Goodbye Europa – reform or die

Last night I attended a lecture hosted by Policy Exchange at which Alberto Alesina launched his new book, co-authored with Francesco Giavazzi. The English title is The Future of Europe: Reform or Decline but it’s more exciting Italian title is Goodbye Europa?

In light of yesterday’s speech by Sir Menzies Campbell about Europe, and my own comments about the need for humbler, more liberal European Union, Professor Alesina’s comments were particularly germane.

He began by noting that between 1945 and 1985 Europe’s economy outperformed that of the USA as it emulated American technology and methods, eventually averaging 75% of American GDP. However, most of this was due to the high relative productivity of European workers – our Continental cousins may not work as long as Americans, but they are more productive when the do – and since 1985 Europe has begun to lose its edge. In future, as total productivity is further eroded by high unemployment (including the effect of demographics), short working weeks (that pesky Working Time Directive) and long holidays, Europe will begin to slip back. He observed that in 1950 Italy’s GDP per capita was 30% that in the USA, whereas in 1990 it had reached 80%; it is now back at 1970s levels and he predicts by 2030 Italy’s relative GDP will be back down to its level in the 1950s.

Professor Alesina was clear about what was needed – and what was not! European economies must liberalise trade in goods and services as a means of liberalising their labour markets. They should allow immigration, especially from areas with “high human capital” (i.e. educated Eastern Europeans), promote (but not subsidise) research, reform welfare and enhance competition. They should steer clear of pumping extra cash into universities, or obsessing about infrastructure, the Growth and Stability Pact, or further integration – especially in social policy.

This will not be easy, for some of our European neighbours are not natural liberals. He cited a University of Maryland study that noted that whereas 73% of Americans and 67% of the British said that they believed the market was the best way to structure an economy, in Italy this was only 59% and in France only 36%! (Interestingly, the highest level of support for the market, at 75%, was to be found in nominally-communist China).

Professor Alesina and the other speaker, Ludger Schuknecht of the ECB, both argued that gradual, piecemeal reform was ineffective. Mr. Schuknecht provided evidence that “timid reformers” had seen little or no change in their GDP growth rates, whereas “bold reformers” had seen GDP growth rise by more than 50%.

The message was clear. European economies need bold, liberalising reform. Whether they get it, however, is another matter.

Reform in Europe should be at core of Liberal policy

Sir Menzies Campbell (I can’t bring myself to call him “Ming”) has given an interesting speech to the Centre for European Reform in which he calls for a rebalancing on Britain’s relationship with the US and reform in the EU.

I have written elsewhere of the need to be an honest friend to the US, supporting them when they are right but telling them frankly when they are wrong. It is Sir Menzies’s comments on the EU that I wish to examine here, for they mark an important shift in emphasis which I think the Liberal Democrats should note and adopt more widely.

His main point, that “The EU would better reflect its peoples’ priorities if it stuck to legislating only when necessary”, is one with which I agree wholeheartedly. At Harrogate last year I attended a fringe event where Nick Clegg asked what the EU would need to do to better reflect the needs of its citizens. My one-word answer was “Less.”

The European Commission exhibits a tendency common to like all bureaucracies, and especially those also granted executive power: a drive to expand its powers. This is catagorically opposed to what we, as liberals, believe.

There is no need for the EU to interfere to regulate individual member-states’ labour laws, VAT rates or manufacturing standards. Indeed, Sir Menzies is wrong to suggest that “Harmonisation” to set common standards on cocoa solids in chocolate and the volume of lawn mowers are welcome policies that allow British goods to be sold abroad. Rather, they undermine the point of competition, which is that all products are different and consumers make informed choices. Perhaps a Parisian has a taste for Cadbury’s, or an Italian is prepared to put up with a noisy but cheap fly-mo. Bureaucrats in Brussels do not need to regulate at this level; consumers will regulate for them by eschewing products that do not meet their needs.

As for that excrescence know as the CAP, if farmers need subsidising that should be a decision taken by national governments. Those that wish to prop up inefficient farms should be free to do so at the expense of their own taxpayers. Those that would rather let their farmers struggle – and in many cases thrive – in the market should equally be free to liberalise their markets and cut their taxes. There may be a single-market/competition issue here, but basic liberal economics tells us that the main benefits of trade come from imports rather than exports; frankly, I would be happy to see French taxpayers subsidising my Brie and Bordeaux.

So I welcome Sir Menzies call for a Powers Audit to decide what should and what should not be decided at a European level. Had this been the aim of the European Constitution I would have been all in favour of it (though sadly it looked more like a means of extending Brussels’ powers rather than limiting them, which is the proper role of a constitution). In fact, I would urge Liberal Democrat colleagues to go further. While championing the opportunities that Europe offers, we must be honest about its failings and unstinting in our call for reform. Indeed, rather than allowing our opponents to paint us as “Pro-Europe” we should make the point that we are pre-Britain, and what is best for Britain is a liberal Europe.

So we must be at our most voluble when we are calling for reform, just as we are within our own nation. Let the electorate hear us demand not just a stronger Europe, but a more humble one; a Europe that trusts individuals, devolves decision making to the lowest possible level, frees markets rather than binding them in red tape, and so thrives through diversity.