The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

PART 6

The Future of Europe

THE ECONOMIC CONSEQUENCES OF A UNITED STATES OF EUROPE*

The grandfathers and the fathers of the current generation of Europeans helped bring about two catastrophic wars in the last century. Even the two decades of peace in between (1919-1939) were not idyllic, graced as they were with the rise to power of Nazism (1933-1945) and the “real existing” socialism of the Soviet Union (1917-1990). The sons were forever marked by these dark memories. The sins of the fathers were being visited upon them, and they were determined not to commit the same sins, which, in their turn, would be visited upon their sons. “Never that again!” Much of what is happening in today’s Europe is driven by the subconscious dread of “that” and the will to make sure it does not happen again. It is in wanting to make sure of this that the sons risk committing new kinds of sins.

When in the 1990s the debate was raging in Germany about the adoption of a common European currency “like the dollar,” there was a steady majority against it of just short of two-thirds. The political parties, academia, and the press unleashed a barrage of arguments about the economic benefits of such a move, but the polls remained unpersuaded. The old recipe used to be that when the people do not agree with the government, change the people. Lately, the recipe has been “if they don’t agree, don’t ask them,” and this is what the German government has finally done, adopting the euro with the full complicity of the people’s elected representatives.

The real motive of the political classes was not the putative stimulus to economic growth which a common currency might provide, a stimulus that has in the event proved sadly absent. At the time, Chancellor Kohl was rightly advised that the euro would prove to be a lame device, perhaps even a downright failure, unless the countries using it came under a common economic government “like in America.” Kohl convinced himself that the mechanics of the common currency would eventually force Europe to organize itself as a single federal state, something it would probably never do otherwise. The euro was designed to make another European war forever unthinkable. (That the U.S. dollar did not prevent the American Civil War from taking place was, probably rightly, dismissed as a false analogy.)

The fiasco of the euro and the need to make it work as it was supposed to has led gradually to the participating states coming together, creating an economic supergovernment, soon to be followed by a full-fledged superstate, without anyone taking much notice of what was going on. But important as this creeping shift may be, it is being overtaken by a more rapid and more deliberate series of moves to endow Europe with a collective decision-making mechanism.

What started out as the four-nation Coal and Steel Community in 1952 (inspired by the naive Marxist notion that wars are caused by the need of steel barons to sell cannon and shells) became the six-nation Common Market in 1957 which was in theory to work by the principle of unanimity but which was run essentially by France. As such heavyweights as Britain (1973) and Spain (1986) entered and membership finally expanded to fifteen nations calling themselves the European Union with an executive arm in Brussels and a legislature in Strasbourg, majority rule was introduced to deal with some questions, but countries retained veto rights over what they chose to regard as their vital national interests. On issues where German submissiveness to French leadership persisted, decisions were reached by Franco-German arm-twisting, on other issues they were fudged or deferred. The feeling grew among the political classes that the system was just not viable. The single market was functioning reasonably well in manufactured goods, but in politically charged areas, such as agriculture, fisheries, financial services, and taxes, gridlock was created. Above all, no progress could be made on the supreme goal the believers in a really united Europe had set themselves, namely a common defense and foreign policy.

With the membership rising from fifteen to twenty-five states as of May 2004, and with further candidates crowding at the entrance, the existing makeshift ways of reaching decisions are judged to be hopeless. It occurs to nobody that decisions at supranational level need only be taken if there is a supranational agenda, and it is not a law of nature that there should be one.

This, then, is the great chance to put in place a powerful decision-making body that will do for Europe what the White House and the Congress have done for the USA—the same, only much better. Anxious to banish their fathers’ sins, the sons are getting ready to commit a new type of sin for which future generations may have to pay dearly.

Two more or less rival projects are in the running. One, spearheaded by Romano Prodi, the president of the EU’s Commission in Brussels, seeks to strengthen the Commission, to emancipate it from its present subjection to the member states and to transform it into a real executive branch of government. The Commission’s budget is now barely 1.5 percent of European GDP, and even of that modest percentage two-fifths are preempted by farm subsidies which Brussels would dearly like to but cannot reform. There is clearly a long way to go before Brussels’s spending power and patronage reach Washingtonian proportions, let alone the bite which the budgets of the separate European nation states take out of their respective GDPs. The Brussels executive is now a mere tadpole. For it to grow into a political toad, powers, revenues, and functions will have to migrate from the national capitals to Brussels just as they have migrated from the states to the federal government in the U.S. The central executive can grow not only by capturing money and functions from the states, but also by engaging in exciting new areas of activity which no one has done before—for there are so many useful things a government can find to do! To help achieve all this, this project would enhance the Commission’s legitimacy by rendering it more responsible to the Strasbourg assembly and making its presidency elective rather than appointed as at present.

The other project is more solemn and formal. It is a constitutional convention guided by Valéry Giscard d’Estaing, a former French president who is to Mr. Prodi as a hornet is to a bumblebee. Prodi wants to be an elected president of the Commission; Giscard (who at seventy-eight cannot be faulted for lack of ambition) wants to be the president of a new “United States of Europe.” This new entity, a republic modelled loosely on the United States of America, shall have the power to tax and to harmonize the fiscal policies of the member states. It is to be dedicated to “human rights” and to the fostering of the “European social model,” a code word the great European center-left, allied to the labor unions on one side and the antiglobalization and anti-American opinion-makers on the other, will take for a discreetly friendly nod toward their political and economic agendas.

Acquiring the power to tax directly, instead of depending on the member states’ contributions for its budget, is of course the decisive novelty. If eventually adopted, it will inexorably create a new top layer of government in Europe that will be destined to grow ever denser, ever heavier, as such layers have always done and always will. However, the constitution would also endow the new republic with powers to intervene in the fiscal, welfare, and labor legislation of the member states to prevent them from competing with each other by lowering corporate taxes and contributions to social welfare schemes. This healthy interstate economic rivalry, which goes by the unflattering name of “social dumping,” is a practice which is jeered at by socialists and cheered on by the small but brave band of “neoliberals” because it frustrates the full flowering of the “European social model.” What little tax and regulatory competition exists between the European states at present is what has prevented many European businessmen from throwing up their hands and shutting up shop, tired of rising payroll taxes and burgeoning regulations.

The road to Brussels is paved with good intentions and the framers of these new constitutional arrangements are motivated by the best political correctness one could desire. They are preparing something that will be neither Soviet Russia nor Nazi Germany. In fact, whether knowingly or not, they are creating a new European constitutional arrangement largely as a reaction to these very same horrors. It is such a pity that they do not see the unintended but very probable effects upon the next generation of what they are now creating. In politics and economics, and perhaps elsewhere too, you often avoid doing harm by refraining from doing anything very much or, in the words of the eighteenth-century French liberal Physiocrats, laissez faire, laissez passer. But how will the sons who strive to correct the sins of their fathers learn this important lesson?

A GIANT FREE-TRADE AREA OR A POLITICAL COUNTERWEIGHT TO AMERICA?*

Nearly half a century ago, with the signing of the Treaty of Rome in March 1957, what is now the European Union (EU) started out as the European Economic Community (EEC) with six member states (France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg). The unanimous aim of the founders, held at both the grassroots level and among the political elite, was that a future Franco-German war must never again happen. In the years immediately after the end of the Second World War the approach was gradual, confined to what were regarded, somewhat naively, as the industries which were thought to be the instigators of wars. Thus the European Coal and Steel Community was founded in 1951 by the same six nations which were later to form the EEC. In 1954 a bold attempt was made by the political elites to create a European Defense Community but this ran aground on nationalistic shoals. Advances continued to be made with the formation of the Common Market or EEC in 1957, the purpose of which was to create free trade inside its members’ frontiers but which would be protectionist toward the outside world. Above all, as the price exacted by France for opening its own market to German industry, the EEC saddled itself with the economic monstrosity of the Common Agricultural Policy, whose most wasteful outgrowths are only now beginning to be trimmed.

The original six-nation EEC could not, in the longer run, shut out the rest of Europe and call itself European at the same time. Several countries were strongly pressing for admission. After de Gaulle’s veto of British membership in the EEC, the European Free Trade Association (EFTA) was formed in 1960 by seven nations which had been refused membership in the EEC—the United Kingdom, Denmark, Norway, Sweden, Austria, Switzerland, and Portugal. The EFTA differed from the EEC most notably in the absence in the former of any broader aspirations for political union, which created tensions with the more politically driven EEC. The federalists inside the EEC resented that the outsiders in the EFTA were getting all the benefits of free trade without shouldering the task of building a politically united Europe. Indeed there was a loudly voiced suspicion that some of them, notably the British, were doing their best to sabotage political unity. The upshot was that little by little all the EFTA members bar two entered the EEC. A northern tier came in with Britain, Denmark, Finland, Ireland, and Sweden and a southern one with Austria, Greece, Portugal, and Spain. The southern members and Ireland reaped huge benefits from the so-called structural funds which the EEC siphoned off from its richer members and distributed to the poorer regions to help them catch up with the European average. The richer members, in addition, had to put on the hair shirt of the Common Agricultural Policy. Margaret Thatcher, wholly unimpressed by Mr. Giscard d’Estaing’s browbeating, secured for Britain a balance where the payments Britain made to the EEC nearly matched the benefits it received from Brussels. Germany and the Netherlands ended up as the main paymasters of the EEC budget, and every other country became a net gainer to a greater (Greece, Ireland, Spain) or lesser extent. With occasional crises and much friction, the new fifteen-member European Union has become an established concern, pushed along by the Franco-German alliance.

Then came the breakup of the Soviet bloc in 1989. All the former satellites asked to be admitted to the EU. Their political elites were motivated by the prospect of the structural funds and the charms of rubbing shoulders in the same club with the leaders of the richer Europe. At the grassroots, there was an innocent belief that what Russia could once do with impunity to a Poland, a Czechoslovakia, or a Hungary, it could never again do to a member of the EU. There was much quiet but bitter opposition among the federalists in France and Germany to the admission of ten new members on the grounds that many of them are in fact Trojan horses harboring Anglo-American ideals and purposes. Nevertheless, it was unthinkable to exclude what were practically founder members of the historic Europe, victims of Yalta and of Western connivance in shameless Russian oppression. So seven ex-satellites and Slovenia were admitted in 2004, and southern Cyprus and Malta were slipped in for good measure as well. Romania and Bulgaria were virtually promised admission in 2007—in large part because none of the lead nations of the EU felt like turning the Romanians and the Bulgarians into bitter enemies by opposing their membership, and driving them into the arms of rival EU nations. Thus, as of 2007, there is to be a twenty-seven-member EU speaking twenty-three languages, with some federalists still hoping to turn it into a homogenous, socialist-oriented political entity, while others now believe that this has become a lost cause.

The EU is now committed to start negotiating full membership for Turkey in October 2005. Though virtually assured of an accord, the talks are planned to drag on for ten to fifteen years with the unspoken aim of giving hostile French and German public opinion time to get accustomed to the idea. Turkey, with over 70 million inhabitants compared to the present EU’s 450 million, will be the latter’s most populous member by about 2020. Because of the proposed constitutional treaty introducing weighted majority decision-making, it will be the EU’s politically most influential state. However, it will also be its poorest member by far. Under present rules, it should be receiving agricultural and regional subventions of 30 billion euros, or 20 percent of the total EU budget. By the time Turkish membership is realized, these rules will no doubt be changed, but the economic benefit to the EU is still dubious. Free trade is in the mutual interest of the EU and Turkey, and is a largely accomplished fact. All other aspects of membership are in Turkey’s interest alone. Turkey’s professional classes and its army in particular expect that EU membership will prevent the country from sliding into Islamic excesses.

Throughout the EU the debate is raging about the wisdom of admitting Turkey to the club, even though the lead governments have already made up their minds and, in the case of Germany and France, are ruthlessly overriding public opinion. The main popular argument for Turkey is that if, after decades as an applicant, it were now turned down, the Muslim world would take the refusal as proof that the EU was a Christian cabal and a successor of the Crusaders. This in turn would lead straight to the “clash of cultures” and the “war of civilizations” touted by pop historians and sociologists. It seems to be forgotten that the Turks occupied all the Arab lands from Baghdad and Cairo to Marrakesh from the fifteenth century onward, and in the case of Iraq, Syria, and Jordan, down to 1918. Little love is lost between Turks and Arabs because of old wounds and because the former are regarded as allies of Israel.

The German government is championing Turkish membership with an eye to its own 2.5-million-strong Turkish immigrant population and the votes of its second-generation citizens. The determination of the French government to support Turkey, despite the polls that show 65-68 percent of French people are opposed to its membership, looks very strange. Its hidden mainspring is the craving to make the EU into a political, economic, and military superpower under undisputed French leadership, enabling France to stand up to America as an equal and a counterweight to U.S. “hegemony.” Ever since the 1950s, this design never came anywhere near fruition, causing mounting frustration in Paris. Turkey has a standing army greater than any two of the largest national armies of the EU taken together. Bizarre as the idea may be in reality, the thought of half a million ferocious Turkish soldiers being added to the puny European forces seems to be too tempting to resist.

There is little doubt that hopes of enlisting the Turkish military to serve French design will be disappointed, as were similar hopes in the past. The addition of Turkey will make Europe even more like a free-trade area and even less of a political counterweight.

After Turkey, it will be Ukraine’s turn. After the courage its people have shown in wresting electoral victory from the pro-Russian forces late last year, its entry with another 50 million people into the EU is a strong likelihood, and the dream of a homogenous and united EU capable and willing to act as one force is receding into some very distant future.

