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European Union Social Policy

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									Problems of European Union
   Economic Integration




                       Brad Podliska
                                                                                                        1


              Problems of European Union Economic Integration
        Since its inception more than four decades ago, the European Union (EU) has

made significant gains in fostering trade and economic cooperation between European

states. The 15 member nations have developed rules and laws, which have encouraged

economic growth. The EU, however, has recently been hampered by a series of political,

cultural, social, regulatory, labor, and immigration impediments. The process toward

economic integration has been difficult, as it must cross the ethnic and national

boundaries of 15 distinct societies. The intra-socialization of Europe has caused a

backlash, which is based on fears of globalization and forced cultural integration.

        The EU was designed to unify the economies of Europe. The 15 member nations

have agreed to give up a certain amount of their national sovereignty in order to reap the

reward of prosperity.1 Moreover, the EU is currently trying to set up a system that allows

for possible inclusion of an additional 15 nations.2 Together, the 30 nations could form

the largest economic trading bloc in the world and represent a major force in the global

economy. The reality of European economic integration has fallen short of its goals --

burdened by an environment of regulations, social costs, and nationalist sentiments.

        The most obvious impediment to economic integration is the cultural difference

between the 15 member nations and the 15 EU-aspiring countries. Italy has fought

measures to regulate its food industry. The United Kingdom has defeated any attempt to

change its currency or measurement system. Germany has rejected an attempt to reform

its language. The French have even battled fellow EU nations in order to defend their




1
 The EU is comprised of 15 member states – Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
                                                                                                          2


wine industry. In many countries‟ view, the trend toward globalization has come at the

price of national sovereignty.

        In addition to the cultural differences, there are political and social impediments

to economic integration. Policymakers must face a multitude of labor and entitlement

interests in order to bring their countries into compliance with EU liberalization goals.

Countries, such as Poland and the U.K., face labor strife as they try to privatize sectors of

their economy and attract new businesses. Austria has raised environmental questions

about its neighbor, the Czech Republic. The most notorious entitlement is the Common

Agricultural Policy (CAP), which has caused enormous costs to consumers and taxpayers

as well as global trade disputes. CAP has become an albatross hung around the neck of

the EU. While its agriculture sector is over-regulated, its international financial and

business sectors lack common oversight in some key areas, namely securities and

corporate law.

        The problems of economic integration are best exemplified by one case study, an

American hot dog company. American Food Products and its brand Sabrett Hot Dogs

encountered a string of regulations when it sought to sell hot dogs in Europe. The

company was forced to form a joint venture, comply with stringent local labor laws, and

even build its hot dog carts according to uniquely European standards.

        As the EU expands, labor and immigration issues have also become impediments

to integration. With high unemployment, current EU members, fearing a flood of cheap

labor and a burden on the welfare state, have been reluctant to accept the weaker

economies of Eastern European countries. Anti-immigrant sentiments have led to


2
 The EU is in the process of negotiating membership talks with 10 states – the Czech Republic, Estonia,
Hungary, Poland, Slovenia, Bulgaria, Romania, Latvia, Lithuania, and Slovakia. Moreover, five countries
                                                                                                      3


violence in Germany and the election of nationalists in Switzerland. Europe, however,

has a dwindling labor force and needs an influx of immigrants to serve as taxpayers and

support its girth of social programs.

         Does the European Model work? Can Europe compete in a global marketplace

with a socialist economy? No. The cost of its social guarantees is a ponzi scheme.

Short-term entitlements have caused long-term economic structural flaws. The result is

chronic unemployment, bureaucratic regulations, and market-defying inefficiencies and

costs.

Cultural Impediments

         The EU expanded its authority into the social lives of Europeans, regulating such

things as what they can eat, how they travel, and how they dispose of their trash. The

reach of the EU government is best exemplified by its requirements of the Italian food

industry. The EU has made demands for such food safety issues as: (1) preventing pizza

from being cooked in a wood-burning oven because carcinogenic ashes are produced; (2)

setting the humidity of fresh pasta as a level that Italian artisans cannot meet; (3)

requiring Tuscan pig lard be cured in stainless steel vats, not traditional marble ones; and

(4) banning the curing of sheep‟s milk cheese in brick-lined underground pits, which

causes its distinctive thick outside layer of mold to form. Edi Sommariva, secretary

general of the Italian federation of cafes, restaurants, and bars protested the new rules,

“We are afraid of standardization…Italy will lose a lot of its appeal, particularly for

tourists.”3



– Cyprus, Malta, Moldova, Turkey, and Switzerland – have expressed an interest in EU membership.
3
  R. Jeffrey Smith, “EU Rules Leave a Bad Taste in Italians‟ Mouth; Regulations Often Conflict with
Culinary Traditions,” Washington Post, August 7, 2000.
                                                                                           4


       The new regulations have burdened small businesses and caused an underground

market to flourish. Approximately 30,000 Italian food shops owners spent as much as

$15,000 apiece to comply with the legislation. They upgraded their meat cutters,

refrigerators, and ovens; purchased wrapping material for their sandwiches; and sent

employees to food hygiene courses. Tens of thousands of Italian shops closed in the

process because they could not meet the new regulations or chose not to comply. In

1998, 120,000 people attended the underground “Hall of Taste” in Turin, which was

sponsored by an EU resistance group, “Slow Food.” The Italian agriculture ministry lent

its assistance by seeking exemptions from EU hygiene rules for 2,100 “traditional” foods.

