Tuesday, May 25, 2010

What is the problem with the EU? Maybe Not what You Think

Daily it seems the woes of the PIIGS spread – most recently bank failure in Spain hard on the tales of the Greek tragedy papered over through the world’s largest cross subsidy to date. Frailty seems to abound.

A friend who – like a very large number of people including me – has a great fondness for all that is or was Europe – finds it hard to conceive of collapse let alone why this catastrophe may be upon us.

The standard economic diagnosis is of course quite correct – decades of dependency policy with the inevitable and rising fiscal cost that brings, labour markets paralysed by regulatory strictures which generate the very unemployment they seek to avoid while channelling rent  to the lesser deserving and so on.

The widespread knowledge of these and numerous other policy ills has done nothing to promote change and their reform seems distant in the extreme. Certainly the recent wild debt binge will bring no life saving reform.

What seems no longer to be noticed though, is that the very concept of the “EU” is now and always has been flawed. The idea of the EU as an “economic major… an economic force to be reckoned with” is based on some kind of trade penis envy in which sheer size generated by political and administrative “grouping” is somehow superior and could trade with majors such as Japan, the U.S and others.

This BLOC notion seems to me to characterise Europe in precisely the wrong terms. It ignores or rather tries to supplant the essentially niche nature of the nuanced complexity which centuries of historical, cultural, social and economic development have brought to a series of quite distinctive countries.

Those niches can operate successfully – very successfully, albeit with the proviso that broadly market oriented or at least not market destroying, policies are maintained. Like all niches however the game is about specialisation, competitive advantage, comparative advantage and working to distinctive strengths.

What does not work is the “build a bigger fruit salad” approach. Trying to run trade blocs which blow the person you are trading with out of the water has a dismal success rate. Worse that approach has two major problems.

First it destroys the distinctiveness which is essential to trade and survival – as parodied decades ago on television’s “Yes Minister” in an episode featuring the need to reject the “Euro-sausage”.

The worst excesses of the innovation killing fruit salad is epitomised by the entire concept of “Brussels” as it has become – an administrative and political machine which strangles initiatives in numerous fields – and at vast cost.

Second the misguided prospect of wealth through scale, or at least redistribution from the centre to the periphery, has those on the fringes lining up at high speed in search of “whatever it takes” to get into the soup kitchen.

As with any dependency  driven welfare system this destroys the finances of the donors while making things worse for the recipients – thus those who have most recently signed up “for the dole” – the PIIGS - have begun the slaughter of the finances of continental Europe while getting themselves further in the mire.

Should this unholy mess – put together by those who believe that politics rather than competitive markets have the power to produce wealth – fly apart this might be the very best thing that could happen since a return to the profitable niches – and all that so many admire about those niches - might be possible.

That fruit salad currency the EU – a daft concept for all the above reasons – appears (exactly as we would expect) to be leading the way.

Those on the side of the bureaucratic Goliath who doubt this analysis might ask themselves why the  Swiss – for centuries one of the world’s most stunning niches on every front - are not members of the EU nor even vaguely interested in joining the queue.

Reasonable bet? Long the Swiss franc against the Euro…. in spades.


  1. Why is it that the Swiss were not bullied into joining the EU like some of the others were?

  2. Said bullying a tough task when it comes to the Swiss. Not bullied into WW I or II either.... but a good point.