Reflections from Europe | JULY 5, 2004
Jogging, Not Racing: European Cross-Currents and the Federalist Drift
See the Editor's Introduction to this article.
A similar situation could be said to exist with the Franco-German “core Europe”, in which French vanity in foreign policy and French fidelity to socialist economics set the direction while German subservience provides the driving force. This is a race for jogging, not sprinting. The embryo welfare state they created around the mid-1970s began to weigh the joggers down. As their pace slowed and as unemployment either side of 10 per cent of the labour force became endemic, conviction and electoral necessity have combined to make them add ever more and ever heavier building blocks to the welfare edifice their economy was supposed to carry on its back. The end result was the much vaunted “European social model”, economic stagnation, and the social strife which stagnation nearly always breeds.
Britain, which had set about building a welfare state three decades earlier than Continental Europe, gave itself insane labour relations, narrowly skirted bankruptcy and in 1979 was ripe for the Thatcher revolution. Some of the benefits of the Thatcher reforms are still being felt; unemployment is consistently low and the economy is moving forward, with national wealth per head having decisively outgrown the Franco-German level.
Understandably, the British and half-a-dozen smaller European countries would rather go on with the race. France and Germany, just as understandably, insist that they must join the jogging party of “core Europe”.
The latest collision of these two deep cross-currents has shown up on the surface with the renewed Franco-German demand for “tax harmonisation” and their attack on “social dumping”.
Corporate tax rates are between 35 and 40 per cent in “core Europe”. They are 10 per cent in Ireland. In Slovakia the corporate tax rate is 19 per cent and so is, with disarming simplicity, every other tax rate from the personal income tax to the value added tax. In the newly joined member states generally, the effective tax rate is well below the nominal one. The German employers' association has been openly recommending that German companies should re-locate eastward to the new member countries of the European Union to benefit from less onerous employment rules, lower corporate and payroll taxes (and has been castigated for its un-patriotic stance by Chancellor Schroeder). France and Germany are now seriously alarmed by the flight of enterprise and capital.
They insist that to avoid “distortion” of the market, both corporate taxes and social insurance charges must be “harmonised” across the Union. By harmonisation they mean raising tax rates to the Franco-German level. “Social” charges, in particular, must rise everywhere not only because “social dumping” distorts the market, but more importantly because Europe must “fight inequalities” and live up to the “social model”.
It is ironical that the Brussels Commission is a perhaps even more severe enforcer of anti-trust and anti-cartel rules than the U.S. Justice Department when competition among companies is concerned. The strangling of the General Electric-Honeywell merger and the offensive against Microsoft bore testimony to the sternness of Mario Monti, the competition commissioner. However, the Brussels rule that companies must compete is now to be joined by a new rule that states must not compete. Cartels to fix prices and sales quotas are seen as wicked, a tax cartel binding states not to undercut each other's tax rates would be regarded as virtuous, harmonious co-ordination. Arguably, prices are one thing, tax rates are another. But this does not mean that while prices may differ, tax rates must not. Uniformity of rates does not follow except perhaps if we are already in a full-fledged federal state where equality before the law may, in extremis, be thought to require equal taxation.
The tax controversy is but one example of how national cross-currents induce a federalist drift. Any national difference that has a cross-border implication affects the operation of the single European market and as such (it is argued), must be moved from national to Union jurisdiction. This upward flow of matters from the state to the Union level has been going on for years and will apparently broaden still under the new constitution. Since everything has some cross-border implication, however hypothetical or contrived, especially when borders are open, there is no evident limit to the federalist drift. The single market clause is destined to play the same role in draining power from the states to Brussels as the interstate commerce clause played in draining power to Washington. The European Court of Justice will have to help this process along much as the U.S. Supreme Court has done.
In a recent report commissioned by Brussels, the former French finance minister and front-running socialist presidential candidate Dominique Strauss-Kahn has called for a European tax that would endow the incipient federal government with its own resources. The parallel with the earlier U.S. evolution is obvious enough. (True to form, French President Chirac has gone one better and is calling for a world tax, but that is a story for another day).
None of this is meant to suggest that every single transfer of power to the centre and every case where states are forced to jog along together rather than racing against each other separately, is necessarily a bad thing. Trade commissioner Pascal Lamy, though a socialist and a French one to boot, created a sensation last May by offering to abolish all European subsidies on agricultural exports. This was a bold attempt to rescue the stalled Doha round of trade liberalisation bargaining. The attempt will probably fail if only because the U.S. will not agree to scrapping its own export subsidies, but it is nevertheless a worthy try and may bear fruit after some delay. The Lamy initiative has unleashed the fury of the French farm and commerce ministers and of public opinion which sees it as another move to undermine that sacred pillar of French national interest and “rights”, the Common Agricultural Policy. As the policy engenders idiotic and vicious side effects, undermining it would be the best thing that could happen to it.
However, even if every single part of the dismantling of national sovereignties and their concentration at a new federal level were a good thing—which is far from the case—the sum of the parts may yet prove to be a hard lump to swallow. Here again, the U.S. experience that so many Americans would love to undo if they could, might serve as a lesson for Europeans.