The price of conformity is changing Italy‟s economic and social climate.

       Italy is known for its small businesses and eccentric food traditions. Eighty

percent of Italian firms have less than 15 employees, and towns 30 miles apart have made

salami or cheese differently for centuries. Food items, such as buffalo milk mozzarella

cheese, fresh egg pasta, sheep‟s milk cheese, and ricotta cheese, must now all comply

with strict EU guidelines. President of Italy‟s leading association of food producers

Lanfranco Morganti cited the threat to Italian tradition, “To enter the European Union

and lose the products we‟ve had for hundreds of years – we just don‟t agree with that.”4

       The U.K. has also demonstrated a propensity to defy EU regulations in the

interest of national identity. The “Save the Pound” campaign is a resistance movement,

countering EU legislation on two fronts. First, the campaign seeks to prevent conversion

to the euro. A recent European Commission poll showed that only 22 percent of Britons

supported the common European currency. Second, British shoppers have turned away

from the metric system, embracing the traditional measurement system of pounds and
                                                                                                      5


ounces. Recently, the U.K.‟s largest grocery chain, Tesco, defied British legislation and

returned to using pounds and ounces. Tesco spokesman Simon Soffe explained, “We

discovered that customers think in imperial measurements. If they are glancing at price

posters in the stores, they don‟t want to be converting figures in their head.”5 The

willingness to ignore directives from Brussels is reinforced by the fact that only 25

percent of Britons view EU membership in a positive manner.

        The Germans are orchestrating their own cultural war against European

integration. The Frankfurt newspaper Allgemeine Zeitung staged a popular revolt against

a 1998 reform of the German language. On August 1, 2000, the paper was published

with Germany‟s traditional language rules – long compound words and Teutonically

strict grammar. In its editorial section, the newspaper defended its decision, “We shudder

to think how our readers must have suffered ever since we reluctantly agreed…[to adopt]

the new rules of spelling.”6 German-speaking countries had agreed to allow a

multinational commission to oversee the implementation of new language efficiency

rules. The reforms, which included reducing spelling rules from 212 to 112 and comma

rules from 52 to nine, are all part of an effort to unify Europe and make it globally

competitive.

        French wine growers staged their own set of culture-based protests against

cheaper European wine imports. The protestors demanded that imported wines,

particularly mixed wines from Italy and Spain, be held to the same “system of control”

established for French growers. Chairman of a wine growers cooperative Jean Huillet



4
 R. Jeffrey Smith, “EU.”
5
 Kirsten Studlein, “Britons Want Their Pounds – and Not Euros, Kilos, or Grams,” Los Angeles Times,
August 4, 2000.
                                                                                                    6


explained the reasoning behind the protests, “The production of [imported] wines is not

controlled at all. We know nothing about where they come from, the countries or the

wines, or the different percentages of the mix.”7 The 700 demonstrators voiced their

complaints to local government officials in southern France. Moreover, about 80

protestors entered a supermarket and destroyed nearly 300 bottles of wine from other EU

countries. The growers were later granted a hearing with French Agriculture Minister

Jean Glavany.

        Within the EU, there are cultural limits to total integration. The foreign ministers

of France and Germany recently revealed a secret pact in which they agreed to support

each other in using French and German at EU functions. The pact was a response to the

trend that English was “creeping in” as the EU‟s official language. Since former

Commission President Jacques Delors‟ reign ended in the mid-1990s, daily news

conferences were no longer held exclusively in French but in English as well. The EU

has 11 official languages, and it was largely understood that German was the third

official language. Regardless, arguments occurred with the Italians and Spanish over the

valuable seats in the interpreting booths. The lack of a common language came to the

forefront in 1999, when the Finns (who held the presidency) as part of a cost-cutting

move, refused to recognize German as a language for informal council meetings. The

Germans protested by boycotting meetings.8

Political and Social Impediments


6
  Peter Finn, “Compounding German‟s Problems; Newspaper Leads Charge Against Language Rule
Reforms,” Washington Post, August 10, 2000.
7
  Associated Press, “Angry French Wine Growers Protest „Inferior‟ Foreign Wine,” Dow Jones Newswires,
August 11, 2000.
8
  Associated Press, “Politics & Economy: France, Germany Make Secret Pact on EU Language – Countries
Agree to Support Use of Each Other‟s Tongues,” Wall Street Journal Europe, August 25, 2000.
                                                                                                             7


         The problems have also entered the political and social areas of the EU. Europe

has had problems reforming its labor, agricultural, and pension laws. All of these issues

have hindered the future prospects of EU expansion.

         In an effort to join the EU, Poland has encountered some domestic labor strife.

For its EU application, Poland needed to make its coal industry more competitive. As

part of a 1998 restructuring plan, Warsaw announced production cuts from 137 million

tons a year down to 100 million by year 2002. In the process, the government intended to

reduce the work force by 40 percent and lay off 50,000 miners in order to bring the labor

pool down to 128,000 workers. Last year, coal miner leaders launched a protest in which

hundreds of miners shut down international train stations in Tarnowskie Gory and Lazy.9

         Ford Motor Company faced a series of protests when it announced job cuts in the

U.K.. In an effort to reorganize its European operation, Ford announced plans in August

2000 to stop making cars at its British Dagenham plant. Ford intends to eventually cut

2,000 jobs, but the number may rise to 6,000 as it transfers its production operations to

Cologne, Germany. A Manufacturing, Science, and Finance trade union official stated

labor‟s response, “If [Ford] thinks they won‟t have a fight, they are in for a surprise.”10

The British union sought support from other European unions in an effort to challenge

Ford‟s decision.