After Ukraine, whose turn will it be? A new doctrine is arising in educated opinion, which holds that it is not geography that qualifies a state for EU membership, but “shared values.” On the strength of this doctrine, Europe is in for limitless expansion across North Africa, Central Asia, and the Middle East, because if Turks share European values, who does not share them? An ever-expanding Europe straddling three continents would be politically impotent and probably quite harmless. Economically, it would be a good thing, for the larger a free-trade area is, the more good it can do by trade creation and the less harm by trade diversion.

EUROPEAN CROSSCURRENTS AND THE FEDERALIST DRIFT*

Imagine the following situation: some friends are jogging along together, the pace set to comfort the slowest of them. This, some economists would say, is a possible model of coordination. However, if each person starts to run as hard as he can, with some overtaking others, it seems that a race is taking place. The taker-overs can be styled as aggressors, the taken-overs as victims. The model is one of competition and conflict. Alternatively, it depicts progress of a sort.

A similar situation could be said to exist with the Franco-German “core Europe,” in which French vanity in foreign policy and French fidelity to socialist economics set the direction while German subservience provides the driving force. This is a race for jogging, not sprinting. The embryo welfare state they created around the mid-1970s began to weigh the joggers down. As their pace slowed and as unemployment either side of 10 percent of the labor force became endemic, conviction and electoral necessity have combined to make them add ever more and ever heavier building blocks to the welfare edifice their economy was supposed to carry on its back. The end result was the much vaunted “European social model,” economic stagnation, and the social strife which stagnation nearly always breeds.

Britain, which had set about building a welfare state three decades earlier than continental Europe, gave itself insane labor relations, narrowly skirted bankruptcy, and in 1979 was ripe for the Thatcher revolution. Some of the benefits of the Thatcher reforms are still being felt; unemployment is consistently low and the economy is moving forward, with national wealth per head having decisively outgrown the Franco-German level.

Understandably, the British and half a dozen smaller European countries would rather go on with the race. France and Germany, just as understandably, insist that they must join the jogging party of “core Europe.”

The latest collision of these two deep crosscurrents has shown up on the surface with the renewed Franco-German demand for “tax harmonization” and their attack on “social dumping.”

Corporate tax rates are between 35 and 40 percent in “core Europe.” They are 10 percent in Ireland. In Slovakia the corporate tax rate is 19 percent and so is, with disarming simplicity, every other tax rate from the personal income tax to the value added tax. In the newly joined member states generally, the effective tax rate is well below the nominal one. The German employers’ association has been openly recommending that German companies should relocate eastward to the new member countries of the European Union to benefit from less onerous employment rules, lower corporate and payroll taxes (and has been castigated for its unpatriotic stance by Chancellor Schroeder). France and Germany are now seriously alarmed by the flight of enterprise and capital.

They insist that to avoid “distortion” of the market, both corporate taxes and social insurance charges must be “harmonized” across the Union. By harmonization they mean raising tax rates to the Franco-German level. “Social” charges, in particular, must rise everywhere not only because “social dumping” distorts the market, but more importantly because Europe must “fight inequalities” and live up to the “social model.”

It is ironical that the Brussels Commission is a perhaps even more severe enforcer of antitrust and anticartel rules than the U.S. Justice Department when competition among companies is concerned. The strangling of the General Electric-Honeywell merger and the offensive against Microsoft bore testimony to the sternness of Mario Monti, the competition commissioner. However, the Brussels rule that companies must compete is now to be joined by a new rule that states must not compete. Cartels to fix prices and sales quotas are seen as wicked, while a tax cartel binding states not to undercut each other’s tax rates would be regarded as virtuous, harmonious coordination. Arguably, prices are one thing, tax rates are another. But this does not mean that while prices may differ, tax rates must not. Uniformity of rates does not follow except perhaps if we are already in a full-fledged federal state where equality before the law may, in extremis, be thought to require equal taxation.

The tax controversy is but one example of how national crosscurrents induce a federalist drift. Any national difference that has a cross-border implication affects the operation of the single European market and as such (it is argued) must be moved from national to Union jurisdiction. This upward flow of matters from the state to the Union level has been going on for years and will apparently broaden still more under the new constitution. Since everything has some cross-border implication, however hypothetical or contrived, especially when borders are open, there is no evident limit to the federalist drift. The single-market clause is destined to play the same role in draining power from the states to Brussels as the interstate commerce clause played in draining power to Washington. The European Court of Justice will have to help this process along much as the U.S. Supreme Court has done.

In a recent report commissioned by Brussels, the former French finance minister and front-running socialist presidential candidate Dominique Strauss-Kahn has called for a European tax that would endow the incipient federal government with its own resources. The parallel with the earlier U.S. evolution is obvious enough. (True to form, French president Chirac has gone one better and is calling for a world tax, but that is a story for another day.)

None of this is meant to suggest that every single transfer of power to the center and every case where states are forced to jog along together rather than racing against each other separately is necessarily a bad thing. Trade commissioner Pascal Lamy, though a socialist and a French one to boot, created a sensation last May by offering to abolish all European subsidies on agricultural exports. This was a bold attempt to rescue the stalled Doha Round of trade liberalization bargaining. The attempt will probably fail, if only because the U.S. will not agree to scrapping its own export subsidies, but it is nevertheless a worthy try and may bear fruit after some delay. The Lamy initiative has unleashed the fury of the French farm and commerce ministers and of public opinion which sees it as another move to undermine that sacred pillar of French national interest and “rights,” the Common Agricultural Policy. As the policy engenders idiotic and vicious side effects, undermining it would be the best thing that could happen to it.

However, even if every single part of the dismantling of national sovereignties and their concentration at a new federal level were a good thing—which is far from the case—the sum of the parts may yet prove to be a hard lump to swallow. Here again, the U.S. experience that so many Americans would love to undo if they could might serve as a lesson for Europeans.

HOW CONFEDERACY COULD TURN INTO A FEDERAL SUPERSTATE*

It is a tenable proposition, supported by masses of historical evidence, that the main reason why any human society fails to attain the prosperity and material comfort that its endowments and culture should enable it to reach, is that its politics stifles and disrupts its economic potential. Moreover, it is likely that the gap between what would be possible and what is achieved tends to grow larger as technology advances and as political power expands and gets a grip on more and more aspects of people’s lives.

Two polar cases illustrate this thesis. One is the average black African country. Its women and most of its men would till the land, engage in commerce, and peacefully go about their business. However, a fraction—the army, the police, lawyers, bureaucrats, and professional politicians—have got hold of the levers of a rudimentary government. They extort taxes from the rest “legally” and steal them blind “illegally,” especially if the country produces cash crops, minerals, or oil. Some of the most able and energetic who are excluded from the stealing coalition and cannot get themselves co-opted have an incentive to form countercoalitions of “rebels.” Militias of half-crazed adolescents, with machetes and submachine guns as their toys, will rampage across the country, massacring the villagers who have not fled to the misery and doubtful safety of refugee camps. Poverty and the shredding of the social fabric produce more teenage recruits for the militias, and so it goes on. At any one time in postcolonial Africa, an ample handful of countries are suffering from some version of this syndrome and the others are not far from falling victim to it. Arguably, none of this could happen if there were no rich prizes to be had from using the all too potent machinery of politics.1

The other polar case is the mature welfare state. Its government need not be corrupt and usually it is not, or not in a big enough way to make much difference. However, it is a prisoner of democratic politics. Unless it wants to commit political hara-kiri, it must fashion policies that will buy it a majority of votes. This involves it in selecting a variety of interest groups, necessarily including the poor, the unemployed, the sick, and the old, who all will vote for whoever best looks after them. It also involves a scattergun approach hitting most groups, whereby resources are taken from all strata and used to buy the votes the government needs to survive. It must stretch itself to the limit of the country’s tolerance of redistribution, for if it left the least bit of slack in the system, its political rival could outbid it by promising to increase benefits by taking up the slack. The mature welfare state eventually ends up with a set of subventions, regulations, and entitlements to resource transfers to favored groups that is carved in granite and very difficult to change, let alone substantially to reduce. The net result is that mature welfare states tend economically to stagnate. Germany, France, and Italy are eloquent contemporary examples. The irony of this is that if they bore no excessive welfare burden, they would grow faster and be richer, hence a given welfare burden would no longer be so crippling.

Many economists have in recent decades come to be persuaded that there is a way to get the political incubus off the economy’s back. All you need is to devise the right rules. The idea has been formally developed by the school that calls itself “constitutional economics.” It maintains that if only society saw its best long-term interests and ignored short-term gains to be had from pressure-group politics, it would adopt a constitution that strictly limited the scope of collective choices, forbidding the government to go beyond the enforcement of law and order and maybe a welfare safety net to catch the genuinely helpless. Property would be secure from public covetousness, and full scope would be left for voluntary exchanges. Market solutions could not be interfered with except to facilitate manifest Pareto-improvements, if any are left to facilitate.

Dissenters from this idyllic conception, including the present writer, suspect that such a constitution would not be adopted and that if it were, it would be circumvented and after a while twisted out of all recognition. They point to the American Constitution, in intent as close to the ideal as one can get, and what happened under it to states’ rights, the freedom of contract, and the role of government at the hands of the Congress and the Supreme Court.

Another great test is about to start. The draft constitution of the European Union, elaborated over the last year and a half by a 105-member convention of delegates, is up for approval by an intergovernmental conference by mid-December 2003.

It will not be approved as it stands, and some wrangling will continue past the deadline, but the likely modifications will not greatly affect the central issues.

The final text will then have to be ratified by the fifteen existing and ten new member states of the Union. A few are also obliged to submit it to popular referendum and a few more will opt to do so. Barring a miracle, several of these will be lost and some fudge will have to be produced to get over this obstacle. A couple of states—Spain and Poland are bracing themselves for the role—may go to the brink, refuse to ratify, and hold out for special concessions. There will be many false and a few genuine alarms. In the end, however, the holdouts will be bullied into acceptance. Pressure of Europe’s mostly pro-Union media, and the carrot-and-stick potential inherent in the Union budget by which a wavering state may be bribed or blackmailed, will presumably prove strong enough. Within two years or so, the Union will have its brand-new constitution ratified.

The text, absurdly long at 360 pages in the French version, bears the hallmarks of verbose French rhetoric and cautious English fudge. Its ambiguities will prove a gold mine for tomorrow’s lawyers. However, for all its clumsy grandiloquence, it is bound to turn out to be a fascinating experiment for economists and political theorists to watch.

The constitution was expected by the hopeful to settle the issue between confederacy and federation. In fact, it did what the realists thought it would do, and produced a compromise neither side really likes. Of the two camps, it is the federalists who are the more disappointed. The text provides for no common defense, no common economic government, no tax harmonization among the member states, and no common executive branch of government. Worst blow of all for the federalist is that under this constitution the Union has no power to tax. For its budget, it must continue to look to the contributions of the member states, which are negotiated for four-year periods. The main channel through which power in federal structures is drained from the states and migrates to the center has apparently not been opened.

Confederate relief at this reassuring absence of the essential ingredients of a federal superstate is premature, to put it no higher. It is rather like seeing a tadpole and rejoicing that it is not a frog.

A tadpole, if it survives at all, is quite certain to turn into a frog. A confederacy may survive without turning into a federation, and not every constitution laying down the ground rules of a confederacy carries in itself the seeds of a future federal state. As in all historical processes, multiple causation is at work and the issue is more a matter of odds than of predictable certainties.

MAJORITY RULE BY ANY OTHER NAME*

The new constitution equips the European Union with a new decision rule to replace the method used hitherto, namely unanimity assisted by arm-twisting and talking-to-exhaustion. Sheer cheek and nerve also had a role, often helping France to get her way when her case was seemingly hopeless.

Under the new system, three bodies reach decisions jointly. The Commission proposes, the Council of Ministers disposes, and the European Parliament approves.

The Commission is reformed, reduced to fifteen voting members but enlarged by another fifteen nonvoting ones. A total of thirty seats should permit each of the twenty-five member states to nominate one commissioner, which means that the latter will increasingly become the spokesmen of their home states and not the impartial servants of all. So far, so good—this is inefficient, but consistent with confederacy. The Commission will technically remain as powerful as before, for it retains control over what legislation is proposed. It has the executive staff to carry out eventual decisions. However, the Commission has but limited control over hiring and firing, hence the loyalties of the staff are in reality divided.

The whip hand is held by the Council of Ministers, which adopts, rejects, or modifies the Commission’s proposals. The new constitution enlarges the breach the Nice Treaty of 2001 drove into the former unanimity rule. It provides for “double majority” rule; a decision is carried if at least 50 percent of the member states representing 60 percent of the Union’s population vote for it. The 60 percent provision prevents three small members of the twenty-five-member Union from imposing decisions on twelve larger ones. In fact, as things now stand, the usual Franco-German coalition, by co-opting two small to middle-sized states, can always form a blocking minority of 40 percent of the population and use the block as a bargaining lever.

It is amusing, if that is the right word, that Europe’s politically correct circles have convinced themselves that Asia Minor is in Europe, Islam is as consistent with human rights as Christianity (or, as the new constitution prefers to put it, Graeco-Roman and Enlightenment tradition), and it is politically correct to admit Turkey to the Union without much further delay. They are likely to achieve this by 2010 or soon after. On foreseeable demographic trends, Turkey would then be the Union’s most influential member by midcentury.

