Note: I continue with my biographical sketch, on how I learned economics after I had left Harvard. Jack
The European Union
On May 1 of this year, ten new countries were brought into the European Union: Cyprus (Greek part), Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. All but Cyprus and Malta were once satellites of the Soviet Union. The total membership is now twenty-five.
I was right there at the very beginning of the EU (though not in an official position). In 1948-49, as I was tootling back and forth between Frankfurt and Paris, friends on both sides of the border were talking about a "United States of Europe." They had in mind something like the "United States of America," but they had no idea how difficult that would be. (They have not achieved it yet.)
Robert Schuman and Jean Monnet of France led the way. Europe could produce steel more efficiently if customs duties on coal (mainly in the Saar valley, Germany), and iron (mainly in Lorraine, France) were obliterated. The European Coal and Steel Community, begun in 1952, consisted of France, Germany, Italy, and the Benelux countries. It was to last for 50 years, but long before the treaty had expired, further negotiations and treaties had brought about the European Union, a greater unity than Europe has ever known.
In my language (not everybody's), "organization" is a legal being, like a corporation, while "institution" is a mode of behavior, like the educational system. Let us start with the organizations of the European Union. The ultimate body, the Council of the EU, consisting of the prime ministers of all member countries or their representatives, meets twice a year. The executive body, the most important, is the Commission, consisting of permanent civil servants appointed by the Council. Every country is represented, but voting is different for different countries (they are still wrangling over this). The European Parliament, located in Brussels, consists of delegates elected by all residents of member countries. It has certain jurisdictional power over all members, including the possibility (in certain cases) of overriding national laws. The European Court of Justice is designed to interpret the Maastricht treaty (which founded the EU) and resolve its disputes. The European Central Bank, located in Frankfurt, sets the monetary policy (basic rate of interest, etc.) for member countries. Although the EU organizations are scattered over Europe (there are more than these principal ones), the name "Brussels" has become associated with the entire EU. If you wish to know more about the organizations, look in the encyclopedia or Google. This Letter concerns mostly the problems of the EU rather than the organizations.
Free trade and employment
The main fact of the EU is free trade and the legal ability of citizens of member countries to be employed in other member countries. Back in the days when I was tootling between Paris and Frankfurt, I had to present my passport at the border and declare how much currency I was carrying. Whenever I exchanged currency, I had to get a bank receipt and, upon exiting (Germany or France), I might if asked be required to show that the currency with which I had entered, less what I had exchanged, equaled the currency I was taking out. (I was never asked to do that, but it was always a threat.) Two years ago as I drove from France into Luxembourg, the customs officer was reading a newspaper in his glass compartment. No matter how much I knocked on the glass, he would not budge, so I just drove through.
Not all trade is free; there are a few exceptions. Each exception is negotiated separately, but they are minor compared to the very fact of free trade of almost all goods. Employment is more of a problem. Germans (or French, etc.) who do not speak English are not likely to seek jobs in England, although they do so in small numbers.
A bigger problem is refugees from poorer countries that enter the EU illegally (e.g., from Albania into Italy - just look at the map - or from Morocco into Spain). Most of these try to find their way to England, where jobs are more easily available. The British have just persuaded the French to close down a camp for refugees near the French end of the chunnel (channel tunnel), from which refugees would try illegally and unsafely to board trains to England.
About three years ago, Robin and I stopped at a bed-and-breakfast in central France, and at breakfast I sat opposite a businessman. I spoke to him in French, but it was obvious he did not understand, so I suggested we continue in English. He told me of many French who came to work in his factory in England but decided to leave, not because of economics but because they could not cope with British culture. I recalled one day many years earlier when, while cycling in Germany, I saw an Esso sign. I was shocked to discover that I felt warm toward that sign (I never would have, at home). It was a symbol of my culture, at a time when I was living in a German family who (guess what?) spoke German, ate with their forks in the left hand, drank beer at meals, and always lingered over Nachtisch (dessert) while sipping coffee.