         Socioeconomic issues have also pitted neighbor against neighbor. In August

2000, Austria voiced reservations about the Czech Republic‟s Temelin nuclear plant. An

Austrian government spokesman stated, “We welcome any step that will lead to greater


9
  Associated Press, “Polish Miners Indicted for Blocking Trains in October Protest,” Dow Jones
Newswires, August 11, 2000.
10
   Scott Miller, “Ford to Cut 2,000 Jobs at U.K. Plant as Part of Big European Restructuring,” Wall Street
Journal, May 11, 2000.
                                                                                                           8


cooperation between us. But we still aren‟t happy about the Temelin issue.”11 Austria

has threatened to block the Czech Republic‟s entry into the EU, unless an environmental

impact assessment is carried out on the plant.12

        Neighborly tensions are also apparent within the larger EU member states.

German Foreign Minister Joschka Fischer criticized the U.K. and Denmark in a thinly

veiled statement. He said, “We cannot wait around until the last country has decided if it

wants to go farther along the road of integration. Those who do not want to do this, or

cannot, should not have the right to block it.”13 He was referring to the negative impact

on the EU if the U.K. and Denmark did not adopt the euro. The adoption of the euro has

exposed a rift between EU member states. The U.K., Denmark, and Poland have

expressed concerns that France and Germany are trying to integrate European economies

too quickly.

        The September referendum in Denmark on adopting the euro is being carefully

watched and scrutinized. If the Danish reject the single currency, it may complicate

internal EU reforms and stymie political relations between member states. The EU,

through its Intergovernmental Council (IGC), is trying to streamline its decision making

processes in order to facilitate the entry of up to 15 new members. Eventually, it plans to

adopt a European constitution. If Denmark is not willing to accept the euro, it may signal

that it is reluctant to accept any major changes in EU treaties or policies, thus bringing

nationalist undercurrents to the surface.14 Denmark has already managed to distant itself



11
   Madeline Chambers, “Austria Still Concerned About Czech‟s Temelin Plant,” Dow Jones Newswires,
August 16, 2000.
12
   The Czech Republic is expected to join the EU in a 2003-2004 timeframe.
13
   Associated Press, “Germany‟s Fischer Sees Larger Role for UK,” Dow Jones Newswires, July 31, 2000.
14
   As a note, EU treaties must be ratified by all 15 national parliaments. See Paul Hannon, “Euronomics:
Eastern Europe May Lose Out if Danes Vote No,” Dow Jones Newswires, August 25, 2000.
                                                                                                   9


from a unified Europe by negotiating rights not to join the euro zone, participate in an

eventual European army, and abide by European justice and immigration policy. 15 A

rejection of the euro zone by Denmark could cause a breakdown in the IGC and delay EU

enlargement as well as fuel isolationist tendencies in Norway. Rejection of the euro by

stronger EU economies, such as Denmark and the U.K., may make other euro zone

countries reluctant to accept new members from weaker economies, who would dilute the

value of the euro.

        The most enduring and best example of Europeans using cultural and social

traditions to orchestrate their economic policies can be found with the CAP. Enacted in

1958, it was designed to protect farmers as Europe transitioned from an agricultural to

industrial society. A product of the European Economic Community, the CAP is largely

credited with making the European economic union possible because it formed the

framework for bringing together many different national policies. Today, the CAP has

evolved into a complex maze of import tariffs, price supports, export subsidies, and direct

payments to farmers. CAP served a political purpose: appeasing powerful rural

communities and stemming the harmful effects of global competition.

        The EU‟s Commissioner for Agriculture, Rural Development and Fisheries Franz

Fischer defended the CAP by outlining its political purposes. Fischer illustrated that

“measuring EU agriculture with a purely economic yardstick is inadequate and

inappropriate.” Regardless of economic concerns, EU agriculture policy has three

purposes: (1) maintaining a “living countryside,” (2) preserving family farming, and (3)

ensuring environmental protection. Moreover, Fischer cites that if Europe had no CAP,


15
  The euro zone is comprised of 11 nations that are members of the European Monetary Union. See Almar
Latour, “Why Tiny Denmark‟s Euro Vote Matters – Flailing Currency, European Unity Could Use a
                                                                                                          10


then there would be “enormous social and environmental costs” as a result of the

reduction in the EU‟s “farmers‟ ranks.”16

          CAP may have its political benefits, but the economic effects of CAP have been

disastrous. In the late 1980s for example, the EU provided price supports that

encouraged rampant over-farming. Farmers took such advantage of the government

handouts that they began irrigating their crops with excess milk. The environmental

damage was extensive as forests were needlessly cut down and pesticide used in massive

quantities.17 Moreover, Europe has transitioned from an agricultural society, so now less

than five percent of its labor force is engaged in farming. Eighty percent of CAP

payments go to the richest 20 percent of farmers. Interestingly, Britain‟s Prince Charles

receives a payment!18 In subsidizing the income of seven million Europeans, the EU

spends $42 billion per year on CAP, nearly half its budget. As a result, European

families also pay to the tune of an extra $1,200 per year in higher taxes and grocery

prices.

