Most EU countries are rich and highly productive, with specialized industries other countries would die for. Yet the bloc’s economic track record has been mediocre in the past decade and looks likely to become considerably worse. In its 2021-27 Budget, the European Commission plans to tweak its “cohesion funds” away from Eastern Europe and towards Southern Europe and to include all kinds of political criteria rather than just poverty in determining them. Reinforcing failure through handouts is the Commission’s main raison’d’etre, but it is the European people who will get the reward that the Commission so richly deserves.
Successful economies thrive on the contributions of their most capable people and businesses. The free market system allocates resources to those businesses in a way that is generally close to optimal. Ordinarily capable people and businesses, especially small businesses have a role to play, too, adding their own economic value, filling in underserved niches and diversifying the economy. Governments divert resources from these businesses and people, both directly through taxation and indirectly through regulation. When either taxation or regulation become excessive, as in Britain in 1945-79 and in the United States in the Obama years, the economy stagnates. In a few extreme cases, where regulation, redistribution and cruelty are combined with extreme corruption, the economy collapses altogether, as in today’s Venezuela.
The European Union imposes substantial costs on its members, not so much because of its budget (about 1.4% of GDP) but because of its regulatory morass. All 28 EU members have fully developed regulatory systems of their own, but the EU appears to think it necessary to impose a new and extra-intrusive layer of regulation on top of what they already have. Since there is no effective democratic control over the activities of the EU staff designing and imposing regulations, those regulations are likely to be especially expensive and ill-fitting. The very largest companies, at least if they are domiciled in the EU and are not British, can wine and dine their way around Brussels and get regulations designed the way they need them. For smaller companies, foreigners or ordinary non-billionaire members of the public, EU regulation is strictly a non-participatory sport.
Naturally, much of the EU public has reacted badly to being ordered about without any chance to argue. In Britain, this adverse reaction took the form of the Brexit vote in 2016 — and will turn violent if Remainers try to reverse the result of that vote without at least holding another referendum. In Eastern Europe, where the older members of the population suffered for decades under a tyranny only modestly more unpleasant and intrusive than the EU bureaucracy, it has taken the form of various nationalist movements. In countries such as Hungary and Poland, those nationalist movements have proved their impeccable democratic legitimacy, by winning election after election – but the EU apparatus regards them as a mortal threat and is determined to destroy them by any means possible.
We now learn that the “cohesion funds,” totaling at least 500 billion euros over the 7-year period, will be reallocated in the 2021-27 budget cycle. Instead of being paid out according to GDP per capita, with poor countries getting more, they will be re-allocated towards Southern European countries (which tend to have higher GDPs per capita) from Eastern European ones and will also be allocated according to “EU values”, which inevitably include heavy doses of political correctness.
From the EU bureaucracy’s point of view, Southern European countries have one enormous advantage over Eastern European ones — they are much more likely to be politically correct. Even when populism takes hold, as with Spain’s Podemos, the Italian Five Star movement and Greece’s Syriza, it will be a left-wing populism, comfortable with ever-growing government and fairly hostile to nationalism. Southern European countries had right-wing dictatorships in the not-too-distant past (some of them like Spain’s Francisco Franco and Portugal’s Antonio Salazar admirable rulers). They are thus far more comfortable with even left-wing socialism than they are with true free-market capitalism or right-wing nationalism.
Conversely, Eastern European countries’ fairly recent experience of dictatorship was Soviet Communism or its Yugoslav variant. That is not to say they cannot go left – Bulgaria, Romania and Slovenia, in particular, tend to elect governments of the left that are merely warmed-over versions of the Communist ancien regime (but before feeling superior let us remember that Germany has been ruled since 2005 by the former “Free German Youth” (Young Communist) leader Angela Merkel.) However Eastern European countries can occasionally elect genuine capitalists, and the populism that is becoming increasingly popular in the region is a right-populism, hated by the EU bureaucracy but much more conducive to individual freedom and market economics than its southern European leftist analogue.