Like any majority rule, the double majority rule, albeit less brutal, is inconsistent with confederacy. It has the irresistible force of a nuclear bomb to smash the ability of member states to decide matters for themselves. The very consciousness that the bomb is there helps steer the Union’s agenda in a federal direction. Moreover, any likely majority under the 50-cum-60 rule is rose-tinted: it wants Union legislation to be more “social,” to enshrine more “workers’ rights,” and make taxation more “equitable” by stopping member states from undercutting each other’s taxes to attract young talent, entrepreneurs, inventors, research centers, and company head offices.

Recognizing the way the federal wind was going to blow, some states, notably Britain, the Netherlands, and Ireland, obtained “nuclear-free zones,” areas where the majority rule would not apply. Defense and personal income taxes would remain “nuclear-free,” i.e., member states would have a veto over Union intervention in their own armed forces and income taxes.

However, the wording of these exceptions is weak, showing the marks of compromise, and while defense may remain under national control in the foreseeable future, taxation is unlikely to be left “nuclear-free” for long. Corporate income tax should be the first to go, for it will be deemed contrary to the conditions of a single market for the Union that the total tax charge on corporate profits should be four times as high in Germany as in Ireland—and it is not hard to guess which rate will be adjusted to harmonize with the other. After corporate taxes, excise and value-added taxes should follow.

Two guiding principles of the constitution are supposed to determine whether a given issue is to be settled at the state or at the Council of Ministers level. One is subsidiarity. It means, roughly speaking, that everything should be dealt with at the lowest level capable of adequately handling it. If the principle had any objectively ascertainable meaning, it would safeguard against centralization and federal hyper-trophy. Obviously, however, whether an issue is handled adequately at a local level is a matter of subjective opinion and not of fact. The second principle, cohesion of the Union, supersedes subsidiarity when the two conflict. If Madrid wishes to handle a Spanish problem in its own way, it would apparently be sufficient for a majority in the Council of Ministers to decide that cohesion demands that the matter be handled at their level in Brussels in harmony with the way it is handled elsewhere in the Union or, more radically, as it ought to be handled everywhere.

The constitution declares explicitly that Union law overrides state law. This gives enormous potential power to the European Court of Justice, which has the mission to interpret Union law. The Court is destined over time to swell to many times its present size. The primacy of Union law has first been established by judicial precedent at a time when the scope of Union law was limited to matters concerning market freedom. Union law has since been expanding and is obviously destined to expand over many new areas. The Court will, in terms of the constitution, extend its jurisdiction over all of them.

The European Court of Human Rights, even without explicit constitutional mission, has already been active in overturning decisions by member state courts. An incident that is now merrily burgeoning and billowing illustrates its impact. Two teenage Muslim girls in a French state school have after lengthy procedures been expelled because they refused to give up their veils, a religious symbol deemed incompatible with the lay character of a state institution, besides being awkward for taking swimming lessons. The girls’ father, a lawyer, is appealing to the administrative tribunal, where he is predicted to lose, and will then appeal to the State Council, where he is also predicted to lose. His object is to be able at that stage to appeal to the European Court of Human Rights, where he is predicted to win. His victory is feared to give much encouragement to Islamic defiance of school authority, an encouragement France does not exactly need.

Judicial influence in a unifying, federating direction should gain further authority from the deep bow the new constitution makes to political correctness by declaring a Charter of Fundamental Rights. They include a curious ragbag of wishes, aspirations, and general directives, ranging from the right of workers to be consulted on major business decisions (without saying what is to happen if the consultation fails to produce agreement), the right of the unemployed to free placement services, the right of consumers to safe food, and other similarly “fundamental” rights that one is surprised to see as parts of a constitution. Perhaps the most baffling is the “right” to a job. Does your right to a job involve an obligation for me to employ you?—or merely your freedom to sue the government (of your state? or of the Union?) in the European Court of Justice for failing to ensure full employment? Dizzying perspectives are opened up by the Charter in this and other ways.

Next to the Council of Ministers and the Commission, the third leg of the decision-making tripod, the European Parliament, is not really rescued from its present and staggeringly expensive irrelevance by the new constitution. Power is divided between two contestants only, the Council and the Commission. The former is to abandon its half-yearly rotating presidency. It is to get a permanent president and, significantly, a permanent staff. There will then be two rival institutions, two presidents, and two bureaucracies.

It looks a safe enough bet that this structure will not survive intact for very long, except perhaps in form but not in substance. One president will reduce the other to some subordinate role, and one bureaucracy will gradually take over the other. Of the two, the Council is the more likely survivor, partly because it is destined to remain the Commission’s paymaster and partly because the power to settle issues by the weapon of majority rule lends you more power than the putting of issues on the agenda, important as the latter may be. Whichever institution will absorb the other, one can already discern on the future horizon, maybe by the midcentury, the contours of a strong single federal legislative-cum-executive body holding together a superstate on top of the member states—the frog that started off as a tadpole.

WHAT NOW FOR “EUROPE”?

WHY THE PEOPLE FAILED THEIR MASTERS*

France, one of the six founder members and the self-appointed leader of the European Union, has submitted to a referendum the proposed constitutional treaty, which is a four-hundred-odd-page effusion of verbosity. The political “elite,” nearly unanimously supporting the text, blithely made it known that if it is adopted, there will be a “Europe” and if it is rejected, there will be none. The unthinkable happened. Fifty-five percent of the electorate voted “the wrong way,” seconded a few days later by 62 percent of Dutch voters. Both electorates failed their political masters who had called a referendum in the confident expectation that it would endorse their goal of “building Europe” and give it legitimacy. By rights, the constitution is now dead, for its adoption is subject to unanimous ratification by all the member states. While states that ratify by parliamentary vote have approved, and will approve, it, states that submit it to popular vote now look likely to follow the French and Dutch example. Even if they did not, the French vote alone would suffice legally to kill it. I say “by rights,” because desperate attempts are now being made to resuscitate the treaty in some disguise, of which more below.

The motives for voting “the wrong way” were kaleidoscopic, but two major ones stand out. One was the idea, encouraged by the authors of the document and the media which assisted its birth with loud applause, that a modern constitution is above all a list of what people have a “right” to get from their government (and never mind where the government gets them from in order to give them to the people). Despite the mouth-watering list of good things promised them in the “Charter of Fundamental Rights,” which forms the most extravagant part of the document, the people were still disappointed: there were not enough “social” promises of levelling upward. The list was not rich enough. “Europe” was not going to be sufficiently insulated from “inhuman,” “blind” market forces. On the contrary, it was to be liberal or, as its critics insist, “ultraliberal,” enshrining rules of free competition and thus undermining even the present level of “workers’ rights.” In particular, it does not require all member states, notably the ten new east-central European ones, to raise their taxes and social welfare entitlements to the Franco-German level, thus allowing free rein to “social dumping” and the luring of productive business and employment from West to East.

The other and perhaps deeper reason for “rejecting Europe” was the ever wider gulf between the common people and those in politics and the media who make a living and a name from purporting to lead and inform them. The “elite” has never ceased to pour out a torrent of rhetoric about the sacred goal of a politically united Europe, forcing it down the public’s throat. A referendum on it was the perfect occasion for the common people to hit back at the Right without sparing the Left and to hit back at the Left without sparing the Right. Both halves of the political “elite” could be taught a lesson.

THE ECONOMY GOES ON MUDDLING THROUGH

Before the French vote, no less an authority than the prime minister announced that a “no” vote would lead to an economic crisis—a singularly irresponsible prophecy for a head of government to make. The crisis may come for all we know, but it is not likely to, and if it does, it will not be due to the “no” vote. Without the new constitution that would have given greater influence to common institutions including the Council of Ministers and that citadel of political correctness, the European Parliament, most of the important economic decisions now remain subject to state veto rights. While European economic policy cannot, for this reason, do much good, thanks to the sanity of the veto-bearing British, Irish, and the northern Protestant belt, it cannot do much harm either.

There is every prospect that the European economy will continue to underperform, dragged down by the near-stagnation of Germany, France, and Italy. Without quite radical structural reforms, these core countries will continue their decline relative to the rest. There is some chance of reforms starting in Germany with the foreseeable change of government in the autumn, a weaker chance in Italy next year, and no chance at all in France at least for the next two years until the presidential term of the “republican monarchy” runs out.

Some sections of opinion in Italy and Germany would like to shed the euro, returning to their original national currencies in the hope that this would raise their performance to the British, Danish, and Swedish level, countries that never gave up theirs. However, though a majority in Germany and a strong minority in Italy would welcome a return to the mark and the lira, there is no support for this among decision-makers, and it would in fact be a tricky undertaking with a high short-term risk of shocks to the dissident countries’ new exchange rates and bond markets.

“LITTLE MAN, WHAT NOW?”

Little Man, What Now?—the title of a popular German novel of the interwar years—would fit a book about the present predicament of the minor politicians, journalists, lobbyists, international functionaries of all kinds whose influence, income, creature comforts, and, above all, sense of self-importance have hung on the political “Europe” that the French and Dutch referenda seem to have now dispatched down the drain.

It is not only old-fashioned honest selfishness that drives them. If that were the case, they could all be installed at public expense in luxury somewhere in the South of France or Portugal to play golf and discuss Europe. Compared to the European budget of about 116 billion euros, let alone some national ones, the cost would be minute and probably worth it. The problem is that most of these people passionately believe in the dream of their “Europe” becoming a superpower “able to stand up to America” (though apart from flattering their pride, it is not clear what good such “standing up” would do anyone). This ambition cannot be bought off and is dangerous even if it remains a mere dream, let alone if steps are taken to realize it.

The “political class” is not taking its defeat at the hands of the people lying down. Instead of accepting that the European Union is destined to remain a free-trade area with some common regulatory bells and whistles and that the proposed constitution destined to transform it into a political entity is dead, they are busily trying to salvage something from the wreck. The plan seems to be to scrap the November 2006 deadline for ratification, have a pause in the process to allow the memory of the French and Dutch “wrongheaded votes” to fade out, and have some kind of fresh start in the expectation that some ingenious formula or other will be found and adopted to get round the obstacle of unanimous ratification. A modified formula, avoiding the ill-fated name “constitution” and sweetened with “fudge,” could eventually be concocted so that only the European Parliament’s vote would be required to pass it. The parliament would be as sure to approve it as mice are sure to eat the piece of cheese put before them. This is a longer-term plan that cannot be rushed, and it may not succeed. However, at least for the next couple of years we will not know that it has definitively failed.

FREE-RIDING ON THE EURO*

In most places around the world, it is still usual that parents look after their small children and grown children look after their elderly parents. The looking after is unpaid work and is not counted in the national product. Sweden has passed that stage. In Sweden, the lookers-after look after other people’s small children and elderly parents, while their own small children and their own elderly parents are looked after by yet other people. The state pays everybody for the looking after. The total of this pay is added to the national product. It also gets added to the budget deficit unless taxes have meanwhile been increased.

It is a commonplace that Sweden runs what is probably the world’s most extensive welfare state, and suffers from the absurdities that welfare states usually generate. It is tempting to blame the obtuseness of the electorate for voting with absolute consistency, in election after election, for the extension or at worst the maintenance of the welfare system and a sharp egalitarian bias in tax policy at the cost—a cost most do not recognize—of reduced material wealth.

It is arguable that with its high level of education, exemplary civility, and admirable technological leadership in many fields, Sweden should be much richer than it is. Nevertheless, it is also true (though less of a commonplace) that if they really must have a welfare state, the Swedes manage it less wastefully and more intelligently than most. Since the reforms put in place over the last few years, the country’s overall economic performance has improved markedly. Moreover, while until the late 1990s Sweden’s “social” spending as a share of national income was the highest in Europe, this share has since been reined back a little and is now exceeded by that of France, whose welfare system is not quite as comprehensive but is more wasteful.

Sensible Sweden has now taken a sensible decision; in a referendum on 14 September, it has by a majority of 56 percent rejected the proposal to adopt the euro as its currency. Two things are remarkable about this outcome. One is that government and opposition, large corporations, the media, and all the chattering and scribbling classes have joined forces in a sometimes quite frantic campaign for a “yes” vote. Outlandish claims were made about how the euro will speed up economic growth and reduce the cost of living—the exact opposite of what has happened in the euro-zone since its formation. The electorate has remained deaf to these extravagantly un-Swedish promises. Nor did dire threats of being “shut out of Europe” impress it.

The other remarkable feature of the referendum was that according to the pollsters, the chief reason for rejecting the common currency was the fear that as a member of the euro-zone, Sweden would be obliged to curtail its welfare system—a misperceived threat if ever there was one. However, the upshot is that Sweden is staying out, Denmark is less and less likely to reverse its earlier rejection of the common currency, while the present British government’s ambition to persuade the country to adopt it looks for the time being utterly hopeless.

Maybe the euro is rejected for all the wrong reasons, but the choice is probably right: the euro is a trap. It is an unintended one, but no less cunning for that.

Each member state of the euro-zone is caught between two alternatives: to engage in fiscal free-riding or to be the sucker, the victim of free-riding by the others. The reason is easy to grasp. When a country has its own currency, fiscal profligacy carries its own punishment. Interest on the national debt rises more than proportionately to the debt, both because the country’s own capital market gets overstretched and because the risk attaching to its currency increases. Default on the debt and devaluation of the currency (coming after a flight into inflation to water down the debt), though perhaps still remote, start looking less improbable. The repercussions render a loose fiscal posture more and more difficult to hold, and in due course tend to impose some discipline on the government.