          In addition to harming consumers, CAP has resulted in resource misallocations

and missed trading opportunities, causing global trade distortions. The CAP‟s annual

cost is estimated to be $75 billion. This cost estimate includes the additional costs placed

on the global economy due to the inability of countries outside the EU to produce and sell

goods according to their comparative advantage over Europe. For example, CAP

restrictions on imports result in American and Canadian farmers producing 11.5 percent


Boost,” Wall Street Journal, August 25, 2000.
16
   Franz Fischer, “Keep CAP: Scrap CAP? Think Twice!,” Wall Street Journal Europe, July 20, 2000.
17
   Despite stringent environmental regulations, pesticide use in the EU was several times higher than in the
U.S. See Bret Stephens, “Europe Goes Free Market, but Agriculture Remains Behind,” Wall Street
Journal, August 10, 2000.
18
   Editorial Board, “Review & Outlook (Editorial): Scrap CAP,” Wall Street Journal Europe, June 15,
2000.
                                                                                                      11


fewer grains and exporting 71.5 percent less milk. Further, Eastern Europe and the

former Soviet Union have lost an estimated 76.8 percent in livestock exports due to the

restrictions on imports imposed by the CAP.19 Thus, European consumers pay a far

greater price for food than if the CAP were not in place. The excess food costs place

inflationary pressure on the entire economy.

        In addition to its high economic costs, Europe‟s protection of its agricultural

market has caused an ongoing trade dispute with the U.S. After the EU failed to bring its

beef and banana industries into compliance with a World Trade Organization ruling,

President Bill Clinton signed a so-called “carousel” law on May 18, 2000. The law

required U.S. Trade Representative Charlene Barshefsky to rotate a list of European

products every six months. The “carousel” theory is based on the notion of spreading the

pain among European exporters, who would then pressure the EU to abandon its beef and

banana policy. Initially, the law slapped 100 percent duties on approximately $191

million of European handbags, bed linens, and coffee makers as well as an additional

$117 million in fees on pate, Danish hams, and French mustard.20

        The EU has recognized the hefty political and economic costs associated with

CAP. Former Warsaw Pact countries seeking to become EU members see guaranteed

government handouts as a requirement for agreeing to join the EU. They want CAP

benefits for their farmers as soon as they join the EU. Realizing the potential strain on

the EU budget, the EU bureaucracy has sought to deny CAP benefits for as long as 11

years after the Eastern European countries become members. The result has been public


19
  Bret Stephens, “Europe.”
20
  The tariffs on the European domestic goods were made because of the banana dispute, and the tariffs on
the agricultural goods were in connection with the beef dispute. See Elizabeth Price, “Beef, Banana
Groups Press Clinton for EU Sanctions List,” Dow Jones Newswires, August 21, 2000.
                                                                                                      12


opposition to the EU in places such as Poland, where support for membership has fallen

below 50 percent.

        In a strange twist, former East Germany has raised objections to the harm on trade

caused by CAP. When Germany was reunited in 1990, large and profitable farms

emerged from the agricultural cooperatives which had been established under communist

rule. Eager to make a profit through free trade, Eastern German farmers have

campaigned for an overhaul of the EU‟s agriculture policy. Beef and grain farmer

Helmut Dornbush stated, “There are more regulations than in the former East Germany. I

would have preferred a free market.”21 The farmers complained that EU policies were

hindering efficiency and hurting their export attempts.

        The EU identified the problems with its farm program and took steps toward

reform on July 1, 2000. The EU plans to reduce its guaranteed cereal prices by 15

percent in 2000-2001, its beef price by 20 percent in 2000-2002, and its dairy prices by

15 percent in 2005-2007. The EU will continue to compensate farmers though through

direct farm subsidies. In the past, the EU would purchase and store agricultural goods

under its guaranteed price system. Direct payments to farmers are projected to be

cheaper than the old method. Eastern German farmers don‟t appreciate the reform; they

must now provide regulators with countless pages of farm-related figures. Grain and

potato farmer Martin Umhau denounced the latest reforms, “I hope the system breaks and

we get a radical reform. I hope the coffers go empty.”22

        The balancing act between the EU‟s entitlements of its welfare system and its

attempt to liberalize its economy are best exemplified by Prime Minister Victor Orban‟s


21
  Johnathan Stearns, “Eastern Germany‟s Farmers Await Free Market,” Wall Street Journal, August 23,
2000.
                                                                                                          13


decisions in Hungary. Hungary‟s economy is growing at an annual rate of 6.6 percent,

but the accompanying by-products of 9.6 percent inflation and 6.6 percent unemployment

also hamper it. Orban made the decision to hold down prices on such consumer staples

as drugs, electricity, and heating. The same Hungarian companies that manufacture these

products, however, also drive the economy. Investors have taken notice, and the

Budapest BUX Index has fallen 18 percent in 2000. Orban‟s decision has been popular

with Hungarian consumers, but it defies EU regulations.

         The EU has harmonized its regulations on many facets, but it still lacks adequate

pan-European regulation in some key areas. National regulators have been adamant in

protecting their national power and resisted any efforts to draft common rules on

corporate laws. For instance, it took 17 years before an EU mergers law became enacted.

Also, there still isn‟t a single EU-wide standard for tracking productivity rates. The

European Central Bank measures labor productivity but only for the 11 euro zone

countries.23 Ironically, the EU has excelled in regulating such issues as limiting the level

of lawnmower noise and standardizing the requirements for the curve of cucumbers.

         Banking regulations are a prime example of the lack of pan-European guidance.

