Imagine the United States incorporating Mexico and Central America into its territory. Then imagine the United States pledging to invest in those countries’ economies and infrastructure until their peoples’ standard of living becomes level with our own. You’d probably call this plan crazy, a well-meaning, yet foolish initiative placing a debilitating burden on U.S. taxpayers and the U.S. economy.
Now imagine the European Union doing the very same thing. Actually, there’s no need for imagination: The union’s member states are about to make this plan a reality. With Ireland’s adoption of the Nice Treaty this week, the constitutional path is now clear for the incorporation of 10 or more states into the European Union. Future members include Poland, Romania, Cyprus, Lithuania and a host of other eastern European nations.
Ireland adopted the treaty through a referendum. This was the second time around for Ireland, as its voters had rejected the treaty at the polls last year. Part of why the “Celtic Tiger” expressed its temporary opposition stems from the workings of the union budget.
The European Union employs a welfare-state system of taking tax revenues from its richer member countries, such as Germany and the Netherlands, and “investing,” or spending, them in its poorer members such as Greece and Portugal. The union spends the money on such things as roads, mass transit and civic buildings. Predictably, as with most government spending, the union spends the money inefficiently and ineffectively.
Until very recently, Ireland was in on this transfer gig. Now, however, partly due to years of union spending, but mostly because of its prudent policy of low taxes and regulation, it stands on the cusp of the union’s “richer half.” The Irish government has been so successful that it was ranked the fourth-freest economy in the world in 2000. This newfound success gave Ireland’s voters pause as it considered the union’s proposed expansion.
And for good reason. The coming expansion truly appears staggering. The needs of the “new” poor countries are enormous. While not “third world,” few have anywhere close to the standard of living of Western Europe. The European Union, even if it attempts to slow the coming transfusion of funds, will be obliged to invest billions upon billions of euros into its newest members. Along with this, Eastern Europe’s societies will have to endure the union’s sometimes stifling regulatory policies. The union will attempt to lift Eastern Europe with a shot of Keynesian spending while shoving it down with the weight of the modern regulatory state.
All this portends perhaps decades of large transfer payments from present European Union countries to their second-world neighbors. It comes at a time when most union members are trying to coordinate their economic policy. One loudly enforced initiative is to limit their budget deficits to 3 percent of their GNP.
Over the last two years, partly due to the sagging world economy, a host of center-right governments swept into power in European Union states. With the adoption of “third-way” politics by much of their center-left predecessors, however, these governments do not offer much of a change in policy. Few have any plans to cut domestic spending.
In addition, the world economy may sputter at its current lackluster pace for years. This means no economic boom in Europe to pump up government revenues. Therefore, current European Union governments will soon face the following: On one side, the union’s incoming members will require massive transfer payments, while on the other there is no room to borrow more money, cut spending, or expand revenues through economic growth. Large tax increases will be the only way out. Of course, the union could reform its harebrained welfare-state policies, but reform of the European Union occurs about as often as the Irish sing “God Save the Queen.” It just doesn’t happen.
You might wonder how the European Union’s leadership ever came up with such a daft idea. The sad truth is the idea is not all that surprising. Ever since the union turned from a free-trade customs union to a political bureaucracy, its leaders have governed not with economic planning but with grand visions of empire. It is the dream of the European Union elite to create a super-state stretching from the Atlantic to the Urals, from the Artic to the Mediterranean. A few Irish voters understood the absurdity of this, but it was too little, too late. Europe is in for a long, shockingly brutal ride, which we will all get to enjoy. The best that I can say is don’t invest in any French stocks. But you probably knew that already.