The EU has several ways to reward its pets in Southern Europe. Even before they re-direct the stream of cohesion funds to them, they have devised a mechanism through the Euro’s central banking system, the Target-2 mechanism. In a normal multi-jurisdiction single currency system, balances in surplus or deficit jurisdictions are not allowed to build up excessively but are returned to zero regularly to prevent the system getting out of kilter. Thus New York has not built up a huge credit balance with Alabama over the centuries. In the Eurozone, this does not happen. Southern European countries run perpetual deficits, which are financed by the surplus countries of northern Europe. Theoretically, these are only loans but since they never have to be paid back and carry interest only at the ECB short-term rate, currently 0.25%, they are essentially free money.
Guess what? As you would expect, the principal lenders under the Target-2 facility are Germany (914 billion euros at February 2018), Luxembourg (192 billion) and the Netherlands (123 billion) (Luxembourg is very rich, with a large banking sector, even though it’s tiny). Conversely, the principal borrowers are Italy (444 billion) Spain (399 billion) Portugal (82 billion) and Greece (54 billion – Greece used to be much larger, but was dragged down in 2013, as everybody hated its credit risk. Eastern Europe, collectively, has a balance of plus 9.5 billion, with no country being more than a few billion either way. Even though Eastern European countries are still collectively poorer than southern European ones, therefore, this gigantic subsidy, more than $1 trillion of almost-free money, all goes to Southern Europe, none of it to Eastern Europe.
If you are a southern European socialist, I would just sit back and enjoy the situation. There is no real pressure to cut back social programs or reduce the incredible amount of corruption in those countries’ systems, because sugar-daddy EU is available to bail them out, as it has been since the 1980s (Spain, Portugal and Greece) or even longer (Italy). A recent study of the “shadow economies” in EU countries is too optimistic, in that it has the shadow economies declining steadily since 2003, with Greece in particular becoming steadily less corrupt from 2003 to 2009, when its economy and debt were driving over a cliff. However, it shows clearly that Portugal, Spain, Italy and Greece still have “shadow economies” of around 20% of GDP, with only Romania and Bulgaria of the East European countries being significantly more corrupt.
Cleaning up the economy in say Italy would be very hard work, almost certainly impossible, as it has been in Greece. Since the subsidy spigot from Brussels can be relied upon to continue running, and maybe increase its volume, it’s much the best alternative for voters in those countries to select a left-populist government and ensure that nothing significant is done. For Greece, there is some danger that Alexis Tsipras, if left in power too long, would turn into Hugo Chavez and run the economy into the ground altogether. However, relying on Brussels subsidies for survival probably reduces the risk of that for Greece compared with Venezuela, which relied on revenues from oil production that was entirely under the dictator’s control.
For Eastern Europeans, the picture is much gloomier. Far from being subsidized by Brussels, you are bearing the additional costs of their taxes and regulations, without receiving any handouts that are worth a damn. Maybe if you are Bulgarian or Romanian, you are still poor enough that you will benefit from some handouts, in which case it’s best to re-elect neo-Communists regularly so you stay in Brussels’ good books and don’t get too rich, which would make the handouts cease.
For the rest of Eastern Europe, however, nationalism is the way to go. You have sorted out your own economies sufficiently and installed enough capitalism that, while you may not yet be as rich as Italy or Spain, you are overhauling them fast. For you, the EU is a serious menace; it prevents you through regulation and taxes from growing as fast as you ought to, and it becomes very unpleasant and unfriendly when you elect a nationalist government. Yet nationalism is attractive to you; it reduces the number of refugees dumped on your social services, and allows you to create a free, independent destiny for your own people, who for thousands of years have been minions of generally incompetent larger empires.
As a Briton (by birth, though not current residence) I have an invitation for Eastern Europeans. Join us in an exit from the EU, perhaps forming a free trade zone together after we have left, adopting free-market low-regulation policies as you do so. Then we can be happy nationalists together, enjoying free market economies with good trading relations with the rest of the world, and immigration policies that preserve our unique national cultures and allow our people to become rich, fully employed and prosperous.
Eastern Europeans of the world, unite! You have nothing to lose but your Brussels bureaucrats!
(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.)