It’s been amusing, in an I-told-you-so fashion, to follow the fiscal crises in Greece, Spain, and other European welfare states.And I feel like a voyeuristic ghoul as I observe the incredibly misguided bailout policies being adopted by the political elites (who are trying to bail out the business elites who made silly loans to corrupt nations in Southern Europe). But I’m not sure how to describe my emotions (dumbfounded fascination?) about the latest bad idea emanating from Europe – to have a fiscal federation that would give bureaucrats in Brussels power over national budgets. It’s quite possible that this would result in some externally-imposed discipline for a basket case such as Greece, so it would not always lead to terrible results. But most of the decisions would be bad, particularly since the Euro-crats would use new powers to curtail tax competition in order to enhance the ability of governments to impose bad tax policy in order to seize more money. Moreover, fiscal centralization would exacerbate the main problem in Europe by creating a new avenue – cross-border subsidies – for people who want to mooch by getting access to other people’s money. The Wall Street Journal Europe has a good editorial on the issue:
Of all the possible responses to Europe’s sovereign debt woes, the notion of centralizing fiscal authority in Brussels may well be the most destructive. But that was exactly what European Central Bank President Jean-Claude Trichet proposed in testimony before the European Parliament Monday. Mr. Trichet’s idea is that an independent body within the European Commission should have broad power to sanction national governments for fiscal or macroeconomic policies that threatened the stability of the euro. This would amount, in Mr. Trichet’s words, to the “equivalent of a fiscal federation” for the euro zone. Mr. Trichet has spent nearly 40 years as a civil servant in one form or another, which may explain his belief that Europe’s budgetary problems can be solved by technocrats. …Fiscal centralization would also undermine competition between different fiscal and macroeconomic policies within the euro zone. That would delight some countries, and probably some at the European Commission as well. During this crisis, French Finance Minister Christine Lagarde has criticized Germany for becoming too competitive for the euro zone’s own good. And a decade ago, France was among the euro-zone countries that attacked Ireland for lowering its corporate income-tax rate to 12.5% to attract investment. …Ireland’s 12.5% corporate tax rate was an experiment that contributed to a lowering of rates around the world in the succeeding years.
All they need now is a Euro-military to absorb another 4% of their GDP with little to show in return (as the US example shows) and Europe’s fate of economic marginalization will not only be sealed but swift too.
Whether as a result of naiveté, unwillingness to engage in deeper analysis, or outright opportunistic political propaganda, Europeans grossly misread the core reasons for America’s success. They attributed the US’s success to [federal] centralization and thus proceeded to mimic it by creating the United States of Europe, to supposedly compete with the US.
So long as the focus was on establishing a European free trade zone (free trade of both goods and people) the openness yielded results and delayed the accumulating detrimental effect of Welfare State incentives to produce, exactly because free trade increased competition. But in the last decade or so, European union has inevitably shifted its focus from free trade and competition to homogenization, harmonization, uniform business regulation and subsidies of inefficient economic activities, core elements of economic decline, a core theme to Mr. Mitchell’s work I happen to agree with.
The US is successful not because of centralization, but in spite of it. For reasons in great part related to historical and geographical coincidence, the US has had unique infusions of liberty at its creation, which set it worlds apart from all other nations 200 years ago. But maintaining that American exceptionalism, now 200+ years on, requires that Americans correctly rationalize the reasons for their success. The initial historical coincidence responsible for America’s massive initial endowment of freedom is no longer enough and thus the freedom margin differential compared to the rest of the world is dangerously narrowing, largely because the rest of the world is becoming freer while American freedom has stagnated, if not reversed in many ways. That rationalization of America’s exceptionalism amongst inhabitants of this continent is sorely missing and the main reason for America’s current relative decline compared to the rest of the world.
[…] by Dan Mitchell The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece, Ireland, and Portugal getting to the point […]
[…] fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece, Ireland, and Portugal getting to the point […]
[…] by Dan Mitchell The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece, Ireland, and Portugal getting to the point […]
[…] fiscal disintegration of Europe is bad news, though I confess to a bit of malicious gleeevery time I read about welfare states such as Greece and Portugal getting to the point where they […]
[…] fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece and Portugal getting to the point where they […]