The meaning of cultural artifacts is very strange until one becomes accustomed to living among different peoples. We experience this a little in the United States, but not very much compared to Europe.
In its attempt to become a "United States of Europe," the EU has run afoul of unforgotten nationalism. Each government tries to obtain advantages for its own businesses. The EU was intended to include free mergers of corporations from many countries. However, governments (particularly that of France) keep passing national laws that limit the merger of national corporations with those of outsiders. This is especially so with respect to banks and telecommunications.
A common currency, the euro, was the original intention. A set of fixed exchange rates among member-country currencies was adopted, and ultimately national currencies were converted into euros. However, member countries may choose whether to join the currency union or not. The United Kingdom, Denmark, and Sweden are members of the EU that have chosen to keep their own currencies. Even so, the euro often circulates in these countries alongside national currencies, though it is not legal tender.
There are now three tiers of banks: the European Bank, national central banks, and ordinary commercial banks. The European Bank sets the basic interest rate, at which it lends to national central banks. Banks with low reserves borrow from others with excess reserves, or from their national central bank, in order to maintain their required reserves. Thus the central banks of all member countries may create euros, by lending them as the reserves of commercial banks, which (based on these reserves) lend to all borrowers. That is how euros are created. (Again I am trying to teach a one-semester course in a single paragraph. If you took a course on money and banking, review your notes on how money is created and extinguished. If you did not, try to get the general idea that banks in many countries can create all the euros that their national central banks allow.)
One problem has been that the national central banks might create too many euros, causing an inflation throughout the EU. To resolve this, Germany proposed the rule (accepted by all countries) that they would not borrow (create money) more than 3% of their respective gross domestic products. However, for the past three years both Germany and France have exceeded this percentage. Despite the complaints of smaller countries (e.g., Spain) they have gotten away with this. The EU has no way to enforce its rule, except to kick France and Germany out of the Union, a drastic step that would cause the EU to break up. This problem is still festering. If inflation becomes excessive (it has not yet), the problem will resurface.
According to Keynesian economics. Governments should create money during a depression and retract it in prosperity. But suppose Spain is suffering a depression while Ireland is booming. Interest rates should be high in Ireland but low in Spain. The European Central Bank has to run a tightrope between these issues, which are often a matter of controversy.
Taxes and welfare states
Despite its government health care program, Britain is much less of a welfare state than France or Germany. The French and the Germans both promise more benefits to their citizens than their people are willing to pay for in taxes. The result is not only the violation of EU rules on 3% of GDP, but also the imposition of heavy taxes on much industry, especially in Germany. As firms and jobs leave the country because they are too hard pressed with taxes, Britain becomes a more welcoming country for business. This is mainly what has led to British superiority economically. When the German government has tried to remedy this situation, they are met with labor unions and others who demand their "privileges."
The continent of Europe has tried to establish unified taxes throughout the EU, but Britain has resisted. Unified taxation has not been approved.
The European Constitution
A constitution for the EU has been drafted and is now under discussion. Delegates from continental members favor building the welfare state into the constitution, including such policies as equal rights for women, health care, social security, and the like. In the United States, these are considered the territory of Congress rather than as amendments to the constitution. These amendments may change from generation to generation, whereas Americans consider their constitution as solid, rarely only very occasionally requiring changes.
Britain opposes these continental principles, preferring a document closer to the constitution of the United States. This question is now in stalemate; most observers believe that no constitution will be agreed for decades to come. The Germans and French have recently proposed that amendments to the EU constitution require only twenty votes from the twenty-five members. The British are bound to object, as indeed they should.
When the EU was formed, virtually all members subsidized agriculture, in a manner similar to the United States. So that the farmers of one country would not have an advantage over those of others, they decided to pool their subsidies into a common agricultural policy (CAP) and pay farmers on the same principles for every country. This policy, however, has elicited complaints from Africa and Asia, for which agriculture is a principal export. The Europeans and Americans, with subsidized exports, can undersell the Asians and Africans. Most economists myself included abhor the Euro-American policy, because it is the principal way in which "we" (the more developed) keep the poorer countries poor.
