Diverse National Policies May Offer the Best Route to EU Economic Reform

Article excerpt

The article in the fall issue of European Affairs by Martin Neil Baily and Jacob Funk Kirkegaard, "EU Governments Should Be the Agents of Change," misses one important aspect in an otherwise perfect analysis.

While most economists agree that the pace of economic reform in the older EU member states is rather sluggish, there seems to be a division of opinion as to whether EU-wide initiatives such as the Lisbon Agenda provide the right institutional framework for speeding up the reform process.

Discretion in economic policy allows member governments to take into account their countries' unique national characteristics, and the outcome of their policies can serve as an inspiration or a warning to others. We can thus say that there is a learning effect associated with a diversity of economic policies.

Furthermore, the natural propensity of governments to spend some of their revenues in an inefficient or wasteful manner can be curbed by increased mobility of the tax base - the taxpayers, whether corporate or individual can simply move to another country. The discipline imposed by the possibility of relocation is sometimes called the utaming-of-the-Leviathan" effect. Obviously, however, the effect can apply only to activities by public authorities that are independent of central control by Brussels and not harmonized at EU level.

Taken together, the learning and the "taming-of-the-Leviathan" effects allow gov-ernments continuously to choose and implement the most suitable economic policies while also giving them an incentive to do so. Although diversity of economic policies is probably not a sufficient condition for enabling long-term economic development, it might be a necessary one.

In some of the core EU countries, however, there is a popular belief among both politicians and the general public that diverse economic policies involve substantial costs. Such costs are supposedly the result of tax competition or of so-called "social dumping," when one country lures jobs away from another by offering allegedly un-fair advantages to employers. The implication is that countries with highly redistribu-tive tax policies, and/or high levels of social protection, suffer unwelcome capital outflows in favor of countries less committed to redistribution and social welfare. …