Advocates of free markets harbor a well-justified distrust of the European Union (EU). I, for example, have spent a fair amount of time criticizing its populist overregulation, moral hazard, the damage created by the common European currency, EU structural funds or Common Agricultural Policy. Like many, I am convinced that the EU is a deeply flawed organization and that it mostly deserves much of the criticism that it receives from pro-market circles. At a more fundamental level, I also think that institutional competition and ‘voting with one’s feet’ is important, and see the thoughtless ‘harmonization’ of legal and regulatory regimes across the continent as extremely damaging.
However, I no longer think, as I once did, that the EU is the single biggest threat to freedom and prosperity in Europe. Neither do I believe that an exit from the EU — either by the United Kingdom or some of the smaller central European states, such as my home country, Slovakia — would make these countries, or the continent as a whole, more libertarian. If a break-up were to occur, it would likely push Europe towards nationalism and protectionism, and undo some of the real benefits of European integration.
First, whatever one thinks of the EU, it has sometimes been a force for good. It would be foolish to take the free movement of goods, capital, people, and also — to a more limited extent — of services, for granted. Vicious protectionism, not free trade, has been the historical norm. The second half of the 19th century, is often cited as a counterexample, culminating in the ‘first age of globalization’. But one should not succumb to retrospective optimism — due to measures such Germany’s ‘iron and rye’ tariff of 1879 and France’s Méline tariff of 1892, fin-de-siècle Europe was no free-trade zone. Or, for a different example, think of the transitional economies of Central and Eastern Europe. Whether one likes the EU or not, the prospect of membership was clearly one of the engines of economic and political reforms that would have been otherwise very difficult.
EU break up would lead to more nationalism and protectionism.
Second, it is helpful to keep a perspective on the magnitude of the problem. The EU’s annual budget amounts to one percent of its GDP. Even the structural funds, which I recently blamed for the rise in corruption in some of the Central and Eastern European countries following their accession, are relatively modest, cumulatively accounting for some 4 percent of their GDP.
What rightly bothers the critics of the EU is not the absolute size of the spending but rather its wasteful nature. Over the period of 2014-2020 the EU is planning to spend €312 billion on agricultural subsidies. And the non-fiscal side of the EU, namely the unnecessary red tape and regulation it generates every year, is a much greater problem. This of course has to do with the lack of accountability of Brussels’ mandarins and with their belief that for every European problem there is a one-size-fits-all European solution.
These are all valid criticisms. However, it seems odd to think that the EU is acting as an external, exogenous force, dumping bad legislation on unsuspecting member states. After all, the European Council, composed of the representatives of national governments, is an integral part of the legislative process. In only a handful of areas, in which such powers have been explicitly delegated by the Council, can the European Commission (that grey, anonymous, unaccountable bureaucratic body) act alone.
Eurosceptic groups are correct to point out that much of the legislation adopted across EU countries originates in Brussels — as does a dominant part of the regulatory burden facing European businesses. However, that is a reflection both of the institutional structures — which make the adoption of bad, EU-wide legislation, more likely — but also, quite independently, of an intellectual climate which sees all human problems as amenable to improvement by legislative action, without regard for costs and benefits. It seems plausible that bad European legislation is acting in part as a substitute for bad domestic legislation. That does not make it any better, of course, but it should shed some doubt on the notion that, if it weren’t for the EU, national policymakers would be adopting significantly better policies.
The EU often acts in ways that are inimical to freedom and prosperity. But so do other political organizations, groups, and movements, and we need a sense of perspective to identify our key enemies. For one, I am much more afraid of the rise of Europe’s neo-reaction, of Vladimir Putin’s imperial ambitions in the EU’s immediate neighborhood, of the ties that connect the regime in the Kremlin with the populist nationalists within the EU, and of the damage that these can generate when in power. These are not just abstract threats. In Hungary, Viktor Orban - who wants to create a Hungarian alternative to liberal democracy, inspired by Russia and China — already nationalized the pension system, populated the board of the central bank with his political cronies, and helped elect a former skinhead as the deputy speaker of the Hungarian Parliament.
