15-Feb-17 – Euro Error

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The Dilemma: Prosperity Or The Single State, A Choice Must Be Made

By Prof. Jean-Jacques Rosa

via Algora Publishing

Dr. Rosa was an economic adviser to the French Prime Minister, 1997-1999. He founded the MBA program and two doctoral programs in business finance at the Inst. of Political Studies, Paris, which takes a practical and broad-based approach to the study of economic, political and social problems; he taught at Sciences Po from 1978 to 2008 and is now a Professor Emeritus.

Who among Europeans could be anti-Europe? In the entire world, the Old continent is the place where the standard of living is the highest, where the culture is the oldest and, at the same time, the richest in diversity, where the way of life is most pleasant, and where democracy is the most widespread.

But if Europeans are so happy with their continent, what kind of Europe do they want for the future? Starting with the formation of the common market at the end of the Fifties, intended to restore the free exchange of goods, services, men and capital after the wave of protectionism and isolationism of the depression years and the war, the European leadership have gone on to erecting a plan for a monetary and thus a political Europe, that of a very great and a single State.

Without that, they would have it, we would be relegated to decline and impotence and finally to obliteration. Not to want Europe unified, statist and monetarist, would be not to want Europe at all, as if the latter could admit only that one definition, only that one design; a typical example of politically correct thinking.

Actually, the European plan and consequently the future of the continent are marked by a deep ambiguity. The concept is economic and liberal when it comes to reintroducing free trade on a continent that had been given over to state intervention and protectionism for half a century: a single market and competition, in contrast to national statist intervention. Initially intended to support the United States against the Soviet threat, the European enterprise has retained a statist and military purpose, which tends to be defined as an end in itself.

It is this statist aspect that today comes into question precisely at the moment when the Soviet threat is disappearing, whereas the aspect of the market and competitive free trade has pretty much been carried out or is about to be completed. This is the moment that the European political leadership chooses to prod us down the path toward a single currency that leads logically and necessarily to the construction of a single federative or confederate State.

As long as Europe wants to preserve a political role in the world, that would appear to be a natural ambition. Of course, it does not please the Americans, who are afraid of competition in managing the planet’s affairs. But that is all the more reason to do it! And it would be so much simpler for companies and travelers to use only one currency for the whole continent.

Unfortunately, this apparent simplicity is misleading. As scientists know, complex problems always have a solution that is clear, common sense, simple . . . and false! Upon superficial examination, the diversity that generates competition, the complexity of States and currencies as well as that of companies, always seems wasteful. To manufacture one product for every consumer, be it the black Ford Model T of the beginning of the century or the unisex uniform imposed on the Chinese by Mao, has a fatal allure for the social engineer slumbering inside each one of us.

In the same way, a single State seems as though it would be more efficient, more “rational” than several, to the Platonic and Cartesian minds that populate the hierarchical and administrative organizations.

That was the “solution” of Soviet planning invented by Lenin: to manage the country as one immense enterprise. We know how that turned out. The source of the error, as Hayek explained, is that central planning atrophies the production and diffusion of information that, by contrast, competition encourages. The single hierarchy dramatically reduces society’s level of information and diminishes the quality of products as well as that of policies.

But what can we say, then, about the example of the United States? Do they not collectively prove the greater effectiveness of a great continental State able to create and multiply wealth at a rate never before achieved? Why not imitate them once again by creating the United States of Europe?

This parallel is tempting but false. Conditions at the end of the 20th century differ radically from those of the end of the 18th. When the American Federation was constituted, its population was homogeneous and very small. Creating the United States, in 1776, was rather like creating a country the size of Switzerland today. At the beginning of the 19th century, the Union hardly counted more than eight million inhabitants and it reached thirty million only on the eve of the War of Secession.

Thereafter, a small federal State was crowned with exceptional success; it became large because it was effective, it was not a State that was more effective because it was large from the outset. At the time, no one had in mind the creation of a giant by merging highly diverse nation-states. The United States represents the example of the small firm that succeeds, and thus grows, not that of the “national champion” imagined by civil servants who pride themselves in playing one of those construction games, like Lego’s. So the American adventure was and will remain the exception.