The European Central Bank has controlled the monetary policy for 11 countries since

1999. It handles such matters as setting interest rates and executing foreign-exchange

intervention. National banks, however, still regulate the individual banks in their

territory, handling such issues as consumer rights and advertising rules.24




22
   Ibid.
23
   Paul Hannon, “Euronomics: Measuring the Productivity Gap with U.S.,” Dow Jones Newswires, August
18, 2000.
24
   Experts defend the practice: national banking regulators are closer to their local markets than Brussels.
                                                                                                    14


           Most recently, Europe has been hampered by the lack of a pan-European

securities regulator. Securities regulation is split between national watchdogs, stock

exchanges, and central banks. There is not the equivalent of the U.S. Securities and

Exchange Commission. When it offered its stock to investors across 11 countries,

Deutsche Telekom AG experienced the problems and obstacles of conducting

international business in the EU. In Italy, Deutsche Telekom couldn‟t announce the

offering until a prospectus was issued; a full three weeks after marketing was started in

Germany. Several countries then demanded that the 230-page prospectus be written in

their respective languages. This caused undesirable delays. Individual regulators raised

other objections across the region, forcing Deutsche Telekom to negotiate with each

one.25

Regulatory Impediments – Selling Hot Dogs in Europe

           The regulatory environment created by the EU is best exemplified by one

company‟s attempts to sell hot dogs in Europe. In Spring 2000, American Food Products

started selling Sabrett Hot Dogs at soccer stadiums, amusement parks, disco clubs, and on

pushcarts in dozens of Italian cities. The hot dogs seem to have caught on with Italians,

as numbers are expected to rise from about 10,000 hot dog sales a day to 70,000 sales a

day. The company intends to expand to the U.K. and Spain within a year as part of a

move to sell hot dogs throughout Europe.

           Selling the first hot dog in Italy was a difficult task. Sabrett Hot Dogs entered the

European market during the beef and banana trade war. The EU retaliated against

American sanctions by reducing the number of inspectors in American-owned food


25
     Erik Portanger, “The European Casino: lack of Pan-EU Securities Regulator Looks Increasingly
                                                                                               15


plants from 16 to one. As a result, Sabrett was forced to sign a joint venture with one of

Europe‟s largest food processors, Cremonini S.p.A. They also contracted out hot dog

buns to Bimbo S.A.; the same company that makes rolls for Burger King in Europe.

        The hot dog pushcarts also did not comply with EU standards. The pushcarts are

classified as “mobile restaurants,” and thus are required to have a working sink and a

clothing locker. Also, soft drinks in cans or bottles cannot be stored in ice chests; so, the

pushcarts were outfitted with refrigerators. The pushcarts then had to undergo crash tests

to see how well vendors and customers would survive a traffic accident!

        The condiments were subject to EU regulations as well. In the U.S., formaric acid

is used as a preservative for onions, but it is banned in Europe. Sabrett used citric acid

instead. Sodium benzoid, the preservative in sauerkraut, is also banned. Another

substitute had to be found.26

        Sabrett was able to invest in EU countries by adopting European methods of

doing business. The regulations were a considerable obstacle, even a hindrance to other

start-up companies seeking to establish an European market. Sabrett has been successful

because it bypassed stringent trade laws by agreeing to joint ventures and contracting out

work. It also complied with labor laws by hiring local workers. Sabrett was able to

navigate the political and social impediments of setting up shop in Europe.

Labor and Immigration Impediments

        In addition to balancing domestic concerns with EU policies and defending their

cultural identities, individual EU nations have become concerned about maintaining the

integrity of their borders and addressing labor concerns. Immigration has become a


Troublesome – Which Country‟s Rules Apply When Stock Exchanges Merge? – Creation of a Single
Oversight Body Remains Nowhere in Sight,” Wall Street Journal Europe, August 17, 2000.
                                                                                                     16


major issue. In early August 2000, Greek police detained 250 illegal immigrants, who

were believed to be Kurds from northern Iraq. Also in August, Turkish police arrested

115 illegal immigrants, most of whom were Iraqis.27 The detention represents a trend in

the immigration problems of the EU. Tens of thousands of people from the Middle East,

Asia, and Eastern Europe enter such places as Greece and Germany looking for work and

welfare benefits.28

        The immigration issue has turned into violence in Germany. Berlin newspaper

Der Tagesspiegel counted 27 incidents of violence in July 2000. The most recent was the

bombing of a Düsseldorf commuter train station, which wounded 10 immigrants from the

former Soviet Union and killed an unborn child of a Ukrainian woman. The attacks have

mostly occurred in Eastern Germany where unemployment exceeds 20 percent. Eastern

Germany has not recovered from the effects of communism, and some Germans are

resentful of foreigners seeking employment. Foreign Minister Joschka Fischer cited the

implications of these attacks as “devastating damage to the image of Germany abroad.”29

        The Swiss government has also been forced to quell a rise in anti-immigration

sentiments. The Swiss People‟s Party, one of the four members of a coalition

government, has proposed an initiative which caps the proportion of foreigners at 18

percent. In 1999, foreign residents accounted for 19.2 percent of Switzerland‟s

population with Italians and immigrants from the former Yugoslavia forming the largest

two blocs.



