Tuesday, June 01, 2004

How Americans see it

In the past those American commentators who showed interest in the development of the European Union and deplored its centralizing, bureaucratizing and anti-free market policies, expressed great hopes about enlargement. (A bit like the Conservative Party but more logical.)

The argument was quite clear: the former Communist countries, emerging from one of the most oppressive and backward looking political and economic systems, realized that the only way forward was to strengthen the private sector, lower taxes and regulate lightly. These ideas, when brought into the European Union would re-energize the economic developments in that rather stagnant organization. What this theory ignored was Gresham’s Law: bad money drives out good.

In the case of the European Union, specifically, the well-entrenched core members of the Union were not going to tolerate competition from the newcomers that would somehow undermine their own comfortable (for the legislators and regulators and other officials, that is) lives and the equally comfortable, not to say adipose, way of thinking.

This truth is beginning to dawn both on the East Europeans who had hoped, in the teeth of all evidence, that joining the EU would somehow help their own struggle to turn themselves into competitive liberal capitalist economies, and on those well-meaning American commentators.

Writing in today’s Washington Times, Richard W. Rahn, a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute (in parenthesis one ought to note the number of well funded, highly intellectual and productive think tanks there are in the United States, which is, according to some British and European commentators, the stupidest country on earth) compares the latest developments in the European Union to a sports club.

In the light of recent obsessions with obesity, his comments are particularly apt:

“Imagine a club where members of the volleyball teams enjoy drinking and eating more than exercising and, as a result, are very fat and out of shape.

“The club decides to expand its membership to include a group of men who only recently gained their independence from abusive parents and now are working hard on bettering themselves. The newcomers wish to join the volleyball teams.

“The existing players say to the new guys: This is 'not fair' because you are slimmer and more energetic than we, thus you must put on weight belts so you are as slow as we are.”

He also touches on the dilemma that faces those “fat players” in the west – something that we have highlighted several times on this blog. On the one hand, the “fat players” are afraid of competition and want to load the new, lean, mean members of the team with as many taxes and regulations as possible to slow them down. In fact, the author of an NFU report on the effect enlargement will have on British farming actually boasted of this in my hearing.

On the other hand, there is a desperate fear, so far unconfirmed by developments, of a mass movement of people westwards, who will work for lower wages and outside the regulatory structure. (If only!)

Dr Rahn puts it well:

“The E.U. bureaucrats in Brussels cannot seem to grasp the obvious; that the best way for a Hungarian to stay in Hungary rather than move to Berlin in search of a job is to allow him to get a good job in Budapest. Instead, the politicians of old Europe go out of their way to impose higher taxes and regulations in Hungary that can only kill job growth, keep the Hungarians relatively poor, and thus increase worker flight to higher-wage countries.”

In the meantime, the EU has recognized that even imposing higher taxes on the newcomers (woops, sorry, introducing tax harmonization to counter “harmful” tax competition) is not sufficient. There must be tax harmonization everywhere. Nobody must be allowed to compete and overtake the stagnant European economies, where, as Dominique Strauss-Khan wrote in his report on the need for a “political Europe”, on average 48 per cent of GDP goes in tax.

At the behest of France and Germany, a meeting of the Organization of Economic Co-operation and Development (OECD) has been called in Berlin for June 4 -5. The aim is to agree on a measure of tax harmonization that will force low-tax non-EU jurisdictions to abandon “harmful tax competition”.

It is worth remembering that all the members of the OECD are high income countries (though many of them are now economically stagnant) while many of the low-tax states are also low-income ones. Having to comply with French and German levels of taxation will scupper all notions of economic development.

Dr Rahn will also be one of the speakers at a roundtable on tax harmonization and tax competition that is being organized in Berlin on June 2 by the Heritage Foundation, the German Friderich Naumann Foundation and the Center for Freedom and Prosperity. There will be speakers from the United States, Germany and Slovakia, all concentrating on the need for tax competition in order to continue or resume economic growth.

And before any comments are made, British speakers were asked. Unfortunately, prior engagements made it impossible for them to attend. But this blog certainly intends to report on the more interesting papers and discussions.

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