LONDON – There are politicians in Europe who do not hesitate to use the solvency crisis currently raging through Europe’s periphery, to promote an agenda of ever-closer European integration. For instance, the German Finance Minister, Wolfgang Schäuble, said recently that the European Union is in urgent need of fiscal centralisation, in order to, “in ten years, have a structure that will resemble far more what one describes as political union.”
Mr. Rohac is a Research Fellow at the London-based Legatum Institute
Mr Schäuble’s remarks follow a joint Franco-German initiative, aiming at fiscal coordination and harmonisation of various regulatory regimes in EU member states. After their meeting in Freiburg, Nicolas Sarkozy and Angela Merkel announced that, in the first weeks of 2011, the two core countries of the Eurozone would “jointly table structural answers” to the current crisis.
It is an intellectual travesty to claim that the Eurozone’s crisis can effectively be remedied by deeper political integration and further harmonisation of taxes and labour market regulations. Yet, this view is symptomatic of the unimaginative thinking of European political classes, for whom a world of international summits and European groupthink is preferable to the messy domestic politics, fiscal responsibility, and proper democratic accountability.
To begin with, Euro was never an economically justified project. A monetary union imposed on countries as diverse as Luxembourg and Greece was bound to backfire. Indeed, the architects of the Euro hoped to use the common currency as a vehicle for fostering further political centralisation of the continent.
To a certain extent, they have been successful in this endeavour. The European Union now resembles a unitary political entity much more than it did ten years ago. However, for those who dream of a single European state, the Lisbon Treaty arrangements, which are currently in place, leave a lot to be desired. It should not be surprising, therefore, to see European politicians using every opportunity to push forward an agenda that would effectively mean the end of fiscally sovereign European nation states.
There is one group of European countries, which would particularly suffer, should the Franco-German initiative be successful. These are the fiscally responsible countries of Eastern Europe, such as Slovakia or the Czech Republic. Not only would they be forced, under a closer fiscal union, to bear a larger part of the losses associated with bailing out countries that do not share the same level of fiscal discipline, but the driving forces of their economic growth would also be eroded.
In the early 2000s, Slovakia successfully consolidated its public finance. Moreover it introduced a new, more transparent and less burdensome system of income taxation, relying on a 19-percent flat tax rate, imposed on fairly broad tax bases of both personal and corporate incomes. The ‘flat tax revolution,’ which then swept throughout Eastern Europe, accounts for the popularity of the region among Western investors, and for the remarkable rates of economic growth recorded by some of its countries.
In a significant way, the story of Eastern Europe is a story of competition and institutional learning. Back in 2002, the Slovak government had the courage to put in place tough economic reforms – ones that would not be easily palatable to the pampered electorates of affluent Western European economies. And these reforms did bring their fruits, in the form of higher rates of economic growth and higher standards of living. They have also served as a lesson for other European countries, showing them the way towards fiscal responsibility and a greater degree of economic dynamism.
It is not difficult to anticipate what the main elements of the Franco-German scheme are going to be. Given that, in the straitjacket of Euro, it is difficult to impose any degree of fiscal discipline on Greece, Ireland, Italy, Portugal and Spain, we can expect more fiscal transfer to these peripheral economies, partly financed by the relatively poor countries of Eastern Europe. At the same time, we can expect the initiative to target the allegedly harmful tax competition that is taking place in the region, thus eroding a significant portion of the attractiveness of these countries in the eyes of foreign investors.
When facts change, reasonable people ought to change their minds. When a particular political project proves to be a failure, one should recognise it as such. However, for the likes of Mr Schäuble, the crisis of the common currency means that “political cooperation has to be deepened.” One only has to wonder what would need to happen to make European political classes change their minds and recognise that, perhaps this time, further political centralisation is not going to be helpful.
If anything, the Eurozone’s crisis means that the integration project has gone too far, too quickly. What is more - it proceeded without a full appreciation of the role of institutional diversity, competition and learning. And if this lesson is not internalised by its policymakers, Europe will fail in addressing its underlying economic imbalances and will also continue to tread down the path of economic decline. This would be a tragedy not only for countries of Eastern Europe, but for Europe as a whole.
Dalibor Rohac is a Research Fellow at the London-based Legatum Institute.