26
   John Tagliabue, “Italy, land of Noble Food, Gets Pushcart Hot Dogs,” New York Times, August 24, 2000.
27
   Associated Press, “Turkish Police Detain 115 Illegal Immigrants,” Dow Jones Newswires, August 16,
2000.
28
   Associated Press, “Police Detain 250 Illegal Immigrants in Greece,” Dow Jones Newswires, August 6,
2000.
29
   Carol Williams, “German Hate Crimes Prompt Call for Party Bans,” Los Angeles Times, August 3, 2000.
                                                                                                 17


        The initiative is likely to fail as polls show only 29 percent support it, but there

are still consequences. The Swiss People‟s Party made large electoral gains with a

similar campaign, “Stop Asylum Abuse.” Economics Minister Pascal Couchepin called

the proposal “absurd” and “a danger for political peace in Switzerland,” but the initiative

seems a reflection of Western Europe‟s fear of a flood of cheap labor.30 The anti-

immigration attitude of some Germans and Swiss comes at a time when the EU is trying

to attract Third World high-tech workers.

        The EU must attract new workers from Eastern Europe and Asia to offset a

dwindling working age population and a robust social security system. The United

Nations recently stated that the EU would need a net total of almost 80 million

immigrants through 2050 in order to maintain its working-age population. That figure

translates to about 1.4 million people a year, but the EU only averaged about 860,000

immigrants a year from 1990 to 1998. In Germany alone, the labor force declined by

200,000 in 2000. Over the course of the next 20 years, the pool will contract by nearly a

half-million people per year.

        Unemployment has been a problem in countries such as Germany. Nearly four

million people are unemployed in Germany, and many Eastern Germans fear a flood of

untrained immigrants. This is an immediate problem, but the declining labor pool

overshadows the anti-immigration argument. The German unemployment rate should

decline to 5 percent by 2010, even if no jobs are created. By the end of 2002,

unemployment should fall 30 percent to a level of 2.8 million.31


30
   Associated Press, “Swiss Government Blasts Campaign to Limit Foreign Population,” Dow Jones
Newswires, August 18, 2000.
31
   Klaus Friedrich, “European Resettlement: For its Own Good, the Continent Must Welcome More
Immigrants,” Barrons, July 31, 2000.
                                                                                               18


        If the EU does expand and allow for Eastern European immigration and

membership, the impact will not boost the bloc‟s economy. The EU now has a

population of 375 million. The five Eastern European countries next in line to join – the

Czech Republic, Estonia, Hungary, Poland, and Slovenia – have a combined population

of only 62 million. The EU now has a gross domestic product (GDP) of $8.7 trillion, and

the five potential new members have a combined GDP of only $261 billion. The

additional 700,000 estimated new Eastern European workers by 2010 cannot cover the

working population deficit. Germany alone is in immediate need of between 300,000 and

400,000 workers. A EU Commission-sponsored report concluded that “the negative

effects of enlargement are likely to be limited” and “the Western countries‟ aggregate

economic gains are also not large.”32 Birkbeck College economist David Begg supported

this notion with two points: (1) the top 10 accession candidates “just are not very big”

and (2) the Eastern European labor force is “a pretty small number.”33

        The historical trend of labor movements in Europe indicates that expansion of the

EU will not result in large emigration toward Northern and Western Europe. Free

movement of labor was realized in 1968, and high labor movements resulted as workers

moved from poor Southern Europe to booming North-Western Europe which was

experiencing labor shortages. By the late 1970s, intra-European Community (EC) labor

flows had become relatively small. Labor migration did occur in the 1980s as migrants

fled communism, but those flows subsided at the EC expanded southward and eastward.

By the time Greece, Portugal, and Spain joined the EC in the 1980s, net migration within

the EC essentially came to a halt. As the EU expands, disincentives are created for labor


32
 Paul Hannon, “EU Expansion East Likely Won‟t Affect its Economy Much,” Wall Street Journal,
August 14, 2000.
                                                                                                       19


migration; workers realize that unemployment is EU-wide and that there are just as few

jobs in Germany and France as in Italy and Spain.34

        In addition to immigration and expansion issues, the EU has linked its trade deals

to labor standards and regulation. The EU recently granted trade privileges to a former

Soviet state, Moldova, in exchange for labor-friendly agreements. Moldova is slated to

receive a reduction in tariffs of between 15 and 35 percent in exchange for settings

standards on child labor, collective bargaining, and union organizing rights.35 The

Brussels-based International Confederation of Free Trade Unions approved Moldova‟s

labor record before the EU granted tariff reductions. Linking reduced tariffs and high

labor standards appeases European labor unions worried about job losses.36 The

agreement with Moldova appears to be a first step. Russia and its annual exports of

nearly $19 billion to the EU are being considered for a set of trade privileges.

        In regard to improving its social conditions, Turkey has followed in the same

footsteps as Moldova. In August 2000, Turkey signed two international agreements on

political and civil rights – the International Covenant on Economic, Social and Cultural

Rights and the International Covenant on Civil and Political Rights. Turkey has long

suppressed its Kurdish population, most notably banning the use of the Kurdish language




33
   Ibid.
34
   Loukas Tsoukalis, The New European Economy Revisited (New York: Oxford University Press, 1997),
pp. 118-119.
35
   As a note, the trade agreement will have little economic impact on the EU or Moldova. Moldavan
exports to the EU are valued at approximately $98 million. Moreover, the tariff on Moldova‟s biggest
export, apple juice, will decrease to 13.5 percent from 15 percent. These numbers will not have a sizable
impact. See Geoff Winestock, “Politics & Economy: EU Grants Trade Privileges to Moldova, Setting
Precedent – Tariff Reductions in Exchange for Higher Labor Standards,” Wall Street Journal Europe,
August 14, 2000.
36
   Third World countries have frowned on such conditions as excuses for protecting domestic union jobs
against cheaper imports.
                                                                                                      20


in official settings. The signing of the agreements was intended to make Turkey more

democratic in order to improve its chances for EU membership.37

        The EU needs to expand. The shrinking labor force has become a political time

bomb and placed a burden on government social programs. European state pensions are

funded on a pay-as-you-go basis; so as the retirement population increases, the burden on

workers increases. The percentage of the population over age 65 is expected to rise in

