Europe’s Harmony Overdose

PRAGUE – One pillar of the European Union’s single market is harmonization. At first sight, that makes a lot of sense. Harmonized systems of rules make it easier for capital and labor to move around in search of their best use.

Alas, some Europhiles’ unifying zeal has all too often spilled beyond the bounds of economic reason, even common sense. More unification and harmonization does not necessarily lead to effective – or even reasonable – solutions to the EU’s troubles.

The main point of the new European regulatory measures under consideration (apart from the so-called new Basel III rules) is to bring more stability to the financial system. The indirect effect will be to reduce the financial sector’s size – in absolute terms and relative to the economy – and to hinder its growth in the future.

But these effects will also occur in EU countries whose financial sectors have maintained a high degree of stability in the current crisis. Delivery of financial services will be made more difficult and expensive everywhere, even though some countries’ banks are financed by stable long-term deposits rather than short-term interbank loans, with few toxic assets and local loans that are more than comfortably covered by local deposits.