Wednesday, 12 May 2004

Revolutionaries Join Europe

BRUSSELS – “If Mr. Glassman hates Europe so much,” said the head of the Belgian farmers’ union, “then why doesn’t he leave?”

Touchy! Actually, I love Europe – the vistas, the culture, the food, the history, even the people. At a conference here last week, I was merely offering a little constructive criticism of Europe’s agricultural subsidies and its ban on genetically modified crops. These policies block exports from Africa, further impoverishing its poor and people — and literally killing them. Raising such issues, I was admonished to build bridges, not burn them.

But the main reason the Belgian unionist got angry was that he didn’t think I was in the proper party spirit.

Europe is celebrating. On Saturday, 10 nations joined the European Union: eight from the Baltics and Eastern Europe, plus Cyprus and Malta. The accession, as it’s called, brings the total number of countries to 25 and the population to 425 million – 50 percent greater than the United States, though the GDP of the new EU exceeds ours by just 10 percent.

The truth is that the European Union is a remarkable accomplishment, a force for peace on the continent, and well worth cheering. But the 15 pre-enlargement EU members may regret admitting the 10 to their club. Revolutionaries are inside the gates.

Many of the new countries — especially the largest, Poland (with a population of 40 million, about the size of Spain), and the most delightfully radical, Estonia – are outdoing even Americans in their lust for free-market economic policies. The 10 new countries have an average corporate tax rate that’s 12 points lower than the other 15, and Estonia’s rate is precisely zero.

Personal tax rates are low, too; some of the accession countries have adopted the flat tax; others have radically reformed their welfare systems; and Poland has privatized its pension system along the Chilean model, “a policy that Western Europe will one day have to adopt in order stave off budgetary collapse,” writes Radek Sikorski, the former Polish government official who now heads the New Atlantic Initiative, co-host of the conference with Germany’s Konrad Adenauer Foundation.

Also, the former communist countries, especially, are resistant to the bureaucratic nonsense that dominates the EU.

As a result, Poland, Estonia and several of the others meet the criteria for what I call “aspiring” nations – willing to take chances and even endure some economic pain to allow their citizens more choices and prosperity. They are the European equivalent of Asian Tigers like Singapore and Taiwan. On the other hand, Germany, France, and Belgium are “complacent” nations, happy with their short work weeks and long vacations and fiercely risk-averse. The U.K. and Ireland are aspiring, as are the Scandinavian countries, while Italy and Spain are probably in between.

Now, the aspiring accession countries, which could prove an irresistible force, are confronting the complacent original members, which could prove an immovable object.

The bone of contention is “tax competition” – the big buzz-phrase here in Brussels. The line among EU officials is that it is fine for the newcomers to have low taxes, but competition has to be fair – whatever that means.

On Friday, German Chancellor Gerhard Schroder, whose country has a larger population than the 10 accession nations combined, warned the newcomers not to engage in tax “dumping.” Otherwise, they can forget about the future financial generosity of Germany and other rich EU countries.

Germany is no model. Its high taxes and rigid labor laws contribute to an unemployment rate over 10 percent.

The ideal for the newcomers, instead, is Ireland, whose corporate tax rate, at 13 percent, is the lowest in the EU. A poster boy for the Laffer Curve, Ireland’s low tax rates have brought in more tax revenues as the economy has boomed. In a decade, income in Ireland has gone from 50 percent below the EU average to 20 percent above it.

But Schroder said last week that one Ireland was enough. Harmonize your taxes at the high EU levels, or else, he told the accession nations.

Let’s hope they resist the pressure. Poland and its cohorts would do well to call Schroder’s bluff: forgo the subsidies, but whip up the tax competition. And demand less red Eurotape while they’re at it.

Little Ireland has had a liberalizing effect on much of the EU, where corporate tax rates are now lower than in the United States. Just think of what the 10 new countries do. Am I burning bridges? Sorry.

James K. Glassman

This article first appeared on techcentralstation