THE STATE OF THE UNION:

 MARKET-ORIENTED REFORM IN THE EU IN 2004

EXECUTIVE SUMMARY

 

The historic rapprochement that began with the fall of the Berlin Wall fifteen years ago saw eight former Communist countries (plus Malta and Cyprus) become members of the European Union – the world’s largest capitalist club – in 2004. Unsurprisingly, accession has brought with it significant challenges for both the new members and the EU-15.  For the former, greater access to European markets is mitigated by constant calls for tax harmonisation, and their comparative workforce advantage is ever more encumbered by regulation and prohibitive ‘minimum standards’. These are sources of great friction between the competing member states, as the previously sheltered economies of ‘Old Europe’ struggle to compete with efficient foreign competitors.

 

The rapid ageing of Europe’s population over the next few decades is likely to exacerbate these tensions. Current budget deficits and levels of national debt will appear insignificant as the cost of maintaining the continent’s bountiful welfare system become increasingly apparent. Economic growth and productivity will level off and begin to decline as an ageing workforce is unable to replace itself. Commensurately, government programmes that rely on current revenue streams will fail to meet the ever increasing demand for healthcare and social security. As conditions worsen, socialism and protectionism will seem all the more appealing to the public, and government’s populist instinct to centralise power will only strengthen.

 

Fortunately, there is a growing consensus on the necessity for reform. The State of the Union examines the progress of this movement within the individual EU member states, and at the EU level. Broadly speaking, relatively little progress was made towards freer markets and smaller government in 2004. A few significant reforms occurred within EU member states, but few liberal steps were taken in most countries due to a combination of lack of political will, entrenched bureaucracy and public antipathy.

 

 

  1. The EU is publicly committed to reform but institutionally opposed to it, argues Ann Mettler. However, the appointment of President Barroso represents an historic opportunity to fundamentally re-think EU priorities.
  2. Austria missed an opportunity to implement far-reaching pension reforms, say Rahim Taghizadegan and Gregor Hochreiter, after parliamentary opposition significantly watered down the proposals.
  3. DHL’s decision to shift its operations from Brussels to Leipzig is just the latest example of the Belgian malaise of poor political co-ordination and over-regulation, states Stephen Wyckaert.
  4. Negotiations over EU accession prompted Cyprus’s economy to liberalise substantially, argues Stelios Platis, though there is much work left to be done in privatising industry and reducing the power of the unions.
  5. Petr Mach says that the current left-wing government in the Czech Republic has introduced increasingly illiberal measures, such as tax rises, under the auspices of ‘reform’, but also that its decreasing popularity shows that the public is not so easily fooled.
  6. Denmark’s Prime Minister Anders Fogh Rasmussen has steered a prudent course between radical reform and professing support for the state-run services, but has missed some crucial opportunities as a result, argues Chresten Anderson.
  7. Accession to the EU has, according to Meelis Kitsing, created perverse incentives for the already liberal economy of Estonia, and may eventually lead to a larger state.
  8. Anne Jensen believes that Finland must reform the economic basis of its welfare state, but attempt to maintain its philosophical underpinnings.
  9. A programme of gradual reform has not served President Chirac’s government well, believes Philippe Maniere, as opposition has had time to consolidate in France.
  10. The Hartz reforms will serve Germany well, argues Karen Horn, as they focus equally on returning public finances to a more stable footing and shifting public attitudes towards employment.
  11. Preparation for the Athens Olympics, states Sotirios Papasotiriou, meant that market-oriented reform was placed on the back-burner in Greece.
  12. The pace of reform in Hungary has slowed significantly in recent years, argues David Hill.Realised gains – and political in-fighting – have dulled the public’s willingness to countenance further changes.
  13. A similar situation has developed in Ireland, long regarded a bastion of free market liberalism, states Constantin Gurdgiev, as the ruling Fianna Fail party has moved to the left under public pressure.
  14. Alberto Mingardi and Carlo Stagnaro are disappointed by the discrepancy between Premier Berlusconi’s free market rhetoric and his ability to deliver the tangible reform of the entrenched state bureaucracy in Italy.
  15. Wholesale privatisations, and the beginning of reform in the education and healthcare sectors mean that Latvia’s stellar economic growth is likely to continue, argues Julia Pobyarzina.
  16. A huge first-step was taken in Lithuania to putting the pensions system on a sustainable long-term footing, says Monika Kacinskene.
  17. Mid-year elections and the enormous responsibility of the EU Presidency, , meant that very little progress was made in Luxembourg according to Terence O’Dwyer.
  18. Malta is going to have to work hard in the coming years to reform its services and reduce its reliance on EU structural funds and the Italian Protocol, argues Leonard Mizzi.
  19. The polder-model may have suited the Netherlands over the last hundred years, states Eline van den Broek, but it is now holding back growth and job creation.
  20. Accession to the EU did not bring the promised economic and political benefits to Poland, argues Tomasz Teluk, and Poles are beginning to realise that the source of liberalism actually lies in Warsaw, not Brussels.
  21. The loss of Prime Minister Barroso to Brussels, and the political turmoil that followed, brought about the end of a period of limited but encouraging liberalisation in Portugal, believes Andre Azevedo Alves.
  22. Slovakia achieved the whole-sale reform of its tax and pension systems, and its labour market in 2004, state Eugen Jurcyza, Peter Golias and Dusan Zachar.
  23. Ales Vidmar and Rado Pezdir believe that the gradualist model of reform employed since independence has significantly compromised Slovenia’s ability to compete in international markets.
  24. The left-wing government that came to power in Spain following the Madrid bombing in March threatens much of the good economic work done by the previous conservative government, argues Vicente Boceta Alvarez.
  25. Johnny Munkhammar and Johan Norberg believe that public services will have to deteriorate much further before Sweden’s politicians are willing to tackle their reform.
  26. Political debate in the United Kingdom as been forever changed by the legacy of the Thatcher government, argues Stephen Pollard, as the leading parties seek to burnish their reformist credentials ahead of the general election.

 

As this collection of essays reveals, each of the European Union member states faces a unique set of historical, cultural and social circumstances that have obstructed the path to reform. But just as specific policies implemented in one nation can increasingly be transferred across borders, so equally an understanding of the challenges one’s European neighbours face can facilitate the process of reform.

 

These differences have been at the core of the European Union’s failure to implement its Lisbon Agenda and it is now unlikely to become ‘the most competitive and dynamic knowledge-based economy in the world by 2010.’ Agreed in March 2000, the Agenda has run half its course and yet little progress has been achieved. Ann Mettler reasons that José Manuel Barroso’s Presidency of the European Union constitutes an unprecedented opportunity for economic reform in Europe. Yet most of the true burden for reform lies with the member states. The state of the union in 2005 and beyond will depend less on Brussels, and more on the sum of its parts. 

 

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Causa Liberal