As a member of the euro-zone, the same government running a large deficit is spared most of these disciplinary consequences. No member country, with the possible exception of Germany, is big enough in the zone as a whole for its deficit financing to represent a significant strain on the zone’s capital market. Currency risk subsists only relative to currencies outside the zone, in practice only the dollar and the yen, but it is eliminated within the zone; there is no Greek euro and no Spanish euro, so one cannot weaken relative to the other. Fiscal irresponsibility by one country still has adverse consequences for the zone as a whole, but only a small fraction of them is borne by the irresponsible country in question, with the bulk spread over all the other member countries. This is the classic breeding ground for free-riding.

Under these circumstances, fiscal vice is not punished but fiscal virtue is. Today, Spain maintains a balanced budget, while both Germany and France are running deficits that hover around the mark of 4 percent of GDP. According to all serious forecasts, their deficits will exceed 3 percent of GDP for four years or more in a row, not dipping below that level before 2006 at the earliest. One result is that Spanish borrowers have to pay higher medium and long rates of interest than they would do if Germany and France also had balanced budgets. This is not to say that budget deficits are always evil if some of their negative consequences are shifted to other countries, as they in fact are in the euro-zone. In the short run, occasional deficits may be justified—or would be if they were not habit-forming. However, it is clear that in a euro-zone-type arrangement, defense against the free-riding of others consists in becoming a free-rider oneself.

Where the markets do not automatically provide deterrents to over-spending, can “constitutional” rules do so? Germany, with its strong anti-inflationary, sound-money leanings has tried to inject such rules into the euro-zone when it got its partners to adopt the so-called “growth and stability pact,” as part of the Maastricht treaty. The rule sets an upper limit of 60 percent of GDP on the national debt and 3 percent of GDP on the annual budget deficit of euro-zone countries.

The debt limit has no “teeth”; in fact, the average share of the national debts of the euro-zone countries is now 71.5 percent of their GDP, with Italy and Belgium the chief offenders with over 100 percent and both France and Germany now over 60 percent and rising. The deficit limit has “teeth” but very weak ones. The offending country is summoned to take remedial measures, and if it fails to bring its deficit down to the limit, it may be fined. However, few observers seriously believe that the Brussels Commission would dare to fine an influential member country, nor that the fine, if by miracle it were imposed, would change that country’s fiscal policy. To make doubly sure, a strong movement is now afoot to take the “rigidity” out of the pact.

If the pact is not kept when it is not convenient to keep it, what remedy can the euro-zone find against fiscal free-riding that looks capable of undermining the euro? In the United States, the vast bulk of public spending is decided in Washington at the federal level. The states might have an incentive to free ride but have little or no scope to do so. In Europe the central budget is only about 2.5 percent of the member states’ combined GDP, and each member state has both incentive and scope to free-ride at the expense of the rest.

The conclusion is obvious: to throttle back fiscal free-riding by the member states and protect the euro, taxing and spending decisions have gradually to move from the states to Brussels. Whatever it may be called, in practice it means a move toward a more politically centralized Europe—a move the new European constitution, now in the final negotiating phase, would surreptitiously facilitate.

SOME DEMOCRATIC ECONOMICS*

The sordid affair between the European Parliament and money that has been going on for the last quarter century became turbulent last December and promises further turbulence ahead of the European elections in June, all of which prompts some evident and some not so evident conclusions about what we might call democratic economics.

At first sight, the affair is a simple illustration of what happens when lawmakers can legislate about the money taxpayers must pay them. The 626 MEPs (Members of the European Parliament) elected by the voters of fifteen member states of the Union each get a “basic” salary equal to what they would get if they were members of the parliaments of their home countries. Thus a Spanish MEP earns a “basic” salary of about 36,000 euros a year, a British one about 70,000, a German 100,000, and an Italian a bit over 110,000 euros. MEPs from some of the new member countries joining on May 1, 2004, will under present rules have to make do with as little as 6,000 euros a year.

These salaries are “basic.” They are richly supplemented by a rule on expenses which is an open invitation to fiddling. At French insistence, the seat of the parliament is in Strasbourg while the committee work is mostly done in Brussels and all MEPs have to go to Luxembourg as well. An assiduous MEP is therefore theoretically travelling all the time between these cities and his hometown, though many are far from assiduous. They could also have a wide variety of other expenses that may or may not be necessary to incur in order properly to represent the people. They can claim any and all of these regardless of whether they have incurred them: no vouchers are required. The result is that an MEP can make up to 40,000 euros a year “profit”—that is to say, steal 40,000 euros—by padding his expense account.

There are honest MEPs who do not steal. That the majority do is proven by the fact that for twenty-five years all attempts by the honest ones to reform the expense account system have been voted down by a majority. Such brazen insistence on their right to fiddle, and oblige taxpayers to put up with the fiddle, has gradually led to the European Parliament falling into disrepute. Polls indicate that at the elections next June, voter participation will average no higher than 25 percent and may be as low as 18 percent in Britain. There is clearly a tendency for the EU Parliament to sink into utter irrelevance, and in the long run there is a threat to the 626 jobs that provide those luscious perks.

To face this threat and to launder their reputation, last December a majority of MEPs finally agreed to a deal introducing properly substantiated expense accounts. In exchange, MEPs were all to have the same “basic” annual salary of about 110,000 euros, subject to a most favorable tax rate. In addition, they were to get a “special” lump sum allowance of 43,000 euros, a daily attendance fee of 257 euros, and no less than 144,000 euros a year for secretarial and office costs. The deal was vetoed in January by the Council of Ministers as being “bad PR” ahead of the elections, and may or may not be resuscitated in the near future. If eventually it is concluded on anything like these terms, it will be proof that in representative democracy, he who pays the piper does not necessarily call the tune, for the piper may have powers to extort the pay without having to play the paymaster’s tune.

However, it is not really the sums extorted that matter from an economic point of view. In underdeveloped countries, they are indeed very large if we include the proceeds of outright corruption. In places like Kenya, Nigeria, and perhaps above all Angola, they may run into high single-digit percentages of GDP. But in Western Europe and in the United States, the amount the political class as a whole pays itself both in “legally” provided incomes and in illicit graft over and above the total amount the same people could probably earn in private life is a negligible fraction of national income. The popular (and populist) belief that we are poorer than we need be because politicians are thieves and steal our money is naive. Democratic economics very likely makes us poorer, but it does so in a more roundabout way, and not because politicians are more dishonest than most other people—though they very likely are.

In 1906, the French National Assembly voted a law raising the salary of deputies at a stroke by 67 percent. Prior to this watershed law, politics was mostly the domain of “notables” with private incomes and professional men, such as lawyers and journalists, who practiced it part-time. After the law, there was a sea change. The composition of the Assembly changed radically, in came the schoolteachers, and the part-time amateur was replaced by a new breed of professional politician fully maintained by the taxpayer. However, with universal suffrage, he was not chosen and installed in his seat by the taxpayer, but by voters in general, whether they paid much tax or little or none.

Setting pay so that politics as a career is opened up to men and women without private means is by all accounts a step toward greater democracy. If lawmakers as a class have no vested interest in inequalities of income and wealth, the chances are that they will make laws that promote greater equality because in an electorate with one-man-one-vote and secret ballot, there is a natural majority in favor of making an unequal distribution more equal, for any majority will gain more by taking from the rich than from the poor. The result of legislation generated by the democratic process is more progressive taxation, greater welfare entitlements, and a larger share of GDP absorbed in government spending than would otherwise be the case. Politicians who would oppose this trend run a high risk of being voted out of office and being replaced by others who are no more dishonest but are better at attracting the majority vote—which it is the politician’s business to seek if democracy is to be competitive.

However, attaching an adequate income to elective office is not enough. The politician must not depend on particular interests for his campaign financing and for the running expenses of his party. In the United States, he does so depend. The largest sources of money for presidential and congressional campaigns are called AT&T, the public employees’ unions, Microsoft, Philip Morris, the American Bar Association, and so forth. Federal contributions are hardly material; in the perspective of a presidential campaign costing from $100 to $200 million, and congressional districts costing tens of millions to win or lose, federal aid is of little interest. In Britain, both campaign and party financing is wholly nonstate.

As opposed to the Anglo-American systems, in continental Europe there are widespread attempts severely to limit private financing of elections and parties. In France, a 1994 law places an outright ban on campaign financing by private business, while contributions by individuals are limited to 4,600 euros per donor. A 10,200-euro limit per individual donor is fixed by the 1999 German law on party financing. In both countries, there is a complicated system of subsidies paid to candidates and parties according to votes gained, with a ceiling of 57 million euros to any one party and a threshold of 5 percent of the total vote in Germany. In France, the state subsidy is sufficient to keep even no-hope candidates and splinter parties in reasonable comfort from one election to the next. Large parties do trade the odd favor to some private interest against under-the-table contributions, but do not strictly need to in order to get by. These state-financed systems are, in brief, as independent of moneyed interests as one can expect in real life. Significantly, they are legislated by the legislators for the legislators. The piper has emancipated himself from the money that pays him.

The effect of moving toward a more perfect, more completely democratic political system where politicians are not beholden to particular interests stares us in the face. The economics of democracy reveals one reason why government policies in much of continental Europe are more egalitarian, more welfarist, and more statist than in the Anglo-American world, and why the latter is economically more successful than the former. Many other reasons may also be acting in the same direction, but it would be a delusion to forget that democracy, whatever its merits, is no recipe for the growth of riches.

THE SOVIET LEGACY*

The countries that eked out a dismal existence behind the Iron Curtain between 1945 and 1989 were colonies of an unprecedented kind. Every colony in modern history was colonized by a power that was its superior in crucial aspects of civilization, technology, organizing and governing ability. The European colonies of the Soviet Union had the unique misfortune of being subjugated by a power that was their inferior in all but brute military strength. It was a bit like Belgium becoming a Congolese colony. That might happen yet, but not in our lifetime.

Unlike most others, the Soviet colonies had nothing to gain and nothing valuable to learn from the occupier. What the peoples under Russian rule did learn was misbehavior, cynicism, mendacity, dissimulation, and mutual mistrust. They refused to learn the supposed virtues of socialist man, the exemplary behavior of the good Soviet citizen who devotes his life to serving the noble goals set before him by the Communist leadership. They did not end up all bad; they developed capacities of self-defense, ingenuity in the face of need, resistance in the face of force, and rapid grasp of opportunities.

Common to all these colonial subjects was silent contempt for the Soviet people, the Soviet state, and the native authorities who acted on the Russians’ behalf. Contempt for the authorities entailed contempt for their laws. Stealing from the state became a sport, not misbehavior. There was deep contempt for the judiciary and the police that administered what was seen as a mockery masquerading as the rule of law. Disrespect for state law, however, was not offset by greater respect for society’s own unwritten conventional rules of decent behavior, mainly because the ties that would normally bind workmates, colleagues, and even mere strangers had been frayed so thin by the maniacal tugging of a perverse dictatorship that ruled by intimidation, make-believe, and the destruction of all relationships except loyalty to the state.

Every society in the Soviet bloc was horizontally sliced in two. The top slice consisted of the nomenklatura, the party rank and file that supported it, and the secret police that had to protect the tenure in power of the whole upper slice, including first of all its own secure tenure. Comically enough, the secret police in nearly every satellite country was called the “security” police or service, though the only security it cared for was the secure enjoyment of its own and its accomplices’ place on top of the ordinary people.

Like everywhere else, the ordinary people formed the bottom class, with one difference. Everywhere else, there is some upward mobility driven mainly by ability, effort, and luck. In the Soviet colonies, upward mobility from the lower into the upper slice of society depended first and foremost on proofs of loyalty and usefulness to the party. Proof more often than not included denunciation and betrayal of one’s fellows and hypocritical play-acting and flattery of the mighty.

A really striking feature of the postwar history of this part of Europe is that nowhere were the nomenklatura, the party hacks, and the secret police called to account. When Hitler’s Germany collapsed, the Western allies in their zones of occupation initiated a large-scale “denazification” process, screening out and banning from certain public posts or sending to prison those who played an active role in Nazi misdeeds. Many of them fled to the Soviet zone, where the Russians and later the “German Democratic Republic” found useful collaborators among them. But when in 1989 the Soviet colonies regained their independence, party bosses and secret police officers, let alone minor functionaries, all went scot-free, the more so as they have all declared that they had always been social democrats at heart. Apart from those guilty of murder and torture (difficult to prove), they were tacitly forgiven for the humiliation and misery they had inflicted on their own people while they enjoyed the power, prestige, and privileges that accrue to members of successful criminal conspiracies. The watchword was “no witch hunt.” When in early 2007 a new Polish government started a belated campaign of screening former secret police agents and their civilian helpers (most of whom collaborated under duress), large sections of Polish opinion protested and were loudly echoed by intellectuals in Western Europe who invoked the infamous memory of McCarthyism in the USA. Screening might or might not have become a nasty witch hunt, but dispensing with it was to confirm the widespread conviction that unless you actually rob the bank or mug an old lady in front of several reliable witnesses, you never have to pay for wrongdoing and can always walk away with its fruits.

Thanks to “no witch hunt,” when privatization began, ex-secret-police officers, ex-leaders of the Young Communist movement, and ex-“red directors” were all there in the starting blocks, ready to jump and appropriate state property. They had the advantage of their own ready-made network of ex-comrades who “knew all the ropes” and who could smooth each other’s little ways. The present Hungarian prime minister, an ex-Young Communist and member by marriage of a powerful Communist clan, now a billionaire, made his first millions by buying state property for a symbolic peppercorn and then losing little time selling it back to the state for many millions. The extreme case is Bulgaria, where practically all industry and commerce have come to be owned and run by former secret police officers. It is in Bulgaria that contract killings of business rivals are the most frequent, and one wonders whether there is some causal relation between the ownership structure and this muscular kind of competition.