However, the World Trade Organization, at the behest of Brazil, has recently ruled that cotton subsidies by the United States are contrary to international trade rules. Some are hopeful that this is the opening wedge in a wider ruling of illegality of agricultural subsidies everywhere. If so, this is the most significant ruling of the WTO to help less developed countries. I grate whenever Quakers (and others) protest against the WTO, which I consider to be the one international organization that will do much to lift the poor out of their poverty.
The advent of ten more countries into the EU, with much lower income levels than the original EU members, asks if (for example) Poland will get the same agricultural subsidies as France. No, not for several years, is the answer. The Europeans, like Americans, have ways of postponing present inconveniences.
In Germany, when the country was united, the West (ahead economically) feared that many Easterners would swamp the West, competing for jobs and bringing wages down to the level of the East. (This did not happen as much as was feared.) Likewise, as ten new countries, poorer than the original ones, are admitted to the EU, the original members are fearful that many will migrate westward, bringing down the standard of living of the West. The West is willing to tolerate this threat, partly because of the advantages of a wider area of free trade, and partly because they are "stealing" most new countries from the former Soviet bloc.
The EU has declined to open membership to Turkey on grounds that Turkey is not as "civilized" as countries of the EU. Turkey constantly threatens its Kurdish citizens, and it tortures prisoners to cause them to give up secrets. (Britain, which has joined the United States in torturing prisoners in Iraq, is hypocritical in this respect.) Many (including me) believe, however, that the real reason for its exclusion is that Turkey is heavily Muslim, and that Turks would greatly increase the population of Muslims in France and Germany, changing the nature of those societies.
Cyprus is an island divided into a Turkish north and a Greek south. Each side is prevented from communicating with the other. Prior to EU membership, when voting on unification, the Turkish north voted heavily in favor, and the Greek south heavily opposed. The result was that the island remains divided, and only the Greek section is admitted to the EU. Had I been the EU, I would have favored refusing membership until Cyprus became united, but that is not what they did.
World Learning in Brattleboro VT (an organization with which I have been associated since 1936, in its earlier incarnation as the Experiment in International Living), runs conferences in which Greek and Turkish Cypriot young people are brought together in Vermont to discuss the divisions on their island. The young people are much more inclined toward unification than are the politicians, and they have worked out a way by which they can legally hold reunions in a small enclave on the border between Turkish and Greek Cyprus. World Learning performs this service for many groups that do not normally speak to each other. A Quaker program used to do the same for diplomats. This program was abolished, but substantially the same service is offered by Quaker House at the United Nations office in New York.
Sincerely your friend,
It's late on Saturday evening but I've just read all the comments on your recent e-mail message. I think that what you are doing is great although I don't agree with all your positions. But, MOST IMPORTANTLY, you are creating dialogue. I wish more of my colleagues in the Oread Friends Meeting would read and discuss your views.
Howard Baumgartel, Oread Friends Meeting, Lawrence (KS).
What a lot of EU in one essay! To your question: The history to date of the EU involved integration of economies and societies that, while having fought literally hundreds of wars over the last half a millenium, had much in common. The lessons for international economic integration are just now coming into play. There is much more disparity between the 10 new 2004 EU entrants and current EU members than between prior entrants. There are also many more nations with many more inhabitants. To date, the biggest test like this one of EU integration was adding Spain and Portugal. Comparing that expansion to adding Poland and Slovakia, the Baltics, and the others suggests this challenge is of a different order. Good learning times to prepare for economic integration with SE Asia, China, and India.
Christopher Viavant, Salt Lake City (UT) Meeting.
Possibly the Irish case is instructive with the surrender of certain aspects of sovereignty that could permit one country to become a better place to do business than another. The Irish used lowered taxes and businesses poured in. Their GDP per capita now exceeds that of the UK!
J.D. von Pischke, a Friend from Reston, VA.
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