Wednesday, March 23, 2005

A contrary view

Well, we all know where l’escroc Chirac stands on the services directive. And, to judge from an article penned by Slovakia's deputy prime minister and finance minister in the Financial Times, his views do not entirely accord with the aspirations of the Slovakian government.

"Europe must compete from within," writes Ivan Miklos, declaring that "the road to global competitiveness starts with competition at home."

Miklos believes that EU enlargement presented a unique opportunity for the Union to improve its economic standing by unleashing beneficial competitive forces internally, an opportunity it missed when countries joining the Union were not given free movement. "Good economics - and the European economy - lost out to populist politics."

With free movement of labour blocked, writes Milkos, capital, started moving more briskly. Companies from the 15 older member states began to invest more heavily in the ten new members after enlargement.

Still some people tried to hinder the forces of competition. The commission was even asked to produce an analysis of how the EU should deal collectively with the "problem of delocalisation" - the migration of manufacturing jobs abroad.

Unsurprisingly, the Commission discovered that no such problem existed. In line with other similar studies, it also concluded that the relocation of some productive functions could increase the global competitiveness of European companies. This is only one way in which such investments could increase economic welfare in both the investor's home country and the recipient country.

But there was a catch, according to the study. To reap the full benefits, the advanced European economies would have to implement some necessary reforms. Those reforms, including in the labour and product markets, have been on the agenda for quite some time. As a basic condition for improved competitiveness, they have even formed an integral part of the EU's Lisbon agenda. Unfortunately, since most such reforms tend to be quite unpopular, few countries have had the determination to implement them. These countries include most of the new EU member states, he adds.

Miklos is nevertheless convinced his country’s reforms have contributed significantly to increased competition and thereby also to the competitiveness of the entire EU. In fact, he argues, "some of our innovative solutions could probably serve as an inspiration for economic policy in the older member states as well."

One of those reforms was the introduction of the flat tax. Pioneered in the 1990s by Estonia, it was implemented "with great success" in Slovakia last year, with Miklos suggesting that his country now had one of the simplest, most transparent, and least distortive tax systems in the world – a system that has made Slovakia an even more attractive destination for investment.

Yet it has also contributed indirectly to the improved competitiveness of the German economy. For example, the concern that jobs would move east became one of the main incentives for liberalisation of labour relations in the German corporate sector. The first results of these changes are already visible - leading German companies recorded a dramatic increase in export performance and profitability last year.

Miklos asserts that the EU has now developed to the point that administrative intervention cannot halt the advance of internal competition - it can only be slowed down. The most recent attempt, he says, is the attack on the services directive. "If we want the updated Lisbon strategy to be taken seriously this time," he concludes, "efforts to hamper the directive must be resisted."

All good stuff this. But in the real world, many people – often unversed in economic theory - are adversely affected by large influxes of cheap labour, even if it is in the short-term. Miklos does not explain how democratic politicians should go about "selling" free movement of labour to those people and how they make such a policy electorally popular.

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