Could it be said that while the Soviet legacy is not pretty, it has not done real harm, for the European ex-colonies of Russia are now all champions of economic growth? Despite near-total fiscal irresponsibility (that bought the present government its election victory) even Hungary is managing to grow at 4 percent, 6 percent is normal in Poland and the Czech Republic, while the Baltic states have been beating the 10 percent threshold for several years. In the face of such performance, does endemic and shameless corruption really matter?

It is easy to forget the depths of poverty, dilapidated infrastructure, and near-insane investment planning to which these countries had sunk during Soviet rule and socialist management. Some large industrial complexes were actually running at negative value added, meaning that at world prices their bought-in inputs cost more than their output was worth; this in turn meant that, had they been closed and their workers sent home, the national income would have increased. The present high growth rates in these countries are mostly the combined result of the gradual elimination of such absurdities, of the rush of new technologies being borrowed from the West, and of inflows of capital and management induced by the cheapness of local labor—in that order of importance. All these growth-boosters are welcome but almost by definition temporary. Some current economic policies in the ex-Soviet satellites are interesting and promising, provided they are persevered with; radical tax reform and the move from complex tax structures to a flat tax is one of them. Nevertheless, the catching-up phase of easy growth is unlikely to last longer than fifteen to twenty years.

The role of corruption that became endemic in the colonial era is the big question mark. Some economists argue that it is a method of rational resource allocation, for it is the most efficient supplier who can offer the highest bribe to get a government contract, and it is a good thing that he gets it. To say this is to forget that bribing is not an open auction but a clandestine transaction that, in addition, has such non-price aspects as confidence and relationships. Moreover, even in open auction the less efficient might be able to offer a higher bribe than the more efficient if he could furnish cheaper, shoddier work thanks to protection offered by the bribe-taker—an option not open to the high-quality, high-cost competitor. Reams could be written about the effects of corruption, and no incontrovertible conclusion may be available in economic theory. One’s gut feeling, though, is that whatever corruption may do to costs and quality in a particular transaction, its wider effect upon the behavior and willingness to play by the rules of an entire people who watch corruption thriving cannot but be seriously damaging. Prosperity does, after all, depend on the punishment of misbehavior.

A WAR OF ATTRITION BETWEEN ECONOMIC REALITY AND POLITICAL DREAMS*

The international economic scene, like a good Western, is populated by white hats and black hats and is enlivened by tests of strength and endurance between them. The white hats are fighting for the prosperity of the ranch and they have nature and economic realities as their ally. The black hats try to get control of the ranch as a means of realizing political dreams and are backed by mass shortsightedness and gullibility. For the last decade or so, despite some lost battles such as the capitulation of the French government in the great transport strike of 1995 or the failure of the Italian government to force through essential pension reform, the white hats were quietly winning the war. Markets were becoming more free, welfare systems less extravagant, and governments a little less demagogic. After a series of disastrous presidents from Jacques Delors to Romano Prodi, the Commission of the European Union gained a more enlightened leadership under José Manuel Barroso and a more “northern,” more freedom-oriented team of commissioners. They are now the target of bitter attacks by socialists of all countries and all parties for their “Atlanticist,” “ultraliberal” leanings—a sure sign that they are doing some good work for the ranch. The “Yukos affair” in Russia and the “Bolkestein Directive” in the EU are two campaigns in this ongoing war of attrition.

THE YUKOS AFFAIR

In Russia, after his reelection President Putin announced a sensible economic program, encouraging hopes that after two failed attempts in 1861 and 1905, that potentially rich country might be third time lucky and finally extricate itself from the wet, cold mud in which it seemed to be forever mired—thanks mostly to the caprice and perversity of its own governments.

Now, however, a stalemate in the war of attrition seems to exist where neither side is really winning and the black hats give as good as they get. President Putin, despite protestations to the contrary, has abandoned his avowed policy of establishing secure tenure for property with freedom and light taxation for enterprise, both indigenous and foreign. The Yukos affair bore spectacular witness to this U-turn. The company, the country’s biggest privately owned hydrocarbon producer, was hit by a series of claims for taxes in past years that could not even pretend to be founded on the tax code; for 2001 and 2002, the back tax claimed exceeded the company’s total sales. To satisfy unpaid tax demands of $21 billion, the government put up Yukos’s largest productive asset at public auction and sold it to the sole bidder, a letter-box company, for $9 billion; the letterbox company then sold it on to state-owned Rosneft for the same amount. The sinister aspect of this comedy is that the Russian government asserts with a straight face that Yukos was not nationalized, let alone confiscated; the transaction was a perfectly normal case of recovering a debt owing to the state. There is much apprehension in Russia that other, albeit less spectacular, cases will follow.

The running is made by a squad of gray eminences around the president, many his former colleagues in the KGB, some holding high rank in its successor, the FSB. They are nationalist and not corrupt by Russian standards, but not literate in economics. Government ministers are mainly gray bureaucrats with the possible exception of finance minister Kudrin. The intellectual cream is represented by two liberal (in American English, “classical” liberal) economists: Germain Gref, the economy minister, and Andrei Ilianorov, Putin’s personal economic adviser. Ilianorov openly called the Yukos affair “a swindle” and was reduced a notch in rank but kept his place. Gref declared that the government will not meet the president’s 7 percent p.a. ten-year growth target “by banging the table.” He warned that the scarcest factor of production in Russia is an honestly functioning court system, without which the country, intoxicated for the time being by the high oil price, will sink back into the perennial mud.

A delegation of Western economists was received by Mr. Putin and castigated him for not pressing on with his original economic reform program. He told them with a rare sign of real humor: “Everybody wants to go to heaven, but nobody wants to die.” Political expediency and short-termist compromise must prevail over the virtue of doing the right thing.

THE BOLKESTEIN DIRECTIVE

The Bolkestein Directive is not the title of the latest thriller you find in the airport kiosk. It is the last major administrative act of the outgoing EU commissioner for the internal market. It is designed to make the market for services within the EU as free as the market for goods. Its particular sting is a country-of-origin clause which permits a Polish, Baltic, or Hungarian person, say an architect or a market research agent, to sell a service in Germany or France while only paying the (low) social insurance premiums and taxes due in his home country. This is taken in Western Europe as a quite flagrant license to practice “social dumping,” the undercutting of decades of socialist achievements, and is political dynamite. President Chirac of France promptly “vetoed” the directive and was joined, though in less peremptory style, by German chancellor Schroeder. Brussels says the directive was issued under existing powers, cannot be “vetoed,” and will stand. The French government of course will do as it pleases. It will not be the first time that it refuses to apply a directive or honor a treaty; its contempt for the deficit limit it signed up to in the Maastricht stability pact is eloquent proof that the EU cannot force a major member country to do what it really hates doing.

THE LISBON REFORM PROGRAM

The Bolkestein Directive, like the Yukos affair, is symbolic of wider conflicts. In 2000, the EU countries solemnly adopted the Lisbon Program of economic reforms that were to make Europe “the world’s most competitive, knowledge-based economy”: education was to be reformed, regulation simplified, and above all labor laws were to be eased to enable labor markets in the most sclerotic of euro-zone countries, Germany and France, to start functioning.

In the universities, regulatory agencies, and the unions, the black hats were, and still are, sitting in heavily fortified positions. For nearly five years now, they did not permit the Lisbon program to move forward. After he took office last November, and after he survived attacks by the left-leaning European Parliament and other socialist bodies, Mr. Barroso proposed to revive the Lisbon Program and tried to rally member countries to it. He was told in barely veiled terms by some major euro-zone governments that they were more concerned with safeguarding the “European model” than with initiatives that would make waves.

Germany, independently of the Lisbon Program, did carry out one immensely important reform of unemployment benefits that will almost certainly produce a speeding-up of economic growth later this year, though things will first have to get worse before they will get better. France relaxed the ceiling of permitted overtime under the infamous 35-hour-workweek laws from 130 to 220 hours a year. The new upper limit would permit a “legal” workweek of 39 hours, though they would be quite expensive overtime hours. However, true to form, the government made this extension of authorized overtime subject to the agreement, not of the workforce at a plant or office, but of the union supposed to represent them. This was yet another step in the government’s continuing effort to build up the unions and give them an importance by means of legislation that their sparse membership (only 8 percent of the labor force, and that almost entirely in the public sector with negligible membership in private industry) would not justify. However, according to the European model the unions must be important and if they are not, the government will give a helping hand to make them so.

A BRIGHTENING OF THE ECONOMIC SKIES OVER BRUSSELS?*

There is a new Commission of the European Union in Brussels. It is taking office next month. Nearly every member of it is new. The well-meaning but bumbling and often confused-looking president, Romano Prodi, has been replaced by the former Portuguese premier José Manuel Barroso, who is not only smoother, younger, and more articulate, but also a man largely freed from the numbing intellectual ballast of Latin social ideology. For someone who was a Maoist in his student days, he is modern and economically literate. His tactical skill in allocating portfolios in a way that radically reduces the influence of the French and to some extent also of the German commissioner has earned applause from lovers of judo.

Each of the twenty-five member states has one commissioner, compared with two for the larger members and none for some of the small ones in the previous Commission. Many of the member states habitually nominate commissioners to reward politicians who for one reason or another must be put out to grass. Barroso on the whole managed to give such people portfolios of minor, in some cases only of symbolic, significance. The half dozen really important portfolios have gone to men and women of high caliber and liberal convictions. (The confusion of tongues between American and English English calls for making sure the reader remembers that an American liberal is a European social democrat.)

Moreover, given that some portfolios matter far more than others, the influence of northern Europe—Britain, the Netherlands, the Scandinavian and the Baltic states—has grown and that of the “core” states, especially France, has diminished. To French indignation and dismay, Brussels looks less and less like an administrative annex of Paris. Though there are individual exceptions, the shift of influence from the center to the north is by and large a shift from the viscerally socialist to the viscerally liberal mentality.

The Prodi, and before it the Santer, and especially the Delors commission presided over a Europe that was in many respects deeply suspect; suspect, that is, when seen from the politically liberal and economically rational point of view. It was fond of regulating, uniformizing, and harmonizing. It sought to promote “workers’ rights” and a formal machinery of worker participation in management. It was often protectionist in practice even as it condemned trade barriers in theory—in this insincere stance it was a worthy rival of the United States. It fought against the insidious attempts of liberals, mainly the British, to “reduce the Union to a mere free-trade area.” Above all, it administered and often helped to defend the monstrous Common Agricultural Policy that brought to Europe dear food, an unpardonable waste of farm inputs, an endless succession of “crises” due to the overproduction of butter, milk, sugar, wine, pork, fruit, beef, and whatever else you care to think of, and untold environmental damage from the deluge of farm chemicals and manure upon the land, groundwater, and the sea. It must in fairness be said that in latter years the Commission has placed itself on the side of the angels and fought for a rational reform of the Common Agricultural Policy in the face of ferocious French, Spanish, Greek, and even German opposition.

There is, of course, no prospect of an immediate and radical sea change in European Union policy merely because the top men of the Commission have been replaced and the changes are mostly for the better. The Council of Ministers holds the whip hand over the Commission. The Council is still what it has always been, a committee where the voice of the powerful usually prevails even when majority voting is supposed to decide an issue. However, the Commission largely controls the cogs and wheels of the administrative machine, and the influence of the machine, mute as it is, should not be underestimated.

It is at the level of the machine that big changes that had been fermenting for several years seem now to have matured. For at least three decades, the Brussels administration had been something of a French fief. It was France that proclaimed which policy would qualify as “truly European.” The important directorates were mostly headed by Frenchmen, and the French administrative spirit and the French language dominated the Commission’s “culture.” Ten years ago, the bulk of draft directives and other working documents were originally written in French. Today, over 80 percent are drafted in English—with all the change in the spirit of a text that such a change of language involves—even if the English in question is sometimes merely Eurospeak. All commissioners but one speak an English of sorts, but only seven speak some French.

There remains in one corner of the Brussels sky the dark cloud of the new constitution. Several states, including France and Britain, have already announced that they will submit it to referendum, and others are likely to follow. Referendums will be held over 2005 and 2006. Other states will have recourse to ratification by their legislatures. Even if none of the twenty-five member states balk, the process is unlikely to be completed before 2007. At least some states—Britain, Denmark, Poland—may well balk, and some formula or other will have to be negotiated to sweep their opposition under the carpet.

For these reasons, the threat represented by the constitution (as it now reads) is not imminent. All the same, it is a serious threat. Nominally, it removes certain vital areas, notably income taxation, criminal law, and “social rights,” from the competence of the majority, so that any member state can veto pan-European legislative proposals in these areas. Britain, at whose insistence these issues were removed from the rule of the majority, is tipped to be prepared to veto both tax harmonization and advances in welfare provisions, as well as more restrictive labor laws. Ireland, perhaps the Netherlands, and some of the new member states from east-central Europe might also use the veto. For this reason, parts of the European Left are now agitating against the constitution, which they accuse of giving free rein to “savage liberalism.” They interpret it as blocking all progress toward a “social Europe” where no state would be allowed to lag behind in the provision of welfare and the widening of “workers’ rights.”

This is a bit like accusing the padlock, with its keys attached, for blocking access to the beautiful garden. The constitution furnishes the keys. They are wrapped in the Charter of Fundamental Rights and the cross-border implications of the common internal market. The latter has even wider potential effects than the commerce clause of the U.S. Constitution, while the former is so vast, so woolly and vague that under it the European Court of Justice would probably be willing, or could feel forced, to overrule British or other vetoes of proposed “social” measures. If ratified, the constitution would open the gates, not to “savage liberalism,” but to politically correct social “rightsism” with the economic stagnation and unemployment that are its concomitants.

