented attack. The French call their latest protectionist policies "economic patriotism".

This despite the empirical, theoretical and historical evidence that protectionism makes everyone losers. Under protectionist policies, prices rise, investments are stopped, businesses become less competitive, the supply of goods and services shrinks, growth decreases, and global poverty increases.

French Prime Minister Dominique de Villepin has launched a number of protectionist policies. Barriers to global trade, subsidies to agriculture and industry, and stopping foreigners from investing in French companies are just a few examples. But he is by no means alone. German Finance Minister Peer Steinbrück has urged new EU member states to raise taxes, since their currently low rates have "nothing to do with fair tax competition", he says. Steinbrück obviously wants to force new EU members to get rid of one of the main reasons for their success. Instead of lifting Germany, he wants to drag others down. Would he be happier if all European countries had the growth and unemployment levels of Germany?

The European Parliament has approved a worthless, watered-down, services directive. They removed sectors that would benefit the most from free trade in services: health care and education. And they removed the important and simplifying principle that allows countries to follow the regulations of their countries of origin. The gains could have been substantial indeed; independent studies point to 600,000 new jobs. Already, some 70 percent of EU GDP comes from services -- why not make it possible for that part of the economy to grow faster?

These are a few -- of far too many -- examples of how the specter of protectionism is haunting Western Europe now more than it has in a long time. Indeed most of Western Europe is in economic trouble. But if there are problems, why can't we seem to fix them? If you can't compete very well, then why not get more competitive instead of trying to shut out the world or forcing others to become less competitive? Or continuing the same policies that have created the problems?

A few years ago, Romano Prodi, then the president of the European Commission, said that companies now had had their fair share and it was time for "social Europe". As if any social progress can ever take place without improvements for companies and working people, thus creating wealth and new jobs. Since then, attempts to finalize the single market - in services, for example - have been stopped and restrictions on the free mobility for labor were introduced.

The single market is a great achievement. Its positive economic impact on Europe is hard to overestimate in terms of competitiveness, growth, wage increases and new jobs. Without the single market, the economic development of Western Europe during the last ten years would have been far worse, no doubt.

It would be easy to assume that Europe's single market will last forever. But what if that these attacks continue -- not only subsidies to national companies, blocked mergers, restrictions on labor - but also other means of national "protection" from competition. Tariffs, quotas, public monopolies - plenty of other bad policies could return. The street protests in Paris might just be the start.

Ironically, the Western European economy is actually reviving slightly; the business cycle is fairly good. If we have such populist and protectionist policies now and such resistance against any market-oriented reforms, what happens at the next recession? The single market makes us all long-term winners, but in Frenchman Frédéric Bastiat's words, that is what you don't see. What you see are the direct effects on old jobs disappearing.

Some of the so-called "economic patriots" say the current Western European Social Model should be defended because at least it is our Model - it is European. The free market is perceived as non-European; foreign and therefore bad. And yes, Karl Marx was European. But so were many of history's greatest proponents of free markets as opposed to a big state and protectionism. Take Scotsman Adam Smith, Swede Anders Chydenius, Austrian Friedrich Hayek or indeed Bastiat again. Or von Mises and Erhard.

Surely many of the fundamental free-market ideas have a European origin. And in Eastern and Central Europe, they are to a large extent reality. But surely, it is a shame that Western Europe has abandoned its great economic heritage. Those who call themselves economic "patriots" while pursuing protectionism and a big state should realize that they are betraying European ideals.

The author is Program Director of the Swedish think tank Timbro


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