The European Constitution is not a remedy for European economic troubles

It is a great honour for me to speak at this conference. I must admit that I am not used to speaking in Brussels; actually, believe it or not, I have never been to Brussels before. As I lack the experience from the Brussels seminars, I am going to put as clearly as I can what I really think of the Lisbon Strategy, of the European Constitution, and their consequences.

Economists and politicians agree that Europe’s economy has been suffering from a serious disease. In 2000 the Lisbon Agenda identified the symptoms of this disease – high unemployment and low economic growth.

In my presentation

1) I will argue that the Lisbon Agenda misunderstood the real cause of the underperformance of European economy, and therefore prescribed the wrong treatment.

2) I will show that now that the time for Lisbon Strategy is halfway through, the economic situation in Europe is even worse than it was in 2000 when the Agenda was set, and that this is due partly to the wrong diagnosis of the disease.

3) I will argue that there is a direct link between the European economic underperformance and European legislation which allows the spreading of many of those bad and rigid policies that are the underlying cause of the slow growth and high unemployment in Europe.

4) I will argue that by extending majority voting in the Council of Ministers to other areas including labour legislation, the Constitutional Treaty actually extends the list of rigid economic rules that can be imposed on European nations from above. In my opinion, this can only hinder the dynamics and competitiveness of European economies.

Let me now explain these points in more detail.

1) Wrong diagnosis

I am afraid that the authors of the Lisbon Strategy failed to identify the real causes of the economic problems and, as a result, they prescribed a wrong treatment.

In fact, the Lisbon Agenda is a mixture of recommendations, some of which may be good and some misguided. However, whether as a whole, it is a good or a bad plan, it is above all a plan. Instead of relying on spontaneous initiative of individuals and businesses, it only offers new social-engineering visions and recommends shifting public money in another direction.

The main objective of the Lisbon Agenda, that Europe should become „the most competitive and most dynamic economy in the world by 2010,“ might sound like an innocent or even a good idea to the people who have been living in the West for decades. But to those who used to live under the Communist rule in Central Europe, such slogans about catching up with the United States sound all too familiar. The difference is that instead of promoting information technology, the communist planners put more emphasis on heavy industry. Whereas coal and steel used to be the fashion fifty years ago, now it is computers. But the principle remains the same – the politicians believe that they are better qualified than the people in a free market to decide how much money should be invested and in what industries. This principle did not work under communism, and it will not work this time either.

If this is the case, and if the lack of Internet technologies and economic plans is not the real problem of the ailing European economy, what is Europe actually suffering from?

The truth is that economists recognized that the European economy was suffering from a disease many years before the Lisbon meeting, and they even gave the disease a name – „Eurosclerosis“.

Economists also identified the real causes of the disorder. Unlike the European Commission and the Council of Ministers who tend to believe that the problems of European economy can be solved by pouring more money into the IT industry, by connecting everybody to the Internet, by setting up „business incubators“ or by encouraging „employee ownership schemes,“ the economists pointed out that Europe’s slow growth and high unemployment were due to a rigid labour market, over-regulation and high taxation.

The problem with the European economy is not the poor judgment of private individuals and firms, who are reluctant to buy and sell on the Internet or unwilling to invest more into research and development.

European economy suffers from „Eurosclerosis“, i.e. rigid legislation that prevents people from changing flexibly their jobs, and puts a burden of taxes and regulations on businesses.

As long as the European leaders will believe that central action plans, incentives, subsidies and regulations are better tools for running the economy than the judgment of ordinary individuals entering contracts on a voluntary basis, the European economy will continue to ail.

2) The situation has become worse

In 2000, the ministers who gathered in Lisbon were optimistic: the budget deficits were going down, unemployment started to decrease and a higher economic growth was predicted.

Four years on, however, budget deficits are on the rise again.

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With a single currency and without effective sanctions, countries tend to behave as free riders – creating deficits at the expense of others. Since big countries, namely France and Germany, are not willing to comply with the Stability and Growth Pact, the discipline has become lax in other countries as well.

This has a negative impact on economic growth. The more money governments spend through budget deficits, the less is left in capital markets for private investors. What governments do is „crowding out“ private investments, which translates into slower economic growth.

The economic growth had never been more sluggish. While in the 1970s the average growth rate in Europe was 4%, in the 1960s 3% and in the 1990s 2%, in the first years of the „Lisbon decade“ European economy grew at a mere 1% a year.

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Unemployment has started growing as well.

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Had the objective of the Lisbon Agenda been that Europe should become „the least dynamic and competitive economy by 2010,“ we might conclude that we are on the right track.

3) What has bad performance to do with European legislation?