It seems clear that the new Commission is not keen to go in this direction and would drag its feet if pushed. It is already doing so on corporate taxation. Left-leaning governments might go on pushing it, and so might the demagogy of the European Parliament. But by the time the proposed constitution becomes law—if it ever does—several years will have passed. The economic enlightenment and the better grasp of realities that have brightened up the sky over Brussels might, with a little luck, have made some more headway. As the saying goes: the worst is not certain.

TURKEY KNOCKING ON EUROPE’S DOOR*

So Turkey is knocking again at Europe’s door, though this time it is not about to break it down with a battering ram. As things stand today, the odds look in favor of the door being opened to it, though negotiations are bound to be arduous and a protracted transition period may be imposed on the free movement of people.

Admitting Turkey is no routine matter, the less so the more the Union moves from single market to political federation and perhaps superstate. Five percent of Turkey’s territory is in Europe, 95 percent in Asia. Nearly 100 percent of its population of 67 million is Muslim, and 15 million of those are Kurds who refuse to believe that they are “just mountain Turks” and who still dream of self-determination. With present trends, by 2020 the country’s population should grow to 90 million, 15 percent of the Union’s projected 600 million. In numbers, it would be by far the biggest member, leaving Germany with its present 82 million and projected 78 million well behind. At the same time, Turkey, with an average income of about $3,000 per head, would be twice as poor as the poorest members. Turkish traditions are in harmony with the direction the EU is taking toward a strong role for the state in the economy and the imposition of a “social conscience.” In all other respects, however, the fit between the club and the candidate is not obvious, to put it with due restraint.

Making their way into Europe has been the main and constant objective of their history ever since the Ottoman tribe started nibbling at the Greek colonies of Byzantium along the coast of Asia Minor in the thirteenth century. A century later the tribe had the beginnings of an empire. In 1352 the sultan took Constantinople that was to become Istanbul, and went on to subjugate Serbia, Bosnia, Bulgaria, and Wallachia (the bulk of the area that in 1878 was constituted as Rumania). Except for the slave trade that moved people south to the Turkish slave markets (along with a countercurrent of Turkish migration northward from Anatolia), Turkish rule over the Balkans was not harsh by the standards of the age. Unlike the Spanish persecution of Muslims and Jews and the religious wars in France and Germany, the Turks were tolerant of other religions, treating the Greek Orthodox church quite well, regarding Protestants as allies against the Habsburgs, though there was always mutual hostility with the Roman Catholics.

After the defeat of France by Charles V in 1525, France and Turkey concluded an alliance that was to last nearly two hundred years and greatly hindered the coalition of the Habsburgs and the papacy to halt the Turkish advance into Hungary, then one of the major European powers. Suleyman the Magnificent annexed most of it in and after 1541. There were a few more westward pushes till late into the seventeenth century, including another great siege of Vienna, but the steam was by then going out of the Ottoman drive.

Like the British Empire that was acquired in a fit of absence of mind, the Turks also picked up, without really trying, an empire in the south and east, Baghdad, Mecca, Damascus, Cairo, and the whole North African coast of the Mediterranean falling like ripe plums into the sultan’s lap, though his sovereignty was not enough to give him effective control. It is hard to avoid the impression that the non-European parts of the empire were but a sideshow.

The decline of European Turkey was as steep as its rise. Hungary and the Balkan countries were liberated, or liberated themselves, between the seventeenth and nineteenth centuries. After World War I, only Constantinople and a bridgehead around it were left of the European possessions.

Apart from the exhaustion caused by too much conquest in too many wars, the causes of the Turkish decline were socioeconomic and they are still at work under the surface today. As a result of its system of land tenure, there was never a Turkish landed nobility and aristocracy. Unlike most European states that moved through feudalism to unitary kingdom, the Ottomans simply missed the feudal stage and moved directly to a highly centralized absolute monarchy on the model of her Persian neighbors. The high officials were the sultan’s slaves, often Greeks on the civil and Albanians on the military side. Between them and the lowly reaya who paid the taxes, there was nobody with an independent power base on the land or in trade who did not closely depend on the central government’s grace and favor. Society was, and in a way still is, classless, for the meritocracy of officials and state-sponsored businessmen does not generate a class structure that is entrenched in civil society and stands on its own legs economically.

Endemic corruption is in no small measure a consequence of the servile meritocracy. Economists sometimes contend that it makes no difference whether officialdom is decently paid or underpaid and makes it up by taking bribes. For this to be true, the bribes must not affect the allocation of resources, and for that to be anywhere near the truth, the bribe-taking itself must be a competitive process, the business that can make the best use of a state permit or most efficiently fill a state order paying the highest bribe and getting the permit or the order. There are complex reasons, going way beyond the scope of this article, why this benign result fails to be produced. For one, theft trumps competition. If a state bank’s directors siphon off the depositors’ money to their associates and blandly mark its trace as a “nonperforming loan” in the books, the return on the directors’ “investment” is infinity and no legitimate borrower could outbid and outbribe that, no matter how productive the project he seeks to finance. It is along such lines that the misallocation of resources and the poor performance of the Turkish economy much of the time between the eighteenth century and today can find an explanation.

By the early twentieth century, Turkey went by the name of “the Sick Man of Europe.” It is a sad irony that some Turks, indignant at the tendency to classify Turkey as an Asian country that ought not to try and elbow its way into the European Union, cite this unflattering sobriquet to prove that even when it was down and out, Turkey passed for being European. After dethroning the last sultan in 1922, Kemal Pasha and his successor Ismet Inonu ruled a benevolent quasi-dictatorship with a strong lay, Westernizing, and modernizing tendency, a drive that has had a good deal of success, considering the morass from where they started. Inevitably, however, a deep rift in society opened between lay and Western on one side, Islamic and Oriental on the other. The dread of the lay and Westernizer minority of being sucked into Islamic backwardness by the majority is the reason why Turkey has lately come close to gate-crashing in its insistent demand to be admitted to the European club.

Democratic mechanics tend to produce Islamic governments. The army, as the guardian of Kemal’s lay tradition, tends to remove such governments. It has done so four times since World War II, the last time in 1997. Until last November, Turkey was governed, if that is the right word, by weak and teetering lay coalitions presiding over runaway expenditure, ballooning public debt, galloping inflation, and a paroxysm of corruption. Nominal interest rates ranged from 40 to 150 percent p.a., and the price index in the last three years rose by 54.9, 54.4, and 45.3 percent, respectively. In 2001, the dams burst, the Turkish lira was allowed to float downward, and the national product fell by 7.4 percent—a crisis of Argentine dimensions.

The new, moderately Islamic government of the “AK” (“clean”—a play on initials) Party has a stabilization program sternly supervised by the IMF that has had a measure of success. Inflation has slowed to about 30 percent, the depreciation of the lira in inflation-adjusted terms to about 10 percent; GDP in 2002 has risen by 3.7 percent and might manage to keep up this rate this year and next. Unemployment at over 8 percent is average by European Union standards. However, tales of official incompetence and corruption are flying as thick as ever. The task of pulling through is heroic, mainly because of the dire state of the public finances. The public debt is either short-term, floating rate, or dollar-linked, so that inflation does not lighten it. Its service is so onerous that in order to keep the debt constant, the state is supposed to generate a budget surplus before debt interest of 6.5 percent of GDP, and it is far from evident that a nondictatorship in Turkey can politically long survive such fiscal rectitude. The army and the electorate must be satisfied, and in addition too many eager hands are trying to fill too many empty pockets for the accounts to balance.

The biblical camel would find it hard to pass through the eye of the needle, but it is not much easier for a democracy to reform a statist, politically controlled economy along liberal, competitive lines. Truly, the Turkish case seems to be one of scarce means in vain pursuit of self-contradictory ends. Note that the EU, while no doubt wishing to see the Turkish economy in better shape, has set two imperative conditions for their membership: democracy and the abolition of the death penalty. As of last year, Turkey has done both, more or less. The rest, far less important for political correctness, is in the lap of the gods.

TURKEY AND THE EU CLUB*

It is often thought not worth belonging to a club that would accept you, and imperative to belong to one that hesitates to accept you. Judging by her insistent demands made over the last two decades, Turkey finds it vitally important to belong to the European Union, and the EU has not been awaiting her coming with open arms. It has held up several hoops Turkey had first to jump through. She had, as it were, to learn how to use a knife and fork and how to sit with her knees close together. She had to enshrine “human rights” in her legislation and stabilize her wildly seesawing economy.

Now good manners have largely been legislated for, the currency has been redenominated by knocking six zeros off it on January 1, and after a shaky two years in 2000 and 2001 and a spectacular forward jump of 9.9 percent in 2004, the economy has this year settled down to moderately high growth of over 4 percent and just under double-digit inflation—both very creditable achievements provided there is no backsliding. Lip service to “human rights” is not the same as embedding the rule of law in tradition, and one year’s very decent economic performance does not wipe out the rocky record that goes back to the ’70s. Nevertheless, while the peoples of the EU member states remain dubious, reluctant, or downright hostile, the political leadership has decided that Turkey is now ready and eligible for membership. Negotiations on terms formally started in October 2005. They are irreversible and will not be allowed to fail; despite much hedging on both sides, refusing entry to the Turks has become unthinkable. According to the Turkish side, a membership treaty will probably be signed in 2012, according to the EU sometime between 2015 and 2020. Under present rules, ratification and/or popular referendum in member states would then still be needed, but nobody seems seriously to expect that they will derail the project.

DOES TURKEY NEED TO BELONG?

Two obvious questions arise at this stage. Why does Turkey want to belong to the EU, and why should the EU take her in? Neither answer is obvious.

There is already free trade between Turkey and the EU except in farm products and some services. Membership would yield little additional commercial benefit. Capital movements are also free. Movements of labor would probably not become much freer for many years than they are at present if the treatment of Poland, the Czech Republic, Hungary, and the other states admitted in 2004 is any guide; only Britain freely accepts workers from these countries, and Turks are not likely to fare much better initially.

Because average income per head in Turkey at under $7,000 is less than a third of the EU level, the country should receive “structural funds” from the EU, and because she is more agricultural than the average, she should be a large net beneficiary of the Common Agricultural Policy. Under present rules, she should receive an annual total of 13 or 14 billion euros from these sources, comparable to what Spain and Ireland used to get and more than the 9 billion euros France is still managing to draw from the CAP. There is no serious prospect of Turkey ever getting anything like this sum. Even a fraction of it would be hard to squeeze out of the EU budget.

Adopting unified EU rules and regulations to ensure competition, honest accounting, and the policing of financial and product markets might prove to be useful for Turkey, and if EU regulations could curb corruption (which may be too much to hope) the benefit would be great. On the other hand, it has been argued that what gives the Turkish economy much of its vigor is the mass of small family businesses with a foot in the “black” economy, free of minimum-wage, maximum-workweek laws and social charges that the labor union and socialist influences in Brussels seek to impose on all EU member countries.

On balance, the economic case for Turkey seeking admission to the club is not proven and the judgment may go either way. The real spur driving the Turkish application is political. The business and professional classes and much of the officer corps are dreading a slide of the country into Islamic obscurantism and bigotry. They strongly feel that membership of the EU would be a safeguard against this danger. In fact, they see it as the sole available safeguard. Though their pride is offended by the lukewarm welcome they are getting in Brussels and by all the hoops they are asked to jump through, they seem ready to swallow it all for the sake of “being in Europe.”

DOES THE EU NEED TURKEY?

In a recent Europewide poll, people were asked whether the cultural differences between the EU and Turkey are too great an obstacle to Turkish membership. In the twenty-five member states, an average of 54 percent “agreed” or “tended to agree” that the obstacle was too great. Country percentages were 73 in Austria, 66 in Germany, 62 in France, 55 in Italy and the Czech Republic, 50 in Holland, 44 in Spain, 43 in Poland, and 42 in Britain. (Turkey is now spending 25 million euros on a public relations campaign to soften these attitudes.) Out of the EU’s 450 million people, only about 16 million are Muslims, but the aggressive assertion of their religious identity makes the number seem and feel many times larger. Adding 72 million Muslim Turks really rouses alarms about the coming Islamization of Europe, especially in view of Muslim birthrates being so much higher than white European ones. Austria, in particular, is not ready to forget that the Ottoman conquering drive up the Balkan peninsula and into central Europe after the capture of Constantinople in 1453 was only stopped by the luck of arms under the walls of Vienna in 1529 and again in 1683.

Contrary to the popular sentiment, and typical of the widening cleavage between the two, the political elite is largely favorable to bringing Turkey into the Union. The reasons are manifold. There is the unformulated feeling that raising Europe’s population at a stroke to over 500 million will at last give her superpower status, “equal to America.” After all, the Turkish army is bigger than any other in Europe, and it would do wonders for the self-confidence of certain political leaders if its command could somehow be made to pass into their hands. A “European foreign policy,” so much lamented for its absence, would then finally be born, to the greater glory of Europe’s political masters.

There is also a vague feeling abroad that integrating more closely a young emerging economy into Europe will wake up and shake up the latter’s somnolent capacity for growth. There is little doubt that the catching-up factor, and particularly the continued borrowing of European technology and organization, will go on stimulating Turkey’s rate of growth and, by a ricochet effect, growth in Europe, too.

