The Bear’s Lair: Europe without the EU

In two months, Britain will vote on whether to leave the European Union. If it votes for “Brexit” there must be some chance that other EU members will follow it, either partially or completely dissolving the union that for good or ill has been the central thrust of postwar Europe. It’s worth trying to imagine what a world without the European Union might look like, and what effect its disappearance might have on the trajectory of 21st Century history.

Several of Europe’s problems go away with the disappearance of the EU. The refugee problem becomes much easier to solve with the elimination of the Schengen agreement. The barriers to refugee access are much higher when there are several well-guarded borders to cross between poor and rich countries. Furthermore, the borders are much better protected when there are no well-meaning politically correct bureaucrats preventing local police forces and border patrols from doing their job. Responsibility for border security is devolved to the national level, and the result is decent border security, since no country wants to become known as an easy mark for refugee benefit-seekers.

Another problem that becomes less salient without the EU is that of regulation. With all the European countries being geographically fairly small, the costs in a single country of say eliminating the coal industry through excessive environmental regulation are borne by people who are well known to those doing the regulating, and whose votes matter greatly to the politicians overseeing the process. Each individual country is relatively unimportant in the context of long-term, large-scale global enthusiasms such as global warming, so local regulators are much less likely to cause major identifiable economic damage in pursuit of some hazy global objective. The same applies to regulation in financial and discrimination areas; if the costs are real, they will be felt by citizens fairly close to the regulators.

Further, without the EU there will be no need to “harmonize” regulations between 28 different national approaches and needs, so regulations can be simpler, tailored to local problems and requirements. The result is a massive bonfire of regulations, and a huge leap forward in the productivity of European economies. Of course, there will be countries such as Scandinavia that culturally accept a greater degree of regulation than their neighbors, and put up with the economic costs of those regulations, but even for those countries the simpler and better-tailored regulations that they draft themselves will provide an important advantage in economic efficiency over the current system.

Labor productivity in the EU has increased on Eurostat figures by only 0.7% per annum since 2007, an appalling rate by historical standards, in spite of rapid productivity growth in the still-restructuring countries of Eastern Europe (2.6% per annum in Poland, for example). A combination of EU regulation and the ECB’s “funny money” policies accounts for this. Both disappear if the EU goes.

A further advantage of the EU’s disappearance will arise in the area of defense. At present, all 28 countries believe they have no great need for defense against their neighbors, and the EU as a whole is somewhat anti-American with a bureaucracy committed to neutralism at best at the international level. Accordingly, no EU country except Britain meets its NATO commitment of spending 2% of GDP on defense and the union punches far below its weight in international crises. Without the EU, each country will see the need to spend adequately on defense, while the NATO alliance will ensure collective security for all.

Contrary to Donald Trump’s worldview, NATO is one of the few elements of the postwar international settlement that continues to have value. In a world containing Vladimir Putin, the smaller countries of Eastern Europe need protection, and it is entirely appropriate that their more powerful allies provide it, thereby avoiding throwing away the hard-won triumph of the 1980s.

However, the need for NATO does not imply a need for other international bodies. The EU itself, the United Nations, the World Bank and the IMF have all done more harm than good during their sorry existence. Only the World Trade Organization, like NATO, has a genuine purpose to its activities. In any case, without the EU, the countries of Europe will spend adequately on defense and will bind together in the ongoing NATO alliance with the United States to protect themselves against outside aggression.

Contrary to the opinions of the founders of the EU, European states are able to survive for quite long periods without going to war with each other – they did so with only modest interruptions from 1815 to 1914. World War I was the result of a bizarre series of misjudgments, desired by almost nobody except French revanchists. World War II was a direct result of World War I and the Depression having brought to power in Germany an evil politician eccentric even beyond the elastic limits of the general run of evil politicians.

Seventy years after the last shots were fired in World War II, the major countries of Europe have learned to live with each other satisfactorily, so a European war is vanishingly unlikely, beyond the possibility of a skirmish or two in the Balkans. After all, there is so much less for belligerent Europeans to play for these days. Even total dominance of Europe would still make you only about the third or fourth most important world power, with an economy devastated by war that was quite unable to play on an equal basis against China, the United States or India.

