By GEORGE MELLOAN
Can 11 Eurostates Find
Harmony? Does It Matter?
A Journal editorial last week described how Brussels bureaucrats are
pressuring the Irish to raise taxes, a move that would surely slow Ireland's
rapid progress toward unaccustomed prosperity. Imagine that. Trying to
boss the Irish around. What can the world be coming to?
Well, that part of the world called the European Union
is pursuing something it calls tax "harmonization." As the EU moves toward
replacing national currencies with a single "euro," its movers and shakers
are concerned that some nations will end up more equal than others under
a single currency regime. For six years the EU has been attempting to harmonize
the tax and budgetary policies of its members so that when single currency
fusion occurs, the more virtuous low-spending states won't have an economic
advantage over those that prefer to tax and spend.
Hence Ireland, an EU state blessed with relatively low taxes for industry
and an economic growth rate approaching Asian Tiger levels, is being threatened
with curtailment of EU subsidies if it continues to provide investors with
tax incentives. It also is being told not to follow through with its plan
to cut the overall 36% corporate rate sharply.
Ireland is not as virtuous as it might be. It is a beneficiary of large
farm and regional subsidies from Brussels. Indeed, its per-capita income
from the commission is the highest among EU member states. So the commission
does have a weapon. But what about the soundness of this harmonization
policy over all? Aside from the difficulties of making it work, the principle
Harmonization was implicit in the Maastricht Treaty of 1991 that pointed
the EU toward a single currency. The treaty's much discussed "convergence"
criteria conditioned entry into the European Monetary
Union on national budget deficits of
no more than 3% of gross domestic product and government debt of 60% or
less. Those conditions will most likely be reinterpreted next year to admit
countries that are at least heading in the right direction. As many as
11 of the 15 member states could be admitted to the EMU. Britain, Sweden
and Denmark expect to reject first-round membership and Greece is not likely
While these Maastricht requirements have often been cited as a strong,
coordinated effort to achieve budgetary discipline in Europe, we now know
that didn't happen. Governments didn't cut spending. They raised taxes.
The commission reported last month that taxes in the EU set a new record
as a percentage of GDP in 1996. Governments siphoned off 42.4% of economic
output, compared with 41.7% in 1995 and 38.7% in 1980.
So Maastricht harmonization has simply fed welfare statism, which explains
the EU's overall slow growth. France now collects 19.5% of its GDP in what
the EU euphemistically calls "contributions" to social programs, such as
national health. That's the highest take in the EU and not far below what
the U.S. government collects in total federal taxes.
France's total national tax take, at just under 30%, is far below the
50% of Denmark, the EU tax champion. But France, unlike Denmark, wants
to be a kingpin of the EMU and it is highly protective of its current rate
of social spending. Indeed, its present Socialist government wants to further
expand spending, not reduce it, as its dubious answer to high unemployment.
It thus is not surprising that France has been a driving force for harmonization--or,
in other words, for bringing all EMU members up to its taxing and spending
The Maastricht treaty would have been more effective as a discipline
if it had focused on curbing government spending. But few of the member
governments were willing to bite that cannon ball, so they decided to describe
virtue in other terms. Now, of course, they are prepared to push the single
currency project ahead by defining virtue in a still more liberal way--as,
in essence, good intentions.
All of this has a bearing on the future of the euro. The new European
Central Bank will start creating euros as a unit of account on Jan. 1,
1999, locking national currencies to the euro at a fixed rate of exchange.
Coinage and currency won't be issued until 2002, at which time, it is proposed,
national currencies will cease to exist. Ultimately, the ECB will be responsible
for determining the money supply for EMU countries, functioning for them
in much the same way as the Federal Reserve functions for the U.S.
But there's a big difference. The ECB will be assuming the role of the
central banks of sovereign states, with the existing central banks subordinated.
Theoretically, the national banks will not be able to finance national
deficits by printing money. National governments will have to borrow euros
in the market, and the rates will vary according to their perceived fiscal
and budgetary soundness. The high-spending, high-debt states will be at
a disadvantage, faced with higher borrowing costs than the low-spending
states. Can the more profligate welfare states permit such a condition
That is not clear. What is clear, however, is that France in particular
is pushing a plan to ensure that the ECB does not totally escape political
influence. French Finance Minister Dominique Stauss-Kahn met with German
Finance Minister Theo Waigel in Munster, Germany, some days ago to formulate
plans for a special council that would consist of the finance ministers
of EMU member countries only. It would meet in advance of the meetings
of finance ministers of all the EU countries and would thus be in a position
to pre-empt the full council. It would give special attention to the management
of the euro, that is to say the operations of the European Central Bank.
So don't be too sure that the ECB will follow a hard line on monetary
policy when the heavily indebted European states are faced with the problem
of financing their debts.
All of the above efforts have a single political goal: to prevent competition
among governments to provide more hospitable environments for work and
investments. This is quite the opposite of what happens in America, where
the states compete freely to the overall benefit of the total economy.
It is also counter to the most powerful argument for the European single
market. It is to be a place of sharpened business competition, with companies
achieving greater efficiencies in their bid for a share of a huge continental
market. The missing element is any encouragement for more efficient government
to provide better economic incentives through less spending, taxing and
regulation. That may happen anyway through natural causes, but "harmonization"
certainly doesn't point Europe in that direction.
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