One may say that the choice between Orban or Putin on the one hand and Jean-Claude Juncker on the other is a false one. Indeed, I have argued that the current anti-EU populism is largely a response to the heavy-handed policies and catastrophic response of European leaders to the financial crisis of 2008, which led to a six-year recession in Greece. The continent needs a compelling intellectual alternative to the way the EU is being currently run, taking into account the importance of institutional competition and trying to limit the arbitrary powers exercised by unelected bureaucrats (or sham parliamentary bodies). However, such an alternative is not going to come from Europe’s populist Right. In the meantime, taking the prevailing intellectual climate as a given, we may still face the unpleasant choice between virulent nationalism and a flawed EU.
One reason why it is not easy to pin down the real counterfactual to EU membership comes from a famous paper by Richard Lipsey and Kelvin Lancaster, outlining the idea of the ‘second-best’, published in 1956 in Review of Economic Studies. Its idea, in simple terms, is that in a world with multiple distortions, it is far from obvious that removing one such distortion in isolation (say EU membership) will move us closer to the desired state of affairs as it is possible that the other distortions (say, petty nationalism) might then become ‘binding’.
If this sounds too general, consider what the likely dynamics of an EU breakup might look like. First, it is fairly unlikely that it would come primarily from the hands of the pro-market critics of the EU, such as Richard Sulik in Slovakia or the Alternative for Germany - who are not even arguing for an exit — but rather from the hands of politicians like Marine Le Pen, Geert Wilders or Orban, who aptly combine Eurosceptic rhetoric (which may or may not sound libertarian) with an embrace of nationalism and anti-immigration scaremongering.
Given the salience of immigration, it is difficult to imagine that a break-up of the EU would preserve the free movement of people across Europe. It would also likely result in a wave of protectionism and disruption to intra-European commerce. The possibility of a sudden dismantling of EU rules and regulations would be the perfect opportunity for lobbyists and rent-seekers in European countries to come forward and plead for special privileges, subsidies, tariffs, or quotas to shield them from European competition.
True, all of this is just speculation. Maybe the break-up would be perfectly amicable, like in the case of Czechoslovakia in 1992, resulting in a free, economically integrated continent simply liberated of the burden of Brussels’ bureaucracy. Perhaps the individual countries would be able to get off the Euro without triggering a major financial crisis. But maybe not. Let’s keep in mind that the pro-market Eurosceptics do not get to choose the kind of break-up they want. So if there is a sizeable risk that things take an ugly turn, how wise is it to try to become a cheerleader for dismantling the EU?
Europe’s economic and political problems — and the dangerous populist response that they elicit — are largely self-inflicted. There is also a downside risk in continuing with business as usual. But instead of feeding the fantasy of a better life outside of the EU, it is more practical to try to convince our fellow Europeans that the EU needs to shift its focus away from wasteful spending and overregulation toward providing genuine Europe-wide public goods: common market, free movement of people, goods, capital, and a real market in services. To get out of its present crisis and to prevent new ones, the EU needs to learn to manage the common currency and prevent chronic fiscal irresponsibility of its member states. And after Russia’s war against Ukraine, there is also a strong case for a common European foreign and security policy, instead of a simple reliance on America’s willingness to police the neighborhood.
The continent clearly needs a massive, 1970s-style deregulation, as well as stronger institutional safeguards against the unchecked growth of economically destructive rules in the future. Such safeguards may include the strengthening of the role of the European Council and returning to unanimity voting on significant matters of economic policy.
Unless more Europeans become convinced of the virtues of free markets and limited government, it is far from obvious that the EU will succeed in addressing these issues. Yet, in that case, it is equally unlikely that exit would generate an outcome appealing to libertarians. However that may be, it is worth keeping in mind that, for all the flaws in the design and execution of the European project, Europeans have been enjoying a historically unparalleled period of peace, prosperity, and freedom. It would be a shame if it all came to an end.