There are however some disadvantages to the disappearance of the EU. Currency exchange costs and probably tariffs would increase between the former EU members. That would cause a loss of wealth similar to that in the former countries of the Austro-Hungarian Empire when that polity broke up in 1918, or in the countries of former Yugoslavia after its breakup in 1991.

There are three reasons why the costs of an EU breakup might be relatively less than in those two unhappy examples. First, the atomization is less; France, Germany, Italy and Spain are all large countries with substantial economies, and hence far more self-sufficient than the impoverished Hungary and Czechoslovakia of the 1920s. Smaller countries would only suffer more if they erected tariff barriers against each other; clearly the Baltic States, for example are too small to prosper in an autarkic Europe. However, there is every reason to expect that the disappearance of the EU would leave informal arrangements in place between regional groupings; the customs union between the Benelux countries for example was established in 1944, well before the EU.

Second, international free trade arrangements, notably the World Trade Organization, provide for more or less free trade in many goods worldwide. Hence the protectionism of a split EU would be less than that between the countries of former Austria-Hungary in the 1920s. In addition, product standards that have been established across the EU would presumably not be lightly changed if the EU was abandoned. Hence many products that were once sold across the EU would continue to be sold across the majority of EU countries without additional non-tariff barriers being erected.

Finally, the fine words of the EU’s free trade principles are in any case not followed currently. When French winemakers violently attack shipments of Spanish wine, as they did last week, because Spanish “social costs” are lower than the bloated French social costs, the EU internal market is certainly not working as it should. It’s inconceivable that the crude protectionists of French agriculture, for example, would get any more protectionist if the EU disappeared, and at least the rest of Europe would not have to continue subsidizing them.

The costs of EU disappearance are thus moderate in comparison to the benefits it would bring. There would be an additional intangible benefit to decision-making overall, in that decisions would be made more locally and by smaller polities. They would thus be made more quickly than by the sclerotic EU bureaucracy, with greater sensitivity to changing conditions in the economic and political environment. Countries would also be able to adapt to their own capabilities, adopting laws and practices that suited their own cultures, rather than being subjected to lowest-common-denominator governance from Brussels.

Countries such as Greece, Cyprus, Romania and Bulgaria, poor and corrupt, doubtless believe they benefit from EU membership, which provides them with massive subsidies and perhaps limits the amount their governments can steal. But the sorry example of Greece since 2010 shows that a country whose living standards are bloated far beyond their natural level by prolonged subsidies, in Greece’s case for the 30 years since it joined the EU in 1981, simply becomes unable to support itself at all. It must then undergo a process of “austerity” that is far more painful and unfair to its inhabitants than if it had just remained at its original middle-income level.

Provided it maintains free-trade arrangements with its richer neighbors, a Greece or Bulgaria outside the EU can build its own economy on the basis of its own capabilities, with foreign investment from rich neighbors when justified, and corruption controlled by the anger of its own voters when it manifests itself.

As for the richer countries of northern Europe, they would benefit immeasurably from leaving the EU. They would no longer bear the costs of its bureaucracy (mostly deriving from the bureaucrats’ regulations rather than simply from their salaries and lavish expense accounts.) They would also no longer have to support their poorer neighbors, except to the extent they wished to. All these countries are highly competitive internationally, with Germany running an estimated current account surplus of 7.6% of GDP in 2016, for example. Thus when Germany left the EU and the euro, it could expect the “new deutschemark” to revalue by perhaps 20%, with a corresponding increase in its citizens’ living standards.

As for Britain, it was for a thousand years the first principle of British foreign policy not to allow the continent of Europe to be dominated by a single power. For the shell-shocked Europe of the 1950s, it may have been inevitable that an “ever closer union” would seem an attractive way forward. Britain should never have welcomed this, for traditional foreign policy reasons (as in so many areas, Winston Churchill was wrong here.) Britain should never have joined the EU, for solid economic reasons that I have set out in a previous column. If the EU breaks apart Britain should rejoice, and should welcome its newly individual European neighbors back into the family of prosperous and happy nations.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)