Economic Theory

Hayek would have been a Brexiteer

At our IEA Brexit debate, my opponent and colleague Diego Zuluaga appealed to the authority of Friedrich Hayek’s advocacy of a European economic federation as evidence that the EU should be something that free-marketeers should support. Yet a re-reading of Hayek’s essay ‘The Economic Conditions of Interstate Federalism’ shows clearly that the EU as currently constituted does not live up to his vision. For a variety of reasons, some of which simply could not have been foreseen in 1939, both the institutional development of the EU and the context of a globalising world means the EU can no longer be viewed as a ‘free market institution’.

In the context of the build up to World War II it was probably not surprising that Hayek focused on how European institutions might curb the excesses of nationalism. His vision was very much one of an economic federation amongst the European nations, with the clear intention of delivering peace through prosperity. Hayek believed that a federation, in the form of a zone where factors of production and goods and services were able to move freely under a single currency, would deliver more prosperity through the gains of trade, enhancing the likelihood of peace both through interdependence and increased wealth protecting Europe from external forces. Furthermore, and importantly, a federation would prove a strong counterweight against nationalist protectionism, both due to the elimination of protections directly and the discipline of the internal competition created through states being able to vary their tax and regulatory systems.

Clearly, in some respects, the EU is a realisation of Hayek’s vision. Indeed, if you look at the Messina conference and the Treaty of Rome, the original idea was almost exactly like the one Hayek put forward in that paper and it mainly came from the Ordoliberals in Germany and Italy. Free market proponents should support the free movement of goods, services, capital and labour that has been delivered, and these probably have contributed to peace and prosperity more than many eurosceptics would admit. The disciplines of single market legislation have clearly helped liberalise some countries. State aid rules do prevent the narrow nationalist interests which are prominent in some European polities from favouritism and protection. These are healthy constraints on governments, in favour of freedom, which free marketeers should support.

And yet, the modern-day EU actually goes way beyond what Hayek would imagine the legitimate role of a federation would be. As I mentioned in my speech, far from embracing the principles of diversity, competition and subsidiarity which Hayek thought was a necessary discipline, instead the EU has a harmonising and centralising agenda, which sees regulatory coordination of products as necessary to prevent a ‘race to the bottom’. These regulations are often extremely costly. The ECJ and its interpretation of law has also seen the EU involve itself with much process regulation too, in areas such as employment law in the push for a ‘social Europe’ (and if the Five President’s report is anything to go by, in future things like bankruptcy law and property rights). This is completely unnecessary for protecting economic freedom.

The EU involves itself with attempts to deal with many externalities, even though these tend to be either global (think climate change) or very local (think most other environmental issues) in nature – meaning the EU is an inefficient level of government. And the EU has proven highly protectionist as a customs union, with sustained agricultural protectionism, common external tariffs and a slow bureaucratic approach to new free trade deals (which have proved much easier for nimbler independent nation states to agree). Worst of all, the nature of the EU institutions is such that proper of reform is virtually impossible.

Put frankly: the EU is not a free market institution. But if I’m right and the EU is far from a free market model, then what went wrong relative to what Hayek sought to achieve?

First, the EU decided to respond to non-tariff barriers to trade not through the use of the European Court ruling to ensure protection was impossible where necessary, but with regulatory harmonisation. This eliminated the discovery process associated with regulatory competition across member countries, and due to producer and other interests, led to a higher level of regulation overall. Part of this at least was down to globalisation and the desire of the US to push harmonised laws and regulations in some areas on a worldwide basis. But this make the EU either wrong or trivial. In some areas the EU has pushed for regulatory harmonisation where it is unnecessary. But in other areas the EU ends up merely adopting global rules decided in other fora, where different nations get represented as 1/28 of an EU representative.

Second, whilst Hayek was right to point out the dangers of demands for protection from national interests, his vision underplayed the degree of opportunity for other vested interests (often by sector or groups of countries) who are able to take advantage of the centralisation of power in Brussels. We still have significant protection of agricultural markets, for example. Companies and lobbyists lobby Brussels to pass non-tariff barriers to insulate them from competition from beyond the customs union (see steel and so-called anti-dumping demands). Environmental lobbies push for expensive energy policies at an EU level despite it doing nothing to solve a perceived global problem. Socialists and social democrats use the EU as a vehicle for a ‘social Europe’. The Eurozone countries themselves have become a vested interest in using the EU institutions to support the currency, even when it has entailed breaching the rule of law.

Finally, the EU has simply ignored Hayek’s later works in opposition to constructive order and in favour of the evolution of institutions. Many EU projects such as the euro itself have been imposed from the top-down, seemingly ignoring the differing conditions across countries. Whilst no doubt he would have seen virtue in the ‘hard money’ nature of the ECB, it is difficult to claim that in outcomes this has enhanced peace or prosperity in the Eurozone. Far from uniting the continent politically, it has led to significant tensions between many nation states. The same could be said of the way Brexit has become a real possibility as the EU has usurped power over a range of competences.

Hayek’s vision of a European economic federation was a worthy ambition but a product of its time. Were Hayek still residing in Britain, he would acknowledge that the reality of the EU as currently construed has been the creation of a distant bureaucracy with a constructivist centralising and harmonising agenda, dominated by sectional interests and slow to adapt to a rapidly globalising world. With his belief in evolutionary change and his respect for the UK’s common law traditions, and the technological possibilities of the emergence of genuine global trade and friendly cooperation, Hayek surely would have believed that Britain’s mission in the EU was complete and that it was time to embrace a globalist agenda.

Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Initiative.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.