EU exacerbates economic problems

This is my latest comment from Fund Strategy.

A clear lesson from this year’s eurozone turmoil is that the European Union (EU) should be abolished. It is not the fundamental cause of the economic problems facing Europe but it only makes matters worse.

The most important objection to the EU is its undemocratic character. Unelected officials typically make decisions which are imposed on sovereign nations. Although there are directly elected members of the European parliament their role in the EU is marginal.

The authoritarian nature of the EU was at its most blatant in relation to the Irish recovery plan. EU officials, along with others from the International Monetary Fund (IMF), were given the right to scrutinise government policy in great detail.

Yet it is this undemocratic quality of EU institutions, imposing their will on sovereign governments, that many of its supporters uphold. So in a speech the managing director of the IMF, Dominique Strauss-Kahn, said: “When the agenda is driven by the centre, things happen … but when the agenda is left with the nations, things stall.”

To make matters worse the extensive regulations imposed by the EU tend to be highly risk averse. The precautionary principle – essentially “better safe than sorry” – made its way into English from the German Vorsorgeprinzip. It was incorporated into European environmental protection legislation before being more widely applied.

Yet this outlook provides the worst possible mindset to overcome the challenges that Europe is facing. Indeed it played a key role in getting Europe into its present mess. Rather than tackling problems head on it encourages an excessively cautious approach to dealing with difficulties.

Finally, there are the problems inherent in the eurozone: it is a monetary union without political union. This means it consists of different national economies operating with a uniform monetary policy and (supposedly) strict fiscal rules.

Under such a rigid set-up tensions can emerge within the union as different economies have different levels of competitiveness. As a result substantial imbalances are liable to open between member states.

Some eurozone supporters have countered that Ireland, unlike Greece or Portugal, has a positive trade balance with the eurozone. What they miss is that it was caught up in the turmoil that comes from being part of a rigid currency bloc.

None of this is to suggest that a genuinely democratic union within Europe is undesirable. On the contrary. But it would have to be achieved on the basis of abolishing nation states and replacing them with a single sovereign and unified region.