The European Union as a Third-Best Solution

My posts below, as well as Shannon’s have gotten a lot of comments. I had meant to respond today, but I’d rather digest all those thoughtful comments for one more day. I also promised some posts on the Euro, which I also hope to be able to post tomorrow.

For now just this: I see from some of said comments that people have gotten the wrong idea about me. I actually value individual freedom and free markets as much anyone, but unfortunately we are not living in a perfect world where such things can be taken for granted, as some may have noticed. Like it or not, we need some institutions to at least achieve a reasonable (or even an unreasonable) approximation of same.

So, to rank the possible institutional arrangements in order of desirability:

1) In a perfect world, none at all. There didn’t need to be any EU, or WTO for that matter, for countries would have rational policies, without any obstacles to trade. Individuals and businesses would be unhindered in the free and voluntary exchange of goods and services (even so I would frown rather fiercely on the free and voluntary exchange of, say, money and arms between Germany and China; then again, in a perfect world the Chinese would only want to buy our weapons systems because they like their aesthetically pleasing looks, and wasn’t it Roger Bacon who said that this here *is* the best of all possible worlds, so… – but I digress).

2) Given a non-perfect world (leaving Roger Bacon and sales of weapons to China aside and under the table, respectively), where barriers to trade exist, both in the form of tariffs and the bureaucratic intransigence Jim Bennett was hinting at in his comment to Shannon’s post, some kind of institution is necessary to facilitate free trade in Europe. The institution I have in mind would be very different from the EU existing now, though. In this I am following the lead of James A. Buchanan, one of the Chicagoboyz above (he’s the sixth from the left), who received the Nobel Price in economics for his Public Choice theory. Buchanan and Viktor Vanberg, one of my professors at the University of Freiburg im Breisgau, had co-authored a paper (memory fails me as to title and publication date of the paper, but I think it is ‘Rational Choice and Moral Order’ from 1988), in which they laid out their idea for a European Union that would offer the most individual freedom and the best prospect for growth, given the constraints imposed on both by the world we live in.

In the European Union proposed by the two authors, each member nation would set all its policies concerning taxation, regulation etc, etc, independently from all others. The two guiding principles of the Union would be ‘voice’ and ‘exit’. This means that the citizens of each nation would have a say over all of these policies (voice), and that those who didn’t like the policies in the nation they are living in could relocate themselves as well as their possessions to the member state of their choice, without any bureaucratic hindrances, taxation and levies on their property etc, etc (exit). The only purpose of the European Commision would be to make sure that the two principles are observed by the various national governments.

The advantages this arrangement would offer are obvious: It is altogether democratic, while having the policies of the individual member states compete with each other. Nations would be free to put foolish policies into place, but would suffer the consequences immediately by seeing the most wealthy and industrious citizens leave for more accommodating environments. Over time this competition would weed out the most damaging political ideas. We see some of this in the real world, due to globalization, but it is a much slower process that also allows people to ignore problems for a long time, for they can live of the economic substance and wealth of their nation instead of actual income for decades, thus risking slow but inevitable collapse.

Unfortunately this system proposed by Buchanan and Vanberg is all but impossible, for Continental policies are traditionally extremely dirigiste, and our electorates would never tolerate this much freedom anyway. In fact, right now especially German and French voters would like nothing better than to sit on their behinds, live of the wealth created in the past, and to complain about the unfairness of the world all the way down.

This brings us to

3) the European Union that we have have, as the third-best solution I mentioned in the title of this post. For all of its warts, halitosis, running sores and so on and on, it still is the best that we can do right now. Its policies are horribly dirigiste and socialistic, but not nearly as dirigiste and socialistic as the policies the individual members would have if they were free to formulate them in any way they wanted to.

So, free trade among the members of the EU enforced by Brussels and common laws is the best we can hope for right now. Besides, while the various interest groups, trade unions, farmers’ associations and so on are united in their avarice, authoritarian leanings and general pigheadedness, the interests of the national subgroup of each diverge from that of the other subgroups. For the cake they want to carve slices from now is a Pan-European one, and the only way they can increase their own share is to go after that of their counterparts’ in other countries. Thus they keep each other in check, and the whole affair is as entertaining as a cage fight.

And to address this particular concern, too: There also is no danger of a European super-state. The centrifugal forces (so to speak) are too strong for integration beyond a certain point, and the attempt to proceed further anyway would rip the EU apart.

And for completeness sake there is

4) the EU dissolving, and the individual members again free to pursue the protectionist and even more socialist policies described above. The way least favored by myself.