Germany to 26 percent in 2025 from 16 percent in 1998, to 24 percent from 16 percent in

France, and to 26 percent from 14 percent in Italy. With few exceptions, European

retirees do not have vested pension funds; they rely almost exclusively on government

pensions.38 The political solutions are not well received: (1) raising the retirement age,

(2) reducing pension benefits, and (3) increasing the contributions of workers.

        The social security programs need to be reformed, but that may be a difficult task.

For instance, the French Parliament is considering legislation that addresses the enormous

costs of France‟s retirement funding system. The French government intends to reduce

costs by $137.4 billion by 2020. The trend toward reform is rooted in a system burdened

by a rising life expectancy and fast-approaching retirement for baby boomers.

Compounding the problem, the retirement age has decreased. French President Francois

Mitterand introduced early retirement in the 1980s as a solution for high unemployment.

People were allowed to retire at age 60 instead of 65. As a result, those paying into the

system will decline from 2 to 1 to 1.4 to 1 by 2010.39



37
   Associated Press, “Groups Say Pressure on Turkey to Improve Rights Record,” Dow Jones Newswires,
August 19, 2000.
38
   British workers have mixed financial assets, relying on private and state pensions funds.
39
   Pascal Salin, “Taking Exception: Pension Funds a la Francaise,” Wall Street Journal Europe, August 14,
2000.
                                                                                                         21


        Economists, such as University of Paris-Dauphine economist Pascal Salin, have

advocated the introduction of a private pension fund system (rather than the current pay-

as-you-go system), but trade unions and politicians oppose privatization. France has one

of the lowest union participation rates in the EU at 9 percent, but the unions have a

stranglehold on public utilities and are notorious for shutting down railways, subways,

airports, and telephone service. Currently, unions are seeking a system that pays a lump

sum rather than the regular payments offered in a pension. The trade unions oppose a

private pension funds for practical reasons – it would decrease their power by allowing

individuals to make their decisions. Also, the socialists are opposed to private pensions;

instead, they advocate “compulsory transfers” – a system where the “haves” support the

“have-nots.”

        Compulsory transfers and a social-market economy coupled with a dwindling

labor force are an ever-increasing burden for European taxpayers. The trend toward

globalization and liberalization has not had an affect on EU member states‟ tax policies.

Taxes have edged up over the past 15 years. In the U.K., Prime Minister Margaret

Thatcher had little effect on lowering taxes during the 1980s. The British government

still takes 40 percent of GDP in taxes. Germany‟s tax rates hover around 45 percent.

Italy‟s taxes have risen from 38 percent to over 46 percent, and France‟s have grown to

over 50 percent.40




40
  By comparison, the U.S. and Japanese governments take less than a third of GDP in taxes. Also, France
and Germany are in the process of approving tax cuts and reform, but these measures will have little effect
on the over-arching high-tax policies of those countries and the EU in general. See Philippe Legrain, “One
World? Don‟t Blame Globalization,” Wall Street Journal Europe, August 9, 2000.
                                                                                         22


The European Model

        The EU is an experiment designed to bring about a single monetary, fiscal, and

social market for its 15 member nations. The experiment seeks to create an efficient

economic bloc based on one of free trade and a single currency. To a casual observer, the

EU represents a global trend in promoting liberal democracies. Upon closer examination

however, the EU adds a socialist twist to an era of free markets, free labor mobility, and

less government intervention. The “European Model” allows for workers‟ rights, social

contracts, and job security but at a price.

        Economist Richard Freeman, of the National Bureau of Economic Research, has

argued that the “deadweight” caused by social overhead is cancelled by freedom of

contracts and low transaction costs. In Europe, employee-owned production systems

result in an asset that costs just as much as those owned by employers. In economic

systems, such as in the U.S., an employer can fire an employee if his marginal product of

labor has fallen out of the profitable range. The employer “pockets” the productivity

gain.

        In Mr. Freeman‟s scenario and interpretation of the European Model, the

employee cannot be fired. Instead, the employee will agree to be “bought out” at the

value of his productivity gain. The employee will agree to walk away with a lump-sum

severance payment, receiving the distribution of income instead of the employer. The

price of the asset will not change because the progress of productivity remained the same;

the employee simply pocketed the productivity gain instead of the employer.