Another fundamental difference should give the eurocrats pause. For a long time the Americans did not need a single currency. And they transitioned toward a central bank at the federal level over more than a century, from 1790 until the creation of the Federal Reserve System in 1913.

The idea of a single currency and a Very Great State belongs in the domain of administrative Utopia. First, because it proposes to create ex nihilo a common currency for several States, which has never succeeded in the past. Then, because it requires the construction of a single State, the continental Super-State, by merging great States of very different nature, and with heterogeneous populations, which has never been seen either.

The effort appears all the more absurd since the single currency will serve practically no useful purpose. On the contrary, it will necessarily harm the national economies. What is more, the Single State would be a fundamental aberration in the general development of private and public organizations. It will be expensive, useless, and will make still more difficult the essential reform of hypertrophied national States.

The elites in power in Europe actually propose to reproduce on this continent the model of ancient China, against the very spirit of the “European miracle” which led the nation-States of this small extension of Asia to dominate the world. How indeed did Europe come so far?

Through competition and rivalry among the States, a process well described by British historian E.L. Jones1. It is the competition between rival nations that explains the unusual quality of the public services which the European populations enjoyed and which in turn determined the exceptional progress of the economy and the techniques characteristic of our continent, in modern times. This is the reverse of China, which very early on established a gigantic empire in which the State held a hierarchical monopoly on the production of low quality publicservices, which paralyzed innovation and destroyed the entrepreneurial spirit for several centuries. Tomorrow China will explode like the USSR and Yugoslavia. Europeans should avoid such a dead-end.

Hayek described the route toward servitude along which the victorious democracies were unwittingly advancing at the end of the Second World War. Today, we must avoid the dangerous slope of a decline that would affect Europe alone. The danger is no longer that of external totalitarianism, it is our own capacity for error and the soft totalitarianism of our elites.

Thus continental Europe is taking a wrong turn. The last decade of the 20th century will go down in history—for this club of old countries that count among the richest in the world—as a period of moral discouragement and economic decline.

Paradoxically, this period should have been marked by optimism and dynamism. The European nations succeeded in making a flawless economic comeback and achieved remarkable growth since the disaster of the Great Depression and the Second World War. In thirty years, between 1945 and 1975, they caught up with the standard of living and the technology of this century’s world leader, the United States. With the disappearance of the communist threat on its eastern doorstep, and the opening on a world in full process of market globalization, Europe should enjoy a time of full optimism and daring changes. The reduction of the defense effort, the normalization of the price of energy, and the triumph of the democratic market system should have resulted in abundant peace dividends. But quite to the contrary, we see moroseness and stagnation, an incapacity for reform, and aging of the structures that dominate since the collapse of the Soviet Union. Continental growth is stunted since the disinflation of the Eighties and the German reunification which was supposed, according to official speeches of the time, to bring an extraordinary dynamism to the economy beyond the Rhine as well as, by contagion, to those of all the other European partners. Instead, unemployment is now reaching levels close to those of the Thirties. The prospect of an indefinite pursuit of restrictive financial policies that choke expansion discourages those more enterprising who now choose to invest elsewhere.

Against this backdrop of deceleration and economic and social difficulties, the governments lack the courage to tackle fundamental reform of the welfare state—inordinately swollen since the last war by the easy tax receipts that readily flow during exceptional growth.

Taxes and costs are reaching the limits of what the active population can support, inflating the underground economy and contracting the job market. Investors are turning away from a continent where the cost of labor has become prohibitive compared to its productivity.

The productive basis of our societies is eroding, while the diminished growth hinders the modernization of businesses.

Having been reformed in-depth, North America, Latin America (having digested its debt crisis), Asia (the dragons, but also continental China, in spite of inevitable mishaps along the way), and Great Britain all already feel the effects of a new world dynamism; but as a result of their restrictive fiscal policies the majority of the continental European economies are just limping along.

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