In a nutshell, I’m no fan of the EU in its current form, but it is the least bad solution I can think of, given the current political climate and real-world constraints.

17 thoughts on “The European Union as a Third-Best Solution”

  1. Ralf, thanks for this. But, query: What does all this say about the recent proposed Constitution? Do you think it would have made things better or worse? Do you think the Union-level ability to impose freer or freeish trade on the national economies will become worse or better if the current regime stays in place? And this: Even a third best regime seems to be incredibly annoying and intrusive and destructive with its meddlesome regulation of things that don’t need to be regulated at all. Is there no hope of a getting somewhere back on the continuum toward position 2? Maybe 2.8 or even 2.5?

  2. I agree with your reasoning here, Ralf. But, echoing Lex, are the proposed changes to the EU constitution a move in the right direction or the wrong direction? Does increasing the power of the the unanswerable central organization promote free trade (both within and outside the EU) or retard it? Does a larger more influential central bureaucracy do ditto?

    This sounds like an argument for confederation and against closer political union to me.

  3. I would assume that the UK leaving the EU would be okay though, by your argument, as the UK is less likely to go the protectionist/socialist route, if only because of the legacy of Thatcher.

  4. Ralph,

    You make a compelling case that the EU is the optimum real world solution given the political and economic realities on the ground in Europe…


    …I think many worry that the EU represents more of a bait and switch. People will be lured into supporting the formation of the supranational government by the promise of free trade but will find down the road that free trade evaporates while the government organs persist.

    For example, the Euro was supposed to control deficit spending by individual nations but appears to have largely failed in that regard yet the Euro and the institutions that implement it still persist.

    What is to stop free trade from suffering the same fate? If as you say, free trade doesn’t really have much of constituency will it really survive for long? Worse, if true free trade does die will the vast institutions of the EU created to foster it die as well or will they seek out new missions?

    You could end up with the worst possible outcome, no free trade and a giant state.

  5. The problem with the Buchanan model is that because of language and cultural differences, the transaction costs of moving between many European nations would be substantial even if there were no bureaucratic barriers at all. That model would work quite well within the Anglosphere, or for that matter the Hispanosphere or Francosphere. In fact the “network commonwealths” I propose in my book are pretty much a Buchanan model for specific linguistic-cultural communities.

    Given, though, that these transaction costs do exist, it’s worth re-examining option 4 again. Realistically, how much more protectionist would fully sovereign European nations manage to be? Unless they wanted to withdraw from WTO, they would have to stick with the low (3%, for the most part) WTO tariff limits. And for the average European nation withdrawal from WTO and shut-down of their export markets would be tantamount to economic suicide. Yes, they would have the option of non-tariff barriers, but they pretty much have them today, and more gleichschaltung-type harmonization rules are not going to cure this. The whole idea of top-down harmonization is wrong-headed, and I said in my previous comment, it was not the way standards convergence was achieved in North America. Moving europe much more back to the idea of a free-trade area and forgetting the “Construction of Europe” along the lines of Bismark’s construction of Germany is in the long run the most realistic option. Just dissolving the sucker (although I don’t think that’s going to happen) is not actually all that terrible an option — it’s almost certain that a free-trade area would rise on its ashes pretty quickly. Or better yet, a North Atlantic Free Trade Area, which is something the US could help make happen and something I very much advocate.

  6. Holy cats! Jim Bennett posts here? SWEET! So, is he an honoray Chicago Boy yet?

    All this talk of the EU lately, I find interesting, but the most striking item in Ralf’s post to me was this gem:

    Unfortunately this system proposed by Buchanan and Vanberg is all but impossible, for Continental policies are traditionally extremely dirigiste, and our electorates would never tolerate this much freedom anyway.

    Our (US) electorate would tolerate nothing less. I think it is yet one more distinction between the US and EU outlook on Life, Liberty and the pursuit of whatever that Europeans feel they can only handle so much freedom, and frankly don’t want to be bothered with more than that. I assume that Ralf’s comment was made with tongue squarely placed in-cheek, but I think there is a certain amount of truth there. Americans would tend to take it as a matter of pride and personal responsibility to use every last ounce of freedom they can and woe to the government forces that try to get in his way (God bless the Second Amendment). Europeans seem content with exercising those rights they are given permission to have.

    Wow. I make some hefty generalizations there. I may throw my back out if I have to support those for long. In any case, I calls ’em as I sees ’em.