        Economist Anthony de Jasay, in a Wall Street Journal article, attacks the validity

of the European Model. First, the model assumes the worker will freely give up his job
                                                                                                    23


for the price of his productivity gain. It does not assume some unproductive workers may

wish to stay in their jobs, pocketing a guaranteed income. Second, there is a cost to the

employee “insurance policy” of choosing between working and receiving a salary or

being “bought out” and receiving a capital sum. Whether a productivity gain is made or

not, the insurance must be paid. This is a cost that can be avoided by not hiring labor or

establishing a business in a more “employer-friendly” environment. Third, the cost of the

insurance is not freely negotiated between a worker and his employer. Rather, the

regulations are imposed by laws, designed to consider social needs and not economic

costs. Fourth, the employee, if he chooses to forgo the safety net of insurance, cannot opt

to take the insurance as cash payment. The result is deadweight loss – the insurance is a

benefit to employees that is worth less than it costs employers to provide.41

        The EU has realized the contradictions and shortcomings of the European Model

and has tried to reform it. In a notable attempt, the European Council released the White

Paper on „Growth, Competitiveness, Employment‟ in 1993. The White Paper addressed

the unemployment issue, recognizing the need for flexibility in labor markets and a

reduction in labor costs. As with most EU reforms, the White Paper did not offer any

structural reforms; instead, it offered Keynesian measures which maintained the welfare

state at its core. Furthermore, the proposals in the Paper were not carried out; EU

reforms often don‟t flow down to the national or local level.42

        Does the European Model have costs? Yes. The deadweight loss of social

overhead has led to chronic unemployment, bureaucratic regulations, and market-defying



41
   Anthony de Jasay, “Market Inefficiencies: Let‟s Throw This Model Away,” Wall Street Journal Europe,
May 11, 2000.
42
   Loukas Tsoukalis, The New, pp. 130-134.
                                                                                          24


inefficiencies and costs. Loukas Tsoukalis, in The New European Economy Revisited,

summed up the EU‟s problems:

           Heavy regulation of labour markets in terms of hiring and firing rules, minimum
           wages and the like, combined with generous social protection systems and high
           taxes on labour, can be at least partly blamed for the high unemployment in
           Europe, which is particularly high among unskilled workers.43


Even as the EU tries to attract investment, it acknowledges the tremendous costs of doing

business in Europe. The Flanders Foreign Investment Office stated that the EU

“regulatory environment is often complex and stringent…the labor law and hiring and

firing procedures constitute a handicap.” In short, the social overhead “…constitute[s] a

significant handicap.”44

Conclusion

           The EU has made tremendous strides in transforming 15 different economies into

a viable monetary and trade union. In forming the world‟s largest single market, Europe

has joined together to endorse the principles of liberal democracies, human rights, and

environmental standards. The EU is also setting up a framework to expand its economic

market for up to 15 additional countries. In the process, Europe and its socialist economy

has, in many respects, neutralized the undercurrent of nationalism running through

Europe.

           The EU economic system, however, does have its flaws and limitations though in

becoming a bona fide political, fiscal, and monetary union. The broad range of

impediments include: cultural, political, social, regulatory, immigration, and labor issues.

With respect to cultural issues, Italy, Germany, the U.K., and France have staked their


43
     Loukas Tsoukalis, The New, p. 135.
                                                                                                     25


position: the defense of traditional norms in lieu of economic efficiency. Italy wants to

preserve its food industry, Germany its language, the U.K. its pound, and France its wine.

The cultural obstacles to integration are closely linked to the political and social

obstacles.

        The cultural lines get blurred vis-à-vis political and social lines over such things

as adoption of a common currency. Besides the increased monetary costs, the U.K. and

Denmark have caused rifts in the EU by refusing to adopt the euro. The CAP, imposed

by political forces rather than economic forces, has also caused intra-EU divisions.

Countries such as France defend the CAP‟s legitimacy despite the high expenses and lost

trade opportunities. Eastern Germany and Eastern Europe want it repealed, so they can

compete on a global scale.

        The political consequences of regulations are evident in American Food Products‟

attempt to penetrate and invest in the Italian market. The labor laws, workplace

requirements, and food standards carried a high overhead cost and resulted in lost

productivity and profit. Although American Food Products was successful in navigating

the regulatory terrain of Europe, it is likely that the business climate stifled many start-up

companies or prevented an initial investment.

        The EU political environment may inhibit investment, but it provides social

protection to its workers. EU-aspiring countries have reformed their political systems

and offered human rights and labor protection to their citizens in order to partake in the

European market and reap its social benefits. As a result of the vast social safety net, EU

members fear a tide of immigrants from Eastern Europe, the Middle East, and Asia


44
 Siefried Verstappen in a presentation: “Foreign Direct Investment: Flanders, A European Perspective,”
May 26, 2000.
                                                                                          26


looking for welfare benefits. While there is little evidence to support any large migration

of immigrants into Europe, countries such as Germany and Switzerland have been forced

to deal with nationalist movements, some resulting in violence. In fact, eastward

expansion of the EU would have little economic and labor impact. Ironically, in a period

of high unemployment, the EU needs workers; the European labor force (and the tax

base) is shrinking, causing individual workers to carry the increasing costs of baby

boomer retirements.

       The European Model of job security and employee-owned production has come

under considerable scrutiny in an era of free markets and labor efficiencies. European

employers have little decision making power in whether or not to fire employees, so

many businesses simply don‟t hire extra workers, or they move labor-intensive industries

out of Europe. As a result, Europe has been plagued by chronic high unemployment and

high taxes and has had trouble competing with the U.S. – which enjoys a record

economic boom, a budget surplus, and low unemployment.

       The EU has always been an experiment, a model that has undergone numerous

revisions. In time, its cultural, political, social, regulatory, labor, and immigration

impediments may be reformed in order to facilitate greater integration and expansion. But

for now, there is a long way to go.
                                                                                     27


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                          Bibliography (Continued)
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                                                                                   29


                         Bibliography (Continued)
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   Journal Europe, August 14, 2000.

								
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