Barroso’s Advisor Speaks His Mind: Do We Need the EU?

Taken from the Open Europe Bulletin a follow up to my piece on the Euro or maybe I should say a prequel,

In an interview with Belgian daily De Morgen (18 March) Commission President Jose Barroso’s economic advisor Professor Paul de Grauwe has argued that the euro has damaged Italy’s economy, and that without ‘political union’ in Europe, the euro will collapse in ten to twenty years. He also argued that the EU’s Lisbon process, which forms the backbone of the Commission’s efforts to make Europe more competitive, ‘is best buried.’

He said, “Sometimes I wonder: do we still need the European Union? I start to have doubts about that. It is sufficient that countries open up their economy. You don’t need to do that in the context of the European Union.” Asked whether Europe has added value he said, “I’m not sure about that. Probably the Union creates a framework to keep markets open in an organised way. In that respect it has added value.

He went on to argue that “the euro is a bad thing for the Italian economy. I’m afraid that Spain is also evolving in the same direction. If that happens, we are stuck with a big problem.” He said that developing a “political union” is the only way to mitigate the problems created by the euro, saying “A political union is the logical end-point of a currency union. But if that political union fails to materialise, then in the long term the euro area cannot continue to exist.

He said, “Now that nobody appears to want that political union, you can begin to wonder whether monetary union was such a good idea. I hardly dare predict that, in the longer term, the monetary union will collapse. Not next year, but on a time frame of ten or twenty years. There is not a single monetary union which survived without political union. They have all collapsed. You invariably get big shocks. A monetary union becomes very fragile without a political framework. With the exception of a Don Quixote like Guy Verhofstadt [Belgian Prime Minister and author of The United States of Europe], I see nobody who is pushing the case for a political union.” He said, “A large free trade zone remains the only feasible option for Europe. It’s an illusion that we can realise a political union in Europe in the near future. Political unification has failed. But that is a big problem for the currency union. That is in danger.

He went on to say: “Lisbon was a political fiction. The Lisbon process is best buried. The whole process, for that matter, is based on the wrong diagnosis. We have built a system of social security that gives people too many incentives not to work. They can easily interrupt their career and leave the labour market early. For many people it is financially unattractive to work. So we shouldn’t be surprised that economic growth is subdued.” He went on to say that productivity per hour worked in the EU is the same as in the US, but that because Europeans take more time off, growth is slower in the US where people work more and consume more.

 

A Postscript by Paul Belien:

Paul De Grauwe has always been a Eurosceptic. In mid 1991 Guy Verhofstadt, the current Belgian Prime Minister, was a Eurosceptic as well. At the time Verhofstadt was (or at least he said he was) an admirer of Ronald Reagan and Margaret Thatcher. He wanted to establish a Conservative Party in Flanders and asked me to approach my friend Paul De Grauwe, a professor of Economics at Leuven University, to inquire whether he would want to help establish such a party. With a group of nine, including Verhofstadt, De Grauwe, myself, Prof. Boudewijn Bouckaert of Ghent University, we wrote the Manifesto of Verhofstadt’s party, the VLD, founded in 1992.

Ultimately I did not join the VLD because it soon became clear to me that Verhofstadt was very opportunistic. He had realised that he could only become Prime Minister in Belgium, an artificial state which is the prototype of the EU, if he became a proponent of the welfare state and a social-democrat. Paul De Grauwe became a member of the Belgian Senate, but while in politics was soon disgusted with Verhofstadt and Belgian politics. After two terms in the Senate he refused to stand for elections in 2003. Prof. Bouckaert has been expelled from the VLD party council for speaking his mind. Today, Verhofstadt uses “Eurosceptic”, “Reaganite” and “Thatcherite” as terms of abuse on a par with “fascist” and “right-winger.”

As some will remember: Verhofstadt was the Franco-German candidate to succeed Romano Prodi as the president of the EU Commission, but, fortunately, the position went to Barroso.

reasons ctd.

If the European countries all would have stayed behind their protective walls, their companies would have felt less competition. With open borders (and also some regulations) these companies have felt the whip of competition. The more competition you feel, the stronger you become. The bigger the primary market you compete in, the stronger you get and the more money you can make. That is one of the reasons why American companies can grow so strong: they have an enormous primary market. Imagine all the 50 states each with its own protective wall. Of course, prices in Singapore, London and San Francisco would have been roughly equal to each other. But do you really think this would not have had any effect on the profits of American companies, their sizes etc? And even the US have laws, institutions and regulations for their economy both on the federal and state level. But probably less so than the EU.