  7. This post took more time than I had planned, so I have to postpone answering your comments here, as well as comments to the other posts, til tomorrow again. But answer I will. ;)

  8. Ralf, this doesn’t really deal at all with the accusations you making the other day. You implied that the criticisms made by conservatives and libertarians of the EU were foolish, and little more than myths peddled by scare-mongering tabloids. As some of your commentators (including myself) said, you’re wrong about this.

    It also seems to me that your dividing the EU’s future up into four possibilities is too simplistic. Yes, we are probably stuck with (3) for the time being. What we have to do is improve what we’ve got, and stop the move to integration and rule by bureaucracy. That’s what the Euroskeptics are doing. I’m puzzled as to why you’re so hostile to them when it seems to me that in the end you have similar views. (You are, perhaps, worried that a complete break-up is on the cards, and full-blown socialism will return to some countries. But what we’re being offered is even worse, because once it’s there, we can never vote it out).

  9. “For all of its warts, halitosis, running sores and so on and on, it still is the best that we can do right now. Its policies are horribly dirigiste and socialistic, but not nearly as dirigiste and socialistic as the policies the individual members would have if they were free to formulate them in any way they wanted to.”

    The problem with this theory is that the exisiting EU may constrain Germany and France to be more liberal than they would be without it, a lot of other countries a being prevented from liberalizing by the EU. The question is whether the benefits of liberalizing the most dirigiste out weigh the costs of socializing the most liberal.

    My own belief is that any country can benefit from freedom no matter what its size or where it is. If that is so, countries that bail out will be rewarded and those that stay in will be punished.

    I therefor expect to see the EU break up. It will be bad for Germany and France, but they will get over it eventually.

  10. Britain only grasped the nettle and reformed when it really had to. Some of the structures of the EU, particularly CAP and structural funds, insulate European countries from so of the realities of globalisation.

    If the individual countries of Europe had to swim on their own, they would all discover the benefits of free trade sooner rather than later.

    The constitution by the way was the last desperate grasp at setting the rules by Old Europe, which is why French rejection is so much sweeter. Without it the chances of changing direction are much better.

  11. Jim,

    a North Atlantic Free Trade Area sounds great, but it is just what the French vetoed a decade ago. If they hadn’t done so, we’d all be

    much better off. Rational thinking has nothing to do with it, and the French would find a way to throw a monkey-wrench into the works again.

    And the experiences your wife had with Continental bureaucrats would be nothing compared to what would happen if there were no EU with a common trade policy. The French could and would assign all of three inspectors to look at the hundreds of thousands of imported cars, to delay the imports for a couple of years (or decades) in port. And it’s not just the bureaucrats: French farmers routinely beat up Spanish truck drivers and burn the trucks, and sometimes the cattle within (alive). For this they usually remain unpunished. If they had reason to think that they could get away with it, farmers and trade unionists would pull such stunts at every single border crossing and port where imports are off-loaded.

    If rules aren’t imposed on them, they’ll find a way to bugger things up.

  12. Lex,

    the failure to get the constitution passed means that the Treaty of Nice will remain the basis for the EU to operate on. The constitution didn’t just attempt to lay down principles, but it also tried to micromanage just about everything and make provisions for every conceivable occurence.

    It would have been a mess, for this isn’t just too much regulation, but you’d also have a lot of provisions contradicting each other.

    As to trade under the existing rules: The EU already has enlarged too much to succeed at further integartion, constitution or not. The EU will have to consolidate for a number of years, and I don’t expect any great moves towards closer integration, and unfortunatelly no moves away from it, to a 2.5 solution.

  13. Dave,

    like I said in my answer to Lex, I don’t expect movement either way. I hope for improvement in the trade area due to WTO level agreements, though.


    the UK would be as good off outside the EU as it is now. As you point out it isn’t likely to go protectionist, and since it has a large trade deficit with the Continent there also would be no incentive to act protectionist towards if it leaves.

  14. Mister Bixby,

    if asked if they are for freedom, they’d say yes, of course, but a lot of them can’t stand it if people and businesses actually act as if they were free, instead of asking permission for just about anything.

    If Monsanto sows a experimental field with GM crops (even those which are routinely harvested and eaten in America), the field will be vandalized, and the perpetrators wil remain unpunished. If businesses hire and fire people as they see fit, they are submitted to incredible invective, and foreign investors are called ‘locusts’ etc, etc.

    So I wasn’t just writing with tongue in cheek, I’m sorry to say.

  15. it strikes me if the Euros want a union, they need to stop acting like Germans, Italians, French, Brits, etc….

    Oh wait, we did that over 200 years ago.

    The only people who could begin to put their differences aside already jumped a boat for these shores….

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