An Apt EU Comparison

Imagine 27 Barack Obamas and John Boehners trying to get a debt and banking crisis under control. That, in essence, is what the Europeans are facing now.

Now the north is belatedly trying to impose radical spending cuts on the south, which has not only plunged countries like Greece and Spain into recession but has made the citizens in those countries very angry, in particular toward paymaster Germany and Chancellor Merkel. Greek newspapers liken Merkel to Hitler and accuse her of turning Europe into a “financial Dachau” with her limits on deficit spending. EU officials dispatched to Athens this summer to help reorganize Greece’s corrupt tax-collection system are nicknamed “the gauleiters”—the title of a Nazi occupation governor. One of the most powerful officials involved in extricating Europe from the crisis, speaking on background, says one of the reasons the crisis has been so difficult to resolve is that in Europe, ancient hatreds and mistrust between countries always lie just below the surface.

I had a recent write up in the Cornell Review comparing the EU to the Hanseatic League. This was my doomer take on what I saw in the EU:

The economic integration of the euro zone is subject to the same faults as any other cartel. When they don’t face competition, they become sloppy. When they have a free insurance buy-in, they become sloppier.

History suggests that this brand of autarky is only successful insofar as it remains unchallenged by outsiders. During the Middle Ages, merchants seeking secure methods of trade retreated from the governance of local nobles to work in cities aligned with the Hanseatic League. The League functioned as a network to protect commercial interests on the Baltic Sea in a time when it was particularly risky to trade. It provided a common market to build wealth by insuring its pursuit.

Yet as the League adopted protectionist measures to sustain trade exclusively among its membership, such as blockading Norwegian ports to prevent commerce with rising British and Dutch merchants, its success dwindled. As the modern nation state caught up to the technological progress and prosperity of many Hanseatic cities, the League dissipated. To the modern reader, the Hanseatic League’s reaction is not unlike the EU’s high tariffs on processed goods from developing nations, or the current rumor that Brussels is considering a raise in tariffs on Chinese goods. The alternative to this protectionism is a market for government – not its reinforcement.

To paraphrase F.A. Hayek, competition is a process of formulating opinion through diversity, creating the views people have about what is best. This does not require the creation of new nations or the demolition of old ones. It requires political diversity. Switzerland was born of dissent from the Habsburg empire and slowly grew to a plurality of states with their own autonomy and cultures. After the demise of Napoleon’s Helvetic Empire, the Swiss cemented their government as a confederation of states at the Congress of Vienna in 1815, only to reassert this sentiment in 1848.

Today, Switzerland boasts 26 distinct cantons, each with their own constitution, parliament and courts. Through their autonomy, every canton is able to attract commerce from across the world by voting themselves into competitive tax brackets within the same monetary system. Pfaffikon, a village outside of Zurich, recently changed its reputation from a small town speckled with dairy farms to a hedge fund incubator. It aims to compete with Zug, once one of the poorest cantons in Switzerland, which attracted more than 180 regional headquarters of large foreign companies between 1998 and 2008. Appropriately, the nation was recently ranked ‘most innovative economy’ by INSEAD Business School. […]

 To its credit, the European Union has not been void of decent proposals to promote competitive government within its borders. Legislation, such as the Shengen Agreement, made travel, schooling and work relatively hassle-free for EU passport-holders. These sorts of windows allow for practical competition, like the tenfold increase in applications from British students to Maastricht University in the Netherlands after their government raised tuitions at universities.

The European story is torn between a history that rewards competitive governance with prosperity and local autonomy, and politicians who see the continent as opportunity for centralization and cartelization (so-called “solidarity”).

Today they seem to be headed in an untenable, but unified, path.