However, the strongest motive for ignoring that 95 percent of Turkey lies in Asia is to kill two birds with one stone: it is to affirm Europe’s secular (rather than Christian) character and to appease Islamic hostility to Europe by taking in a Muslim country as an important member of the club. Whether the latter effect can thus be achieved is a question only time will answer.

On a trip to Rome a quarter century ago, Mr. Chirac told a group of French journalists that while the ruins of Rome are “sweating death,” those of Mesopotamia are breathing life; the great Oriental religions are superior to ours; and it is “an imposture ” to pretend that our culture descends from Athens and Rome. Though he seldom shows much constancy of ideas, in this respect he seems not to have changed them. A strong advocate of Turkey, he is still suspicious of Christianity and would still embrace “Mesopotamia,” in line with the French revolutionary heritage and the traditional pro-Muslim policy of the country. To a lesser extent, the latter also plays a role in the official attitudes of Britain and Spain.

Be that as it may, the progress of Turkey toward full membership in the club is now gaining momentum. It is very unlikely to stop short of its designated terminus. Europe will then begin to look and feel substantially different. With a bit of luck, it might not become a worse place than it is now. It could even be a better one.

EUROPE

MORE SECULAR AND MORE ISLAMIST*

Long-range thinking is a fairly safe pastime. By the time your forecasts turn out to be wrong, nobody remembers what they have been and your reputation remains intact. The present essay will take advantage of this agreeable circumstance.

Our subject is Turkish membership of the European Union, or more precisely how such membership will shape the Union a few decades down the road. As is well known, Turkey has been insisting on admission as a full member for the last half century; the peoples of Europe have been lukewarm or frankly hostile to this, and their politicians, mostly favorable, had to stage a balancing act consisting mainly in keeping the negotiations for Turkish membership moving forward as slowly as was decently possible, while telling their public that membership is too far off to worry about. Realistically, it looked that a treaty with Turkey could be signed some time around 2015 and ratified by the members over the ensuing three to five years. The Greek part of divided Cyprus, surprisingly enough a full member of the Union, kept threatening to veto this process, and though they were legally entitled to do so and used their veto right as a bargaining lever to obtain unification of the island on their terms, nobody really believed that they could make their veto stick to the end.

However, causing surprise in Brussels and anger in Ankara, during his presidential election campaign in 2006 M. Sarkozy flatly declared that if he is elected, France will oppose Turkish membership. A French veto could hardly be brushed aside. The negotiating process, touching only a fraction of the tens of thousands of pages of small print, came to a standstill, and when M. Sarkozy was duly elected, nobody pretended to know what turn the events would take. However, only a few months later France quietly announced that she is not opposed to membership negotiations being fully resumed. The long-range forecast was reinstated, for it was unthinkable that once Turkey made all the concessions, promises, and legislative reforms Brussels demanded, the club could end up blackballing it.

The economic implications of Turkish membership would be modest. Trade between it and the Union is almost completely free anyway, as are capital movements. Turkey is already enjoying the windfall of European technology transfers without bearing the cost of developing it and ironing out its early shortcomings. There would be two additional benefits to Turkey. By rights it ought to become one of the chief recipients of farm aid under the Common Agricultural Policy, or what will be left of it by 2020 or so. It should also get massive allocations of “structural funds” designed to improve the infrastructure of poor regions of the Union. Turkey’s income per head, despite nice progress in the present decade, is still only about 40 percent of the average of the twenty-seven current members. Guesses about the annual aid Turkey might get under these two headings range as high as 30 billion euros, though it could not really complain if it got half that amount.

The economic effects are dwarfed by the political and indeed the long-term historical ones. Turkey now has a population of about 75 million, 60 million Turks and 14 million Kurds, all Muslims. On present trends, soon after 2020 Turkey would become the most populous country of the Union. Under the double majority rule incorporated in the European miniconstitution that might be agreed by end-2007, it would become the most influential, weighing more than Germany, at least in terms of voting power.

Out of Europe’s present 450 million people, an estimated 15 million are Muslims. This is but a statistically puny 3 percent, yet London is coming to be called Londonistan, parts of Marseille and the northeast rim of Paris look and sound as if they were in North Africa, and some Cassandras profess to see Europe becoming Eurabia. Both demographic trends and clandestine immigration favor the relative growth of the Muslim population. However, what makes the Muslim presence look so prominent is not their still-modest numbers but their conspicuous effort to remain apart and the fervor with which they affirm their Islamic faith.

After Turkey becomes a member of the EU, the latter will have a population of about 540 million, of whom maybe 95 million, or 18 percent, will be Muslims. Most of the latter will stay put in Asia Minor and never come to join the Arab, Pakistani, Bangladeshi, and Turkish diaspora in western and southern Europe. Despite their low visibility, their political weight will count nonetheless. A minority of them will no doubt sooner or later flee the poverty of Anatolia and settle in other countries of the Union, intensifying the alarm many there feel about the progressive Islamization of Europe.

At first sight, it looks strange that it should be religion, widely written off as a spent force in the modern world, that should pose such a threat, or at least the apprehension of a threat, to Europe’s identity. The explanation is that as modern-day Europe is gradually shedding the Christian, transcendent, and metaphysical tradition of its culture and defiantly professes to be secular, the Muslim world (or at any rate the most vocal, most active and influential elements of it) is becoming more passionately religious. It puts Islam at the center of its consciousness. Islam fills the life of contemporary Muslims as fully as Christianity once did the life of medieval Europeans. In Iran, a theocratic state has firmly established itself. In Iraq, a civil war is raging along a religious divide. In such secular states as Egypt, Pakistan, and Algeria, only dictatorship could so far resist the rising Islamist tide. In nearly every Muslim community, there is a clamor for Sharia law. In Turkey, despite warning growls of the army, an Islamist president has just been elected, and the governing party is having a hard time reconciling the secular policies imposed by the army, the business classes, and the exigencies of Brussels with the strongly Islamic leanings of its own electorate.

One explanation that is no worse than many others is that rising religious fervor, coupled with feelings of spiritual superiority and an aggressive, conquering posture, are due to Muslim societies being sad failures in a worldly sense. The Arabs ruled much of the Middle East and North Africa from the seventh century onward, occupying the Iberian Peninsula and penetrating deep into France before decline set in. Decline has been almost continuous ever since. Arab mathematics, philosophy, and medicine are but proud memories. The one source of Arab riches and prestige is the oil Western petroleum engineers find and pump out from under the sand.

At its peak, the Ottoman Empire was as glorious as the Arabs had been before it. It became the overlord of the Arab lands from the Persian Gulf to Morocco; it owned the Balkans and nearly captured Vienna in 1683 before it sank into impotence and withdrew to Anatolia, keeping only a toehold in Europe around Constantinople. Its greatness in architecture, handicrafts, and military science became a thing of a nostalgic past.

It should perhaps not surprise nor shock us that peoples conscious of great achievements in their history, conscious of past power and riches, and acutely conscious that power and riches have perhaps irretrievably passed into Western European and North American hands, should take their failure to keep pace very badly. Hatred of the West and its ways must come naturally to Muslims who see their own societies bogged down while others are barrelling ahead. It heals the wounds of Islamic self-esteem to proclaim, and indeed sincerely to believe, that Western values are contemptible, Western materialism, greed, indecency, and immorality disgusting and a provocation to right-thinking men. Islam by contrast is a refuge of spiritual purity and a guardian of the true values.

In the secular world, there is a social hierarchy that, like it or not, puts the successful above the unsuccessful. Thus it comes about that Muslims, too many of them unsuccessful individually and all of them unsuccessful as nations, have a hard time adopting Western standards of success and preserving their self-esteem at the same time. This is why nationalism—a modern movement pursuing modern aspirations with archaic means—is taking such weird forms in Muslim countries. Outright rejection of Western secularism and utter devotion to the service of Islam are psychologically the easier options.

This is emphatically not to say that every Muslim is a potential suicide bomber, nor that there is no remedy to their serious problems of self-esteem. Time, a modicum of personal and national achievement, and time again hold the homeopathic remedy. The fifteen or more years that Turkey will have to spend in the waiting room of the European Union are long, but in the best interest of Europe perhaps none too long.

A BILL OF RIGHTS EUROPE DID NOT NEED*

The British government will not submit it to a referendum, the new government in Poland welcomes it, everyone wants to turn the page. The 2007 Lisbon Treaty giving Europe a constitution it has supposedly so badly needed is now assured of ratification.

Compared to the original draft constitution the French and Dutch referendums threw out in 2005, the “simplified” treaty is still a weighty book (256 pages in the English version). It does most of the things the original was meant to do, though it leaves out much of the federalism that has proved offensive to many. Its most important practical provision is the extension of the double majority rule (majority of states and majority of populations) to new domains. In “social” and fiscal affairs, though, each state retains the power temporarily to opt out of majority decisions. The six-monthly rotating presidency will be replaced by a president elected for two and a half years. The number of commissioners will be appreciably and the number of members of parliament insignificantly reduced. None of this is an earthshaking change and none looks like doing more harm than good.

Even with the best of goodwill (which it would hardly deserve), no such benign verdict could be passed on the Charter of Fundamental Rights. The original draft had it as part of the main text; the simplified treaty puts it in an annex but states in the main text that the Charter is binding on the signatories. There is an apparent contradiction between some “social” provisions of the Charter and the “opt-outs” granted to states in the text, but this is dwarfed by graver blunders, ambiguities, and risks of twistable interpretation.

Ultimately, the Charter transfers part of the power of shaping “social” and economic policy from national governments to the judges of the European Court of Justice. There is an albeit imperfect parallel here with the gradual transfer of policy-making in the United States from the Congress to the Supreme Court. We cannot argue that elected governments make better policy than unelected judges. But we cannot argue, either, that it is a good thing that constitutions, and bills of rights in particular, do have the unintended effect of giving the judicial interpretation of poorly drafted texts the upper hand over politics. There must be less erratic ways of reducing the scope of politics.

In the matter of poorly drafted texts, the Charter would be hard to surpass. Consider Article 14: “Everyone has the right to education and to have access to vocational and continuing training. This right includes the possibility to receive free compulsory education” (my italics). Every italicized word is either open-ended, ambiguous, or meaningless, and “right to be compelled” takes the prize for stark fatuity.

A text of this quality inspires derision and would embarrass the courts if they were petitioned to grant ever fuller exercise of these rights. Other rights laid down in the Charter should leave them just baffled. Article 3: “Everyone has the right to respect for the integrity of his or her physical and mental integrity.” Article 6: “Everyone has the right to liberty and security of person.” Article 9: “The right to marry and the right to found a family shall be guaranteed in accordance with the national laws governing the exercise of these rights.” That is, the Charter confirms that national laws shall be kept—but since affirming the contrary would be sheer nonsense, what is this “right” supposed to do? National laws must be kept anyway because they are laws. To single out some and “guarantee” them throws suspicion on the others that are not so singled out.

Another example of sloppy drafting that is more than just a lawyer’s quibble is the right to strike. Article 28: “Workers and employers or their respective organizations have, in accordance with Community law and national laws and practices, the right to negotiate and conclude collective agreements at the appropriate levels and, in cases of conflicts of interest, to take collective action to defend their interests, including strike action” (my italics). If this clause simply means that national laws and practices must be respected, it is redundant. If it is trying to say more, large open questions arise. If employers have the same rights as workers, are lockouts as sacred as strikes? Do strikebreakers have rights and do pickets have rights to stop them in certain ways? What about “secondary” picketing? If the Charter cannot go into these details, it would do better not to proclaim the right to strike and leave it at that.

At a more fundamental level, the Charter confuses freedoms and rights, and dispenses rights with an open hand as if it were oblivious that when it grants rights to some, it must impose obligations on others.

Freedoms are acts that under the rule of law (or, more deeply still, under the conventions and customs spontaneously adopted by a society and embedded in its practices) violate no prohibition. Sitting down and standing up are freedoms, as are myriads of other acts that do not interfere with the freedoms of others. If they did, they would violate a prohibition. Speaking your mind is a freedom because others would run into prohibitions if they forced you to keep still by threats of doing you serious harm. Article 15 grants you the right to engage in freely chosen or accepted work, Article 17 the right to own, use, and dispose of property. All these acts are freedoms, for they violate no prohibition. It is curious to grant a “right to a freedom”—that is, a right to do what you are free to do.

If the Charter is nevertheless handing out “rights to freedom,” it is tacitly conveying one of two things. Either the freedoms not enumerated as “rights” in the Charter matter less than those that are enumerated; or it does not suffice for an act to violate no prohibition if the Charter does not also declare it to be a “right.” Planting either of these ideas in the public mind—a mind already heavily influenced by the “rightsism” of modern political thought—is an excellent means of stifling the idea of freedom. The framers of the Charter no doubt meant to achieve the opposite, but they clearly failed to grasp what a Bill of Rights is liable to do.

Unlike freedoms that define relations between your own acts and a set of publicly accepted prohibitions, rights define a relation between you, another person, and acts you have the option to require the other person to perform to your benefit. If you have the right to work, there must be another person somewhere who is under an obligation to offer you work. If you have a right to unemployment pay, somebody is obliged to pay it. The whole welter of welfare rights must be matched by obligations of the public authorities (and ultimately the employer or the general taxpayer) to provide the means without which these rights would remain empty humbug.

However, just like electoral manifestos and books on social justice, the Charter is voluble on rights and mute on the obligations they entail. It is mute, probably not out of cynicism, demagogy, or shrewd calculation, but more likely because its framers were not clearheaded and tough-minded enough to see through the implications of what they were doing.

