Monday, November 24, 2014
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Europe’s Blame Game

The European Union’s leaders have just met to draw the lessons from the failed referenda on the Constitutional Treaty. But they need not search too far for culprits; indeed, they need only look in the mirror and confront the consequences of the dishonest game that the leaders of EU member states have played for too long.

Over the years, those leaders hoped to reap the benefits of reform while avoiding the blame, so they routinely let EU officials based in Brussels take the political heat for unpopular but necessary measures. They then bitterly complained to their people about “Brussels bureaucrats” and their undemocratic ways.

But these leaders forgot that their people might actually believe them. So, when the leaders of France and the Netherlands – pro-constitution to a fault – asked their people what they thought about the Union, they received a clear echo of their own message: the people did not like the reforms, and they did not like the “Brussels bureaucrats,” constitution or no constitution.

Nowhere has this game of passing the blame been more visible than in the way EU governments have handled the deregulation of the product market.

The rewards to be gained by deregulating product markets are very large. Breaking up monopolies often yields dramatically lower prices and thus higher living standards for consumers, because the same wage buys a lot more.

Consider deregulation of telecommunications and airlines, which has ushered in competition from low-cost carriers of data and people. Deregulation also leads to economies of scale, lowering prices even further, as we all know when shopping at the hypermarket rather than the corner grocery store.

But deregulation inevitably brings disruptions. Consumers gain, but some workers lose. Existing firms often have a hard time adapting. New, leaner firms take over. In the process, old firms go bankrupt, workers are laid off. Rents disappear, and think of the effects of airline deregulation on pilots’ salaries. Even if as many or more jobs are created as are destroyed, this does not eliminate the pain of those who find themselves unemployed.

By any estimate, with a decent safety net for workers who lose their jobs, the benefits of deregulation far exceed the costs and the pain they cause. But this does not make governments’ political task much easier, because the benefits are diffuse: consumers paying less for airline tickets may not attribute it to deregulation. By contrast, the costs are localized: airline workers who risk losing their jobs are intensely aware of the connection between deregulation and layoffs.

Of course, governments could try to explain why they pursue deregulation. But it is much easier for them to adopt a low profile, get the “Brussels bureaucrats” to do it, and then blame those Brussels officials, indeed the EU, for any and all of the pain.

Or could it really be true that “Brussels” has overstepped its powers, forcing more deregulation than national governments wanted? This exonerating hypothesis does not hold water.

The case of airline deregulation is again revealing. Twice in the last ten years, national governments have explicitly given the EU the authority to tighten constraints on their subsidies to failing airline companies. Governments did not have to cede these powers. But they did, and this did not prevent them for blaming “Brussels” strongly and loudly for these very constraints when their own national airlines got in trouble.

Having triggered and then witnessed the “anti-Brussels” vote, what should European governments do?

One piece of good news is that deregulation of product markets has been largely achieved, so there is less need to play the Brussels blame game. The main item on the agenda now is to design better social insurance, in order to minimize the pain from reallocation, be it from deregulation, technological progress, or globalization.

Of course, some product-market deregulation remains necessary, especially in the service sector. The Bolkestein directive on services played badly, but there is no question that European consumers pay too much for many services. To take just one example, eliminating the monopoly that notaries public hold in countries like France and Italy would substantially decrease the costs of buying and selling homes, decrease the cost of housing, and make it less costly for workers to move to where the jobs are.

European governments face three choices. They can try to stop product market reforms altogether and, by the same token, try to stop trade liberalization and globalization. So far, no government appears to have fallen to that temptation.

They also can continue to play the blame game, letting the Union pursue reforms, while complaining about Brussels bureaucrats. But the anxiety now being felt across the EU shows the dangers of that strategy. Moreover, labor-market policies do not fall under the EU mandate, so national governments will be on their own, without the Brussels bureaucrats to blame.

Finally, they can help “Brussels” define and design product-market reforms, and then sell those reforms, and the EU’s role in enacting them, to their voters. If Europe’s leaders are wise enough to choose this course, the fiasco of the French and Dutch referendums will prove to have been useful after all.

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