However, not all European countries suffer from eurosclerosis to the same extent. Germany, nick-named the „sick man of Europe“, is doing worse than any other.

Budget deficits in Germany are high above the European average, its GDP growth is slower and unemployment higher than in most European countries.

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Unfortunately it seems that instead of cutting taxes and getting rid of over-regulation, Germany is keen to impose its own high taxes and stringent regulation on other European countries as well.

This brings me to the main point of my paper. I argue that eurosclerosis is an infectious disease. The infection is spreading through European legislation. The germs of this disease skip successfully from Germany on other nations, through a dissemination process that is called harmonization of the Member States’ legislation.

The usual way of protecting oneself against a contagious disease is quarantine. But Central European countries, instead of isolating themselves from the harmful European legislation, have been adopting it without any parliamentary debate, and thus continued to litter their legal systems with more regulations every day.

If European politicians want to deal with the economic problems, they must first of all understand that European economies face a disease called „eurosclerosis“, i.e. excessive regulation and a heavy burden of taxation; if they do understand it, they will be more likely to choose policies or laws which stimulate economic recovery. Then they must become aware that the disease is infectious; having understood this, they will be more cautious about ratifying a constitution that would actually encourage further spreading of harmful policies.

4) European Constitution – from bad to worse

The European Constitution is not the product of efforts to fight Eurosclerosis. It is not a set of rules written in order to prevent the dissemination of bad policies. It rather seems to be written with the purpose of making the introduction of new rigid rules even easier.

The European Constitution doubles the vote of Germany in the Council of Ministers at the expense of smaller Member States. Under the current system, Germany’s representative in the Council holds 29 votes out of 321. The Constitution says that the votes of each Member State should be weighted according to the size of its population, which increases Germany’s vote from 9 to 18%. In the new voting system, it will be even easier for Germany and France to go around the rules of the Stability and Growth Pact. These countries with more economic regulation than any other in Europe will then have more power to push through new environmental, labour and other regulations.

The European Constitution extends majority voting to more areas of decision-making. For instance it vests the EU with the power to set requirements regarding working conditions, or even involvement of trade unions in corporate management by majority voting (III-104). At this point I am happy to say that one of my main objections to the draft EU Constitution disappeared. The clause on majority voting on taxes was dropped from the text last week at the IGC thanks mainly to the efforts of the British delegation.

Now, most taxes are no longer under the control of national governments, except for income taxes. Today, the only way in which the EU can impose consumption tax and VAT rates is a unanimous decision of the Council of Ministers. The German chancellor Gerhard Schröder claimed that the principle of unanimity should no longer be required for decisions on taxation, and that the EU should also have the power to set corporate taxes, possibly through majority voting.

The German and French negotiators at the Convention incorporated this idea into the Draft European Constitution. Fortunately it seems that this provision did not make it to the final version.

I believe that tax competition is the only effective force that can make politicians cut taxes, and tax cuts are the only way to economic growth. So it is good news that the tax issue has been deleted from the Constitution.

However tax competition is only one specific example of competition in a more general sense, the one between different legal systems, which is an efficient tool of protection against bad legislation: where there is legislative diversity, good policies can be imitated and bad policies can be avoided.

During the Cold War the Communists, in order to prevent their citizens from „voting with their feet“ for better legal systems, had to build the Berlin Wall and install barbed wire. The European Union, on the contrary, is based on the Free Movement of People. But if all European countries were constrained by the same regulations, what would be the advantage of moving freely across state borders?

Europe no longer allows competition in agricultural policies; there is no diversity in consumer protection regulations, no currency competition, and so on and so forth. If the new Constitution is ratified, competition in other areas will be very limited, too. In fact, the Member States will retain very little legislative sovereignty at all.

I am convinced that if European nations still have any antidotes against the degenerative Eurosclerosis, they should refuse to ratify the European Constitution. If the Constitution is ratified, it will mean that the European economy can hardly get any closer to the objectives set in the Lisbon Agenda.

The advocates of the new system of voting say that without adopting it, the Council will find it hard to reach a consensus on new directives. But what if that is precisely what the European economy needs – fewer regulations and fewer directives?

We do not need more directives and more economic plans written here in Brussels. Neither new agendas, nor new strategies can restore the health of European economy.

A necessary (albeit not sufficient) condition of putting Europe’s economy back on the growth track will be to restore the competition between the legal systems in Europe.

What we need is more national sovereignty and more individual freedom.

To put it simply, in order to be a competitive economy, Europe must preserve competition between its legal systems – in other words, it must not prevent its Member States from stimulating each other to offer better legislative conditions to businesses and individuals.

Thank you for your attention.