Alberto Mingardi  

Europe's problems won't be solved by increased centralization

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The idea that "competition among states and regions [...] lays the groundwork for technological progress and economic growth" is almost taboo in the European debate. Perfectly reasonable people, that may favor competition elsewhere, apparently came to the conclusion that competition between governments creates more problems that it solves.

The cry for tax harmonization encompasses the entire political spectrum. Efforts to curb "harmful" tax competition are part of the mix of recipes most widely advocated to exit the euro-crisis. Roughly, the idea is that member states' public finances should be controlled altogether by Brussels: this being the stick, the carrot will be a harmonization of tax rates, so that businesses and citizens will no longer find any reason to move from one jurisdiction to another. Thus, the threat to reduce national discretionary spending goes together with the promise to consolidate national tax bases.
This is all supposed to be tantamount to the survival of the monetary union - but is that true?
German economist Otmar Issing, one of the founding fathers of the euro, has a very outspoken piece at Project Syndacate that explains that no, it ain't.

Writes Issing:

In short, all of the measures that would implicitly support political union have turned out to be inconsistent and dangerous. They have involved huge financial risks for eurozone members. They have fueled tensions among member states. Perhaps most important, they have undermined the basis on which political union rests - namely, persuading European Union citizens to identify with the European idea.
Public support for "Europe" depends to a large degree on its economic success. Indeed, it is Europe's economic achievements that give it a political voice in the world. But, as the current crisis indicates, the best-performing EU economies are those with (relatively) flexible labor markets, reasonable tax rates, and open access to professions and business.

The whole piece is worth reading. Issing defends competition between jurisdictions within a currency union and explains that further centralization actually endangers European integration. "Europe's cultural richness consists precisely in its diversity, and the basis for its finest achievements has been competition between people, institutions, and places. Its current economic malaise reflects European leaders' prolonged efforts to deny the obvious". This is as sad as true.

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CATEGORIES: Eurozone crisis

COMMENTS (3 to date)
Eelco Hoogendoorn writes:

I don't get it. You mean to say that the solution to the failings of the European union, is not to transfer more power to the European union?

Will somebody please think of the children and burn this man at the stake?

Pretty fair characteriture of the quality of political discourse in europe.

Mr. Econotarian writes:

Europe needs more labor market regulation competition!

The other countries need to catch up with the German Hartz reforms, for example.

Mark A. Sadowski writes:

"But, as the current crisis indicates, the best-performing EU economies are those with (relatively) flexible labor markets, reasonable tax rates, and open access to professions and business."

First of all there aren't that many EU economies that are performing well. Ony seven countries out of 27 have surpassed their previous peak in real GDP.

The two best performing countries are Poland and Sweden. The main thing Poland and Sweden have in common is a flexible exchange rate and hence independence from the ECB's deflationary monetary policy. The other five are Austria, Belgium, Germany, Malta and Slovakia.

And as to tax policy, Austria, Belgium and Germany have above average top personal and corporate income tax rates. Malta has an above average corporate tax rate and Sweden has the highest top personal income tax rate in the EU.

On the other hand Cyprus and Ireland have a below average top personal and corporate tax rate, and Portugal has a below average corporate tax rate. Greece's top tax rates are below Germany's and Italy's are below Belgium's.

So if there is a relationship between tax rates and how well their economies are performing in the wake of the recession it's not at all clear to me:

A similar thing applies to labor market flexibility. The Fraser Institute's index of labor market regulation rates Germany's labor markets less free than all of the SICPIG countries (so much for the vaunted Hartz Reforms), and Sweden's are less free than all but Greece. In contrast Ireland's labor markets are rated freer than all of the top seven performing EU countries.:

I have no problem with supply side reforms but Europe's biggest problems right now are clearly on the demand side. Otmar Issing is simply peddling the same Ordoliberal snakeoil no matter what the economic ailment.

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