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The Trouble With the EU

June 16, 2004

With the enlargement of the EU from 15 to 25 countries earlier last month, "…the artificial division of Europe is finally and conclusively at an end" declared the Irish Prime Minister Bertie Ahern. He added, "The enlarged EU is also ready to play its part in bringing about a more secure, just and equitable world."

According to the EU itself, the organization

"is a family of democratic European countries, committed to working together for peace and prosperity. It is not a State intended to replace existing states, but it is more than any other international organization. The EU is, in fact, unique. Its Member States have set up common institutions to which they delegate some of their sovereignty so that decisions on specific matters of joint interest can be made democratically at European level. This pooling of sovereignty is also called 'European integration.'" 

So goes the rhetoric of the European Union, an organization created in 1951 to keep Germany and France from going to war again.

Unfortunately, the reality of this supra-state is far from its putative promise. Based upon the premise that peace and prosperity are somehow based upon increased size and regulatory conformity, what is left of economically viable Europe is threatened by the social and regulatory policies required by the Eurocrats upon entrance to the EU.  Germany, one of the EU's founding principles, currently exemplifies the interventionist policies that bedevil the existing EU members and threaten to compromise the economies of the new participants. In fact, Germany was the originator of what EU officials call the "European social model," a model of government control that has wrecked the German economy, and with the increasing size of the EU, threatens the whole of the continent.             

The German Miracle?

Germany occupies a special place in economic lore. Over fifty years ago, the Vice-Chancellor and Minister for Economic Affairs of the German Federal Republic, Ludwig Erhard, unleashed the creative impulses of the war-torn country by repealing some of the more onerous economic regulations on prices and wages in addition to the stabilization of the currency, thus creating the German "economic miracle." Heavily influenced by the German economist Wilhelm Röpke and the ORDO liberals, Erhard's policies are considered a model for the reconstruction of formally communist or war-torn (they amount to the same thing) economies.

As with many commonly held notions, there is more myth than reality to this oft-told legend. Along with the benefits of a moderately free economy that the Erhard policies brought, they institutionalized the soziale Marktwirtscharft (socially committed free economy)—that is, "a covenanted as opposed to either a completely unfettered economy on the one hand or a steered or planned economy on the other," in Erhard's words. Not only has this third-way policy brought about the slow demise of the German economy over the past 60 years, the EU has now adopted the flawed German notion of "balance" between the unfettered market and full-blown socialism.  

The Teutonic legend, however, does not end in the early years after WWII. The rise of soft-socialism in Europe, and particularly in Germany, England, and France, has been attributed to the cooption of these governments by politicians on the left. Germany, in particular, has been said to have abandoned the Road laid out by Erhard and the German liberals.  Unions forced inflexible labor regulations upon the economy, while cradle-to-the-grave social policies were enacted by a web of competing special interests. The concomitant rise in unemployment and economic stagnation that followed this ostensible turn to the left can be corrected, argue many, only by a return to the Erhard Days. As Richard Ebeling writes, "The general consensus among many of the German liberals on why [a return to socialism and interventionism] was occurring was that government policy had been captured by those ideologically further to the left; and economic policy increasingly was coming under the influence, if not control, of various special interest groups who wished to use the state's redistributive and regulatory powers for their own benefit."

It is clear, however, that this trend toward socialism is inherent in the words and policies of many of the German liberals. Erhard, for example, warned that Germany was "running a grave risk of becoming bogged down in a morass of ultra-individualism." And perhaps more incredibly, "Has not a people, which means, in effect, a state, obligations to fulfill which require the individual to make sacrifices?" Erhard repeats the same argument used by all protectionists, viz., that because there is not world-wide pure free-trade, government intervention at home is necessary. As he concludes, "The night-watchman State belongs to the past." The policies that have come to typify the German economy of today (tight labor regulations, expansive welfare state, progressive taxation and, of course, a stagnant economy) can all be traced back to the "miracle" of post-WWII.

The influence of the Erhard Doctrine, or at least its mentality, can be seen throughout the theoretical underpinnings of the EU. According to European employment and social policy: a policy for people: "Thanks to what has become known as the 'European social model,' people in the EU are not left to the mercy of market forces. On the contrary, they have access to one of the strongest social safety nets in the world. This is because the European Union firmly believes that while strong competition is necessary to improve growth, strong solidarity between citizens is equally vital to create a stable society and widely shared prosperity." Erhard could not have said it better.

Another central plank of the Erhard Doctrine called for the management of trade to ensure "free competition." Accordingly, "The State must not only take a hand in the running of the market in so far as it is needed to uphold the mechanism of competition, or to supervise those markets where complete competition is impossible." Compare this statement with that of the EU's leading anti-trust regulator, Mario Monti: "The competition policy implemented by the [European Commission responsible for competition policy] and by the Member States' authorities and law courts aims to preserve and develop a state of effective competition in the common market by impacting on the structure of markets and the conduct of market players. Requiring firms to compete with each other fosters innovation, reduces production costs, increases economic efficiency and, consequently, enhances the competitiveness of the European economy…."

The twin goal of the EU, peace and prosperity, are certainly attainable for the European continent. They will not be reached, however, through the EU. The social market economy of Germany and its adoption by the EU should serve as a warning to all those counties who rush head-first into the depths of the World State. As Mises wrote some 54 years ago,

"The conflict between [the principle of capitalism and socialism is] irreconcilable and does not allow of any compromise. Control is indivisible. Either the consumers' demand as manifested on the market decides for what purposes and how the factors of production should be employed or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other."              

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Jude Blanchette is a research fellow at the  Foundation for Economic Education in Irvington-On-Hudson, NY. He can be reached at  jblanchette1@hotmail.com. See  other articles by him. Comment on this article on the Mises Economics Blog.


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