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May 27, 2005

Bruxelles' chicken-and-egg game

Amid reports that Jacques Chirac is counting on illiterate jungle tribesmen in South America to swing France into the "yes" column in Sunday's referendum on the European Constitution, pundits are already wondering the future of Europe's grand experiment. I think the European project is destined to progress if only because of its inertia and even if France causes the 300-page constitution to be scrapped. The document is so objectionable that both French Socialists and I agree that it should be scrapped. We disagree on why: the French left would prefer to see stronger social protections for workers, while I don't think that economic policy belongs in a constitution. The American constitution is perhaps the best ever written (having only been amended 28 times in 225 years), and its terse articles are is entirely silent on economic issues except for four items that empower Congress:

• To regulate interstate commerce
• To coin money, punish counterfeiters, protect patents, and establish weights and measures
• To provide for the "erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings." (this is really for the Militia but could have an economic interpretation)
• To levy taxes and prevent the states from imposing duties and taxes on each other

The American constitutional convention was more concerned with debating what fraction of a person each slave counted as than dictating how an economy should be run; the Europeans should be so fortunate. Compare the US Constitution's four mentions of economic issues to the lengthy Part III, Chapter III, Section 2, Article III, Paragraph 209 et seq of the EU Constitution, which establishes no fewer than five committees and discusses such things as "the combating of social exclusion", "developing exchanges of information and best practices," promoting "the consultation of management and labour at Union level," and (my personal favorite) promoting "hygeine." Is it any wonder that the left distrusts the constitution and the right thinks it enshrines the stifling economic policies that have stagnated Europe?

A cloudy day at EU headquarters in Bruxelles

While overpaid EU bureaucrats in Bruxelles debate social exclusion and hygeine, the economies of member states continue to suffer, as Times columnist Anatole Kaletsky points out:

The people of France, Germany, Italy and the Netherlands may be angry about globalisation or ultra-liberalism or immigration, but this reflects a deeper malaise. Their living standards are falling, their pensions are in danger, their children are jobless and their national pride is turning into embarrassment and even shame. In sum, they feel that their countries, which numbered among the world’s richest and most powerful nations as recently as the middle of the last decade, have gone to the dogs under the leadership of the present generation of politicians. And, at least in the economic sense, they are absolutely right.

The relative economic decline of “old” Europe since the early 1990s — especially of Germany and Italy, but also of the Netherlands and France — has been a disaster almost unparalleled in modern history. While Britain and Japan certainly suffered some massive economic dislocations, in the early 1980s and the mid-1990s respectively, they never experienced the same sort of permanent transformation from thriving full-employment economies to stagnant societies where mass unemployment and falling living standards are accepted as permanent facts of life.

Kaletsky goes on to blame the European Central Bank for Europe's malaise because the ECB didn't follow the American prescription for economic stagnation:

European policymakers could kick-start growth and break the spiral of economic and political pessimism by doing exactly what America did in similar circumstances in 2001. They could reduce interest rates drastically and devalue their currency. As in Japan, interest rates could be reduced all the way to zero and the euro could be pushed down through intervention in currency markets. Such an aggressive policy of monetary stimulation could be guaranteed to revive economic growth, whether or not voters could be persuaded to endorse the labour market and pension reforms that Europe certainly needs in the long run but which can actually aggravate economic stagnation in the short term, as Herr Schröder has learnt [after losing North-Rhine-Westphalia elections].

How easily our European friends like Kaletsky forget that US monetary policy was only half the way President Bush lifted America out of the recession that started in Clinton's final month. Cutting taxes and reducing regulation played a substantial role in economic stimulation and in expanding money supply. In Europe, Ireland went from backwater to economic dynamo by keeping taxes low and resisting the Sirens of social protectionism and economic interventionalism. European leaders are caught in a chicken-egg game: the economic "protections" the EU constitution promises are depressing the economies where such protections originated and causing the rash of worker discontent that will derail the grand experiment. Although Kaletsky points out that some of the current pain is due to reforms introduced so far, Europe's economic stagnation is primarily due to the ultra-liberal principles enshrined in its not-to-be Constitution

Posted by adrianjo at May 27, 2005 04:27 PM

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