So, the larger the local market, the better for the companies and the customers. And also large markets need laws and regulations.

States

Interesting examples. So why did American banks become globally dominant when they weren't allowed to operate in more than one state at home?

The reason American companies became big and powerful is because they believe fervently in capitalism.

You don't get it, do you? There are no "local markets" any more. People in Britain have been banging on about "Free Trade" for hundreds of years. We didn't need the EU - which anyway was originally conceived as a closed market, not an open one - to convince us of that.

Well, if the countries of the EU did need its structure to encourage them to get rid of tariff barriers, then fine. Job done. Let's dismantle the structure before it undoes all the good work with a forest of regulation and bullshit constitutional nonsense.

Bob Doney

reasons

If increased competition does not lead to lower prices then please try to get an article on this published in any economic or business journal. It is the most basic of all basic economic laws: the law of demand and supply: if you have a better product to sell at the same price, then you shift the supply curve downwards and sell more. These are the basics of competition. GM and Ford are exactly learning this: increased competition from the Japanese (lower cost + higher quality) is causing them to change or to go bankrupt. Since last year GM and Ford have lowered their prices considerably, however to little avail. They will have to improve their quality also.

And yes, we can import Japanese cars in Europe too. So the economic EU does not play a role in this example. Some European carmakers (Peugeot, Renault) used to sell their cars in other European countries at lower prices to meet the competition. The French could not buy these cars abroad. With an increased economic EU they can, although there are still price differences probably caused by the costs of transport and not knowing the language.

Is a single market in services a bad joke? Ask the Dutch cancer patients who are judged incurable by their own doctors then go to a foreign country and get cured (still being reimbursed by their health insurance). Dutch kids going to school across the border for better education and not having to pay for it, is this a bad joke?

I agree with you on 1 point: we do not need the expensive bureaucracy.

Many reasons

Hello, George2!

Thanks for your posting and for all your examples, which actually all prove my point that we don't need the EU to gain economic advantages. General Motors and Ford are faced with competition which has nothing to do with the EU per se. The takeover of Chrysler by Mercedes (if that is what it was!) is nothing to do with the EU. These benefits of competition - new industries, new products, new methods - are available to any nation that participates in the global economy. You can try to get an article on globalisation in any economic or business journal!!!

The ability of Dutch cancer patients to get treatment overseas is nothing to do with membership of the EU. Any nation can make such decisions for its citizens. Same with education. Which is why British universities are very popular with students from all over the world. Nothing to do with the EU. In fact, many universities don't like the EU students, because they get the service artificially cheap. And, let's face it, not many UK students want to study in France, Poland or Estonia.

I agree with you on 1 point: we do not need the expensive bureaucracy.

Thanks!

Bob Doney

reasons for an economic EU

a large reduction in costs for customs + waiting times at borders; all this money can be spent on other things; increased competition reducing prices of products and services which is good for you and me; increased competition results also in higher quality for goods and services; reduced costs for financial transactions; all this would have happened without an economic EU, it would have taken only a lot longer; imagine a small town living on its own, with extra costs for businesses of neighboring towns to bring their products in; suddenly these costs drop significantly ... what do you think is going to happen?: all of the above

Unreasons

OK, a customs union is a good thing in saving on paperwork and queuing at borders.

The rest - increased competition leading to higher quality and lower prices - is a mythical beast. Where is the evidence that European consumers have a uniquely favourable market place for goods and services? Can we buy better and cheaper stuff than they can in, say, San Francisco or Singapore? What have we really got for fifty years of expensive bureaucracy?

And a single market in services is a bad joke.

Bob Doney

Ofcourse we need an economic

Ofcourse we need an economic EU. The political EU can wait for another century. Only the strong states will keep the euro. The others can join the Union of African States. Many of their citizens will feel at home.

Of course we do

Of course we need an economic EU.

Yes, of course we do. I can't offhand think of any good reasons why we do, but it's there and we must accept it.

The rest of the world seems to be making perfectly fine economic progress without belonging to it. They manage somehow to sell each other cheese and machine tools without too much difficulty. But WE need it. We DO. Really. No question.

Bob Doney

Verhofstadtian Ambivalence

The man that wrote the book "United States of Europe" still reminisces about his Reaganite days; the rhetoric of Liberals can be summarised in two phrases "I used to be like that but I am alright now" and "on the one hand, on the other".  Truth eludes them.