September 1, 2016    5 minute read

The Outdated Economic Thinking Holding Europe Back

Drawing On The Past For Guidance    September 1, 2016    5 minute read

The Outdated Economic Thinking Holding Europe Back

The French Republic is never far from its past. As any visitor to Paris can attest to, the city is “sliced” across its heart by the famed Axe Historique. One may travel along the Champs Élysées starting from Philip II’s twelfth-century Louvre Palace, past the Place de la Concorde, then under the Arc de Triomphe du Carrousel and the Arc de Triomphe de l’Étoile, past the La Défense de Paris to La Grande Arche de la Fraternité at the Axe’s Western terminus. The entire route celebrates almost eight centuries of French history.

Stuck In The Past?

While one may consider France to be celebrating its past, there’s a colorable argument that, in many ways, they are stuck in it. Though the country is in the midst of record unemployment levels, many of the lucky few who do have jobs are on strike. Earlier this summer, almost all of France’s nuclear power plants were shut down, 40% of the country’s gas stations were running on empty, many thoroughfares were blocked, all thanks to strikes by the country’s many labour unions over labor-law reforms.

The contentious reforms are intended to make it easier to hire and fire workers, which has become a notoriously difficult and time-consuming task thanks to laws that have created a byzantine process for businesses to terminate one’s employment. The resistance is due in large part to the French ideal of corps de métier, a concept that reaches back to the trade guilds and sworn crafts of the Middle Ages. And, though the enrollment in French trade unions is small and diminishing each year, they are still the loudest voices at the forefront in the battle to retain the French cultural ideal of strong protections for labour.

From Globalisation To Protectionism

Many commentators have cast the resistance to even marginal relaxation of labour laws as a backlash against globalisation. Although the EU closed a bevvy of trade deals dropping barriers for third countries to the continent’s market, it seems more and more likely that the trend has slowed and even worse, reversed, heading in the direction of strict and protectionist trade policy, most closely resembling that of the historically all-but-closed French markets.

32% was the drop in primary aluminium production since the turn of the century

However, the barriers being thrown up to overseas trade, though intended to protect industry, end up doing far more harm than good. For example, the European steel and aluminium industries have steadily lobbied for increasing tariffs to reduce the impact of inexpensive imports abroad. Though such measures may help specific industries in the near term, they have long-term negative effects as they ripple down the supply chain. While production of aluminum in the EU has been collapsing under its own weight in the past decade (primary production has fallen by 32% since the turn of the century), tariffs enacted to protect the dying industry have done naught, but harm consumers and SMEs – a tariff of up to 6% on aluminum has cost Europe’s SMEs up to €15.5bn.

Better Bets

Rather than continually performing CPR on dinosaur industries like steel and aluminium, the EU would do much more good for its economy to focus on promoting post-industrial industries and emerging technology. The first order of business for kick-starting such industries is the removal of the nearly innumerable strata of suffocating government red tape. According to a recent study, the top one hundred regulations in the EU have saddled the continent’s market with a $43.9bn millstone, dragging even the most promising industries beneath the waves.

One of the most promising ideas for Europe’s market is the Digital Single Market Strategy. The idea, in a nutshell, is to build a single Internet marketplace with a single tax regime. As it stands now, one of the most stifling aspects of cross-border trade between businesses and consumers in the EU is the veritable death grip each member state has on the right to set tax rates for online purchases. While Europe’s many fiefdoms have been firewalling themselves off from each other along centuries-old borders, stunting online trade in the process, the US has held the line against establishing state restrictions on e-commerce, and the online marketplace has blossomed.

The Effects Of Brexit

Unfortunately, and thanks to the impulsive Brexit vote in June, the forces of free trade, who were already fighting a rear-guard action, are not far from a disorganised and frantic retreat. Given political cover by the rebellious Britons, several EU nations have given in to nativist voices to turn their backs on the Transatlantic Trade and Investment Partnership talks with the US, and another such agreement with Canada is now on life support as well. The moderating voices in London, which have been a consistent counterbalance against German and French governments that have all but been captured by special interests, will soon be silenced, opening wide the door to more restrictive regulation in areas as disparate as trademark, telecommunication, finance, and the service industry.

Europe’s history is a vivid tale of the human struggle to survive and thrive despite all obstacles. As much as history can provide lessons, lawmakers should not use it as a text from which to derive economic regulations. If Brexit had one positive outcome, it was to give voice to the common European who is exasperated over excessive regulation and EU bureaucrats. Legislators in Brussels and the various capitols of Europe should take note of this frustration and work toward removing regulatory barriers to trade. Otherwise, they risk making Europe’s market a relic of history as well.

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