Some of the rights the Charter grants not only place a burden on an unseen, unmentioned obligor, but may actually end up by harming the rightholder to whom the Charter meant to do a good turn. The prohibition of organ transplants involving financial gain, thus reducing the supply of organs available for transplants, may be a case in point. One with a wider impact on material welfare is “labor market flexibility” or rather its opposite. Article 30 gives every worker protection against “unjustified dismissal.” Under the freedom of contract, employment can be terminated on terms provided for in the contract (e.g., notice, severance pay). The Charter now chisels into constitutional granite what the International Labour Office has just claimed to be “international law,” namely that termination of employment must be justified. Whether it is or not can only be finally settled by legal action in the courts, and subject to an appeals procedure. We now know well enough that if the employer cannot fire, he will not hire, so that it is the worker who loses out from “job protection.” However, an article reading “Every party to a labor contract has the right to terminate it on terms previously agreed” would not at all look good in a Bill of Rights—besides being unnecessary, for contracts are freedoms and do not require a “right” before they can be concluded and performed.

EUROPE’S SOCIAL-DEMOCRATIC “GOVERNMENT”*

If national-veto rights are eroded at the European Union’s summit in Nice this week, those who gave in to France will present Paris’s victory as a compromise. The veto—it will be said—has been saved for such important national decisions as the setting of personal income tax rates; qualified-majority voting will be used in other, less important areas. But such claims should mislead no one, least of all students of history. Qualified-majority systems have seldom resisted the pressures that in time turned them into the rule of simple majorities. In Europe, this will mean socialism for everyone, in fact if not in name.

France, the current holder of the rotating EU presidency, and the Commission maintain that with enlargement from fifteen to nineteen members, and then to perhaps twenty-four or more, decision-making will become as good as hopeless unless we do away with the veto.

But if today we won’t let one country stop fourteen, one day soon we won’t have seven stopping eight, or twelve stopping thirteen. Once things start being decided by a count of votes, they nearly always end up with bare majorities imposing their will on the rest.

Among leaders currently in office, only Germany’s Joschka Fischer is knowingly in favor of a European superstate, but he is way ahead of the more cautious official government position. At the other end of the spectrum, Britain’s Tony Blair is looking over his shoulder at his wavering electorate and talks of a Europe whose building blocks will remain sovereign states. (One could ask how sovereign are blocks once they are cemented in a wall.) The British public suspects that a mistrusted French bureaucratic grip over Brussels will be permanent, and it resolutely repudiates being governed by an unelected technocracy.

BETWEEN EXTREMES

But the decision will probably fall between these two extremes, where one finds most European governments. They still harbor the hope of having it both ways—retaining sovereignty where it matters and refusing supranational rule where it hurts, but making European cooperation “more effective.”

This is, alas, little more than a pipe dream. Once a government loses the ability to veto a decision, it is gone forever. And as the areas where qualified-majority decisions hold sway are gradually extended, we would also see a subsequent drift toward bare-majority rule. Power would slowly be drained from the states and flow to a superstate level in Brussels. This drift of power toward the center would increase the distance between government and citizens.

The EU powers that be, from President Romano Prodi on down, say they’re aware of this problem, which they see as a “democratic deficit.” Their suggested remedy is “more democracy.” So they propose transforming the European Parliament from a sinecure for politicians who failed to make it on the national stage into a body with real functions. This body would then elect a president of Europe (Jacques Delors, of all people, is already being tipped), and he would form a government from within parliamentary ranks.

Unlike the present Commission, such a European government would have the legitimacy that the expression of the popular will would have bestowed upon it. The “deficit” would thus be eliminated.

The threat is obvious. Libertarianism, or what remains of it, survives in Europe episodically. In large measure, it is kept alive by the fact that this continent is a decentralized, diversified place, where different laws and different political arrangements coexist. But there is no electoral majority for liberalism in Europe as a whole, and there is plainly no hope for one in the foreseeable future. An elected European government could only be a social-democratic government (even if it called itself something else), and this would likely remain so for as long as it took irreversibly to mold a European superstate in its image.

Electoral majorities are formed by offering various interest groups benefits whose cost will mostly be borne by those who remain outside the majority. After the election, democratic government is under almost permanent pressure to expand welfare provisions and entitlements, create new tax breaks, and generally intensify the redistribution that is the staple of all state activity in any case.

At present, the heavily distributive “European model” is deeply rooted in France and Italy, is somewhat less dominant in Germany and Spain, prevails in a rather antiseptic form in Scandinavia, and is in tatters in most of the formerly Communist satellites.

But an all-Europe government would, almost by necessity, have to be as generous as it is in France and Italy. Any party that sought to form a European majority would have to outdo rival bidders by offering ever more generous programs to all kinds of groups from Greece to Portugal and from Poland to Ireland. Current interstate redistribution programs—such as the Common Agricultural Policy and the structural funds—would pale when compared with what a democratic superstate would feel induced to do.

MEAGER TANGIBLE BENEFITS

There is a belief across most of Europe that progressive taxation, extensive social insurance, and strict labor laws (with, for good measure, a compulsory shortening of the authorized workweek) are good for the poor and the weak, and good even for prosperity and employment. Most of the poor and weak believe this because they see some meager tangible benefits but do not see the cost. But they bear this cost nonetheless in the form of high unemployment and a dependency culture.

Many of the not-so-poor and highly educated classes also believe in the value of these programs, partly because a strong welfare state provides them with roles they covet. Thus, a European federal government, pushing through one “social charter” after another, would have a ready-made constituency waiting for it.

Much of this sounds as though I believed that a conspiracy is being hatched somewhere. That’s not the case. The EU is not all bad. It often does useful work, such as in stopping anticompetitive policies by the members. The reality is that if anyone or any group were consciously trying to make any of what I have described happen, little of it would really take shape.

What makes it plausible—nay, likely to come about—is precisely that hardly anybody is planning it, but all but a few are moving toward this socialist superstate with their eyes wide shut.

POWER CORRUPTS, SO LET ’S MAKE IT LESS ABSOLUTE*

Party-financing scandals seem destined to be Europe’s new plague, cropping up here and there with increasing frequency and never really abating altogether. In the last ten years or so, illicit party funding has become the prime detonator of public scandals in Italy and France and has moved to center stage even in Germany. France now seems to be the country most shaken, with recurring allegations that President Jacques Chirac accepted millions in kickbacks for his Gaullist Party, though few of France’s neighbors have remained immune. Is any of this new?

Using dubious means to raise the money political parties need to keep themselves in the style to which they are accustomed is not a fresh invention. Former British prime minister Lloyd George sold peer-ages the way a grocer sells pound packets of sugar; across the Atlantic, “Boss” Richard Daley of Chicago and the legendary chiefs of New York’s “Tammany Hall” were masters at fortifying their power bases by “judiciously directed” public spending. Across much of continental Europe, professional politicians have seldom missed opportunities to enrich themselves or their parties. As democracy spread and mandates to govern came to depend on electoral swings, competitive vote-getting has come to depend on often-ruthless fund-finding tactics, involving anything from legitimate fund-raising to outright graft.

So why pay attention to the current incarnation of this old phenomenon? The difference this time is that this established practice is, unusually, prompting indignation and disgust from the population. The scandals, spun out by the media in teasing detail, are generating contempt for politicians and increasing a popular refusal to be led by the “chattering classes.” The Danish rejection of the euro in a referendum last month, despite the near consensus for it among mainline politicians and editorial pages, was more than anything an example of people no longer willing to be led by the political class. Europe seems to be fed up with politics as usual.

SUDDEN BACKLASH

It would be nice to believe that this newfound indignation has come about because our standards of public morality have suddenly risen. But in the absence of any visible evidence that they have, we should look for an explanation elsewhere. I would suggest that the sudden backlash has to do more with the size of the corruption than with its nature. As government has steadily grown in recent years, so has politics, and so has corruption.

To see why, we should analyze the three broad ways of financing politics. The first is the Anglo-American one. In Britain and in the United States, substantial differences notwithstanding, individuals, businesses, labor unions, and other associations make voluntary contributions to parties and candidates. The amounts and their disclosure may be regulated, but as long as the system remains transparent, it appears fair enough. It involves no theft of public funds; the donors give their own money.

While the front end may look honest, however, the back end is not always so. While some donors no doubt act out of a sense of public duty, many expect to be noticed and remembered by the party or candidate they have supported. Once elected, the politician must pay for the support one way or another, on pain of getting no support the next time round. There is no more tangible manner of saying thanks than the diversion of public spending or the twisting of the regulatory framework in favor of the benefactor. The bargain may most often be tacit but is no less immoral for that.

In countries where voluntary donations are not the custom, outright graft is the unpalatable alternative. Here, the party controlling a city, regional, or national budget will award public works or supply contracts, issue building permits or licenses for new supermarkets to the enterprise that offers the right kickback in the right manner. Public payrolls will be padded with party stalwarts, this being the carrot; the stick will often be tax audits.

The broad public has long suspected that these exchanges were taking place, but they had seldom seen them come to light, due to the complicity of politicians and the subjection of magistrates and the press to the powers-that-be. Things began to change in the 1990s, when first Italian judges and then their French counterparts staged a veritable insurrection. Their dogged investigations uncovered scandals of Byzantine complexity. Ironically, the culprits were often surprisingly innocent, in that they had stolen millions for their party without much, if any, of the money sticking to their hands.

The third way (growing in political acceptance on the Continent) attempts to solve the moral dilemmas of the first two. The only way to stop parties from working out tacit or explicit exchanges with donors in their search for funding is to give it to them openly and publicly, subsidizing parties subject to some threshold of electoral support, reimbursing campaign expense subject to some ceiling, and so forth.

Advocates of this approach argue that it removes the need to sin. But they fail to notice that it is, if anything, more immoral than the corruption it attempts to stamp out because it forces taxpayers to subsidize the cost of gaining and holding on to power. Not only are taxpayers made to pay for parties whose programs they may abhor, but worse, it makes the whole political class—not just elected politicians, but unelected ones too, as well as a whole host of campaign advisors, party workers, and general hangers-on—a ward of the state.

ALL ARE IMMORAL

Anyone reviewing the three methods could easily conclude that all manners of financing democratic politics are corrupt in some vital aspect. All are immoral, and it is hard to say which is more so. The despair itself suggests a solution, however.

All three flawed formulas would be tolerable, and tolerated the way fleabites or other minor irritants are suffered, if only politics had not assumed such an overwhelming, absolutely dominant role in recent decades. Roughly half of what the average European country produces is consumed in ways decided by national and local governments. A supranational government is starting to take a rising share, too. It is no use saying that all these governments are, in turn, elected by the same individuals who work to create the national product. The connection, tenuous at the best of times, no longer functions. The share of gross domestic product taken by the stewards of the collectivity has simply become too large, while the individual’s influence on the collective’s choice has become too remote, too hypothetical.

The trouble with politics is not that it is corrupt, but that it is too big. Its essentially competitive nature pushes it to expand, to preempt for itself more and more of the space individual choice used to fill, until it reaches the limit of tolerance fixed by each society’s history and state of mind. In most parts of Europe, we are now probably straddling that limit. The disgust with politics is one symptom that we’ve gotten there. The remedy, if there is one, must lie in reversing the expansionary drive of the democratic state. Government must be put in its place. We are paying too dearly for the collective “benefits” the modern state professes to shower upon us.

[* ]First published as “The Sins of the Fathers and the Sins of the Sons: Economic Consequences of a United States of Europe,” by Liberty Fund, Inc., at www.econlib .org on March 3, 2003. Reprinted by permission.

[* ]First published as “The Future of Europe: A Giant Free Trade Area or a Political Counterweight to America?” by Liberty Fund, Inc., at www.econlib.org on February 7, 2005. Reprinted by permission.

[* ]First published as “Jogging, Not Racing: European Cross-Currents and the Federalist Drift,” by Liberty Fund, Inc., at www.econlib.org on July 5, 2004. Reprinted by permission.

[* ]First published as part 1 of “A Tadpole Constitution,” by Liberty Fund, Inc., at www.econlib.org on December 1, 2003. Reprinted by permission.

[1. ]The late Peter Bauer, one of the most clear-sighted of development economists, often insisted that foreign aid is actually harmful because it is given to, or distributed under the control of, governments, which increases the prizes to be had from sitting inside the stealing coalition. See P. T. Bauer, The Development Frontier: Essays in Applied Economics (Cambridge, Mass.: Harvard University Press, 1991).

[* ]First published as part 2 of “A Tadpole Constitution,” by Liberty Fund, Inc., at www.econlib.org on January 7, 2004. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on July 4, 2005. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on September 17, 2003. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on March 1, 2004. Reprinted by permission.

[* ]First published as part 2 of “Misbehavior, Punishment, Prosperity,” by Liberty Fund, Inc., at www.econlib.org on September 3, 2007. Reprinted by permission.

[* ]First published as “A War of White Hats and Black Hats: A War of Attrition Between Economic Reality and Political Dreams,” by Liberty Fund, Inc., at www.econlib.org on March 7, 2005. Reprinted by permission.

[* ]First published as “Weather Forecast—A Brightening of the Economic Skies over Brussels?” by Liberty Fund, Inc., at www.econlib.org on October 4, 2004. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on April 7, 2003. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on December 5, 2005. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on October 1, 2007. Reprinted by permission.

[* ]First published by Liberty Fund, Inc., at www.econlib.org on December 3, 2007. Reprinted by permission.

[* ]First published in the Wall Street Journal Europe, December 5, 2000. Reprinted by permission.

[* ]First published in the Wall Street Journal Europe, October 17, 2000. Reprinted by permission.