Proposal to boost competition misunderstands causes of eurocrisis

20 October 2011

Proposal to boost competition misunderstands causes of eurocrisis

Deputy Prime Minister Maxime Verhagen was correct to state in a recent press article that European integration has made the European Union’s member states vulnerable to the consequences of each other’s economic decisions. He misuses this insight, however, to justify profound intervention in member states’ economic policies. Unfortunately this will also form the Dutch government’s approach at the coming European Summit.

By Harry van Bommel

Harry van BommelMembership of the European Union brings benefits to all member states. That is indisputable. In large part this can be attributed to the removal of import tariffs between an increasing number of countries. The harmonisation of environmental, safety and other requirements for products has also contributed, facilitating international trade. The crisis has, however, made painfully visible the less beneficial side of European integration. Fierce competition around levels of taxation and ever lower taxes for multinationals has robbed some European countries of much-needed revenues vital to surviving the crisis. In addition, the constantly increasing freedom which political leaders have granted to the financial markets is causing much distress and enormous costs for which we must all foot the bill. These are cross-border problems against which action should be taken at the EU level, in the form, for instance, of an anti-speculation tax on capital movements and a minimum tax on profits, designed to combat drastic tax competition.

Verhagen, and the Dutch government along with him, have nothing to say about such measures and point instead to the economic policies pursued by the member states as bearing the guilt for the crisis, citing Ireland and Spain. In fact, these countries had a lower level of sovereign debt than does the Netherlands, yet are now mired in difficulties. It is, however, hard to say how the imposition of economic reforms in Ireland, celebrated in the recent past as the EU success story, could have prevented the explosion of the country’s sovereign debt. This debt exploded, after all, almost exclusively as a result of the rescue of the Irish banks, something which the Dutch government has itself done with the country’s own banks. The property bubble which is currently causing confusion in Spain was caused principally by an unjustified fall in interest rates when the country adopted the euro. In neither case was it the national policy which caused the problem, but rather the country’s European engagements.

In addition, the member states’ economic policies were seen by Verhagen, quite wrongly, as separate from each other and divisible into ‘healthy’ and ‘unhealthy’ policies. Two-thirds of its member states’ trade, however, takes place within the Eurozone. By lowering wages, social contributions and taxes to businesses, states can filch economic growth and employment from each other. A member state’s disappointing economic performance cannot therefore be divorced from the economic policies of other countries. Thus the trade deficit of many southern member states could be alleviated by wage growth in countries running a surplus, such as Germany and the Netherlands, which could give a boost to the deficit countries’ exports. In addition, the unemployment to which Verhagen is anxious to pay attention could be addressed by the same means. There is also much to be said for this on grounds of justice; for decades, the share of national income taken by wages has been falling in relation to the share taken by profits.

Last month, and unfortunately with the support of the Dutch government, European rules were established which make coordinated economic measures such as those outlined above difficult if not impossible. The Netherlands could be liable for a fine of almost €1 billion if the Commission and a majority of Eurozone member states find economic developments persistently disappointing. Thus, what has been opted for is an economic approach which boosts the member states and pressures the Eurozone countries individually into gaining a strong export position on the world market by means of wage moderation. Countries are therefore, on pain of massive fines, to be encouraged to enter into wage competition with each other.

Verhagen emphasised that national powers would not be touched. Member states remain free to determine how they will tackle disappointing economic performance. This is at best a selective rendering of reality. It has been agreed, for example, that wage growth is problematic should it exceed 9%, as it did in the Netherlands in 2001, 2002, 2003 and 2009. The Netherlands would be able to decide to ignore the advice of the other Eurozone countries – for which they might also be sound economic reasons - except that these same countries would later be in a position to impose a fine. Try calling that ‘free’. Furthermore, in such a case there will be little that a member state will be able to do in a short space of time but to try to force down wages, as raising productivity requires for the most part more time and is difficult to influence directly.

Via Europe this government has forced the Netherlands into an economic straitjacket from which it is difficult to escape. European measures and economic coordination which could, however, mean a reduction in mutual competition focused on decent terms of employment and remuneration, and the stimulating of economic growth, are spurned. This government’s argument for ‘more Europe’ is ironically enough inspired by a denial of the independence of European member states. Instead of merely ensuring a form of cooperation that means that harsh competition around social provision and wages will be pursued by the Eurozone countries, this government wants to see a European economic government which will ensure that this ‘race to the bottom’ is reinforced.

This opinion article first appeared on 20th October, in Dutch, on Joop.nl

You are here