The EU shows the risks of selective intervention
The European single market was a huge achievement. Enacted between 1987 and 1992, it eliminated many physical, technical and tax-related barriers to free movement [of goods and people] within the Community. In turn, competition and free trade raised average productivity and incomes.
The European economy wasn’t perfect, it’s true. The Common Agricultural Policy remained in place. There was continual pressure to harmonise national social, employment and fiscal policies. Within the single market itself there were still national currencies. The single market was marked by regional price differences arising from exchange rate fluctuations, currency exchange costs, and the lack of transparency associated with pricing in different currencies. The transaction costs alone might have been worth a few billion euros.
But perhaps it would have been better to have stopped there with the single market, and gone on paying those billion-euro costs, than to move on to the next stage of currency unification, ultimately facing today’s trillion-euro costs of Eurozone bailouts and possible collapse.
Why didn’t they stop there? One can think about it along the lines of what Oliver Williamson called the impossibility of selective intervention. We’d like selective intervention to work like this. We live in a market economy, but from time to time the market fails. Then, when it fails, and only then, we’d like the government to step in and sort it out. When they’ve done that, we’d like them to stop.
In other words, in the best of all possible worlds, government intervention would be limited selectively to those measures that can improve social welfare over the results of the market economy. That way, surely, we would have the best of everything: the market when it succeeds, and government intervention to fix it when the market fails. But unfortunately a government that has the power to intervene when it chooses in the interests of the community also has the power to intervene when it chooses to serve its own interests.
In the case of the single market, Europe’s leaders once saw an institutional deficit. For centuries, the competing nations of Europe were sources of technological, cultural, commercial, and industrial revolution. Revolution was spurred by rivalry. Too often, rivalry led to war. There was an institutional deficit, Adenauer, Schuman, and Spaak believed, that led European countries to make war, not trade. They decided to intervene to fix it.
The solution they sought was to bind Europe’s nations together commercially. But in the process, they created a self-serving international bureaucracy. The European Commission in Brussels was supposed to oversee the single market. A legislature in Strasbourg was supposed to oversee the bureaucracy. However, the lack of a strong popular European identity that could frame political competition on a continental scale led Europe to exchange one institutional deficit for another.
Instead of an institutional deficit there was now a growing democratic deficit. That deficit became a refuge for politicians that had failed on the national stage or, as we sometimes call them, ‘elder statesmen’. Defeated in a national election? Stand for the European Parliament. Just lost your party leadership? Become a European Commissioner. With a few exceptions these were vain, limited people. Unlimited only in their ambition, they tried to take control of Europe’s destiny and shape it in their own interests.
What were the interests that the single currency served? It was another grand project. The worst fate of any political bureaucrat must be to enter office and be told there’s nothing to do. Every politician needs a stream of projects to oversee, institutions to build, offices to fill, and funding to allocate.
For such people, building the single market could never have been enough. The single market was just a phase that added to their momentum. The logic of selective intervention is that nobody tells you when it’s time to stop, and there is always good reason to go on. They could never have just ‘stopped there’.
Not knowing when to stop is at the core of the impossibility of selective intervention. Selective intervention is supposed to improve things. And it can do this, up to a limit. But in the real world the limit of improvement is always fuzzy. If the government fixes one thing that needed fixing, this creates the justification for it to go on to fix something else. If that turns out to have made things worse, then this too becomes the justification for another fix. There’s never a reason to call a halt.
This is how a beautiful dream went too far, and so became a bit of a nightmare.
A longer version of this article is available on Mark Harrison’s blog.