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 *

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.

[* ]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.