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European Union policymakers keep making the same mistakes

Wednesday, May 16, 2012
By Paul Taylor, Reuters


PARIS -- Americans call it a Rube Goldberg machine, Britons a Heath Robinson contraption and the Danes a Storm P machine.

The European Union's policymaking system often resembles one of those cartoon designs of an implausibly convoluted system for achieving a simple task — held together by sticking plaster, string, frequent tinkering and plenty of wishful thinking.

What is striking when you compare Europe's policies on agriculture, monetary union and climate change is the similarity of the way the EU keeps bolting on patches and extra wiring to try to fix problems created by its own solutions.

Over the last five decades, the EU has set out to achieve a set of worthy goals by regulating markets — self-sufficiency in food, currency stability, fighting climate change.

Each of these policies created perverse incentives or what economists call “moral hazard,” causing unintended consequences such as grain mountains and wine lakes, real estate bubbles and debt overhangs, and the collapse of the carbon price.

When things go off the rails, the EU reflex is never to question or scrap the policy, since political dogma, vested interests and institutional inertia rule out going back on what in Eurospeak is called the “acquis” — European achievements.

The default response is always “more Europe,” although not necessarily the most straightforward solution, which is often fenced around with political vetoes.

“In political science, it's called 'past dependence,'” says Helen Wallace of the London School of Economics, an authority on European governance. “You are so locked in by what you have done before that you end up doing a version of it again and again.”

While similar behavior exists in national governments and private businesses, the EU is special due to the number of veto holders who can obstruct change, but also because supporters of the European integration project are reluctant to be critical when policies go wrong, she said.

Furthermore, EU policies are enshrined in law and treaties, making them harder to amend, an adviser to European Commission President Jose Manuel Barroso noted.

Take the Common Agricultural Policy. Conceived in the 1950s and early 1960s to feed postwar Europe at stable prices for producers and consumers, the system subsidized farmers to over-produce cereals, wine, meat and dairy products. By the early 1980s, it was swallowing 70 percent of the community budget.

Surpluses grew so large they had to be taken off the market and stored for long periods in giant warehouses and tanks at taxpayers' expense. Some were sold off at subsidized prices to the former Soviet Union and developing countries.

Then farmers were paid to dig up their vines, reduce their herds and take land out of cultivation and leave it fallow. Eventually, the link between subsidies and production was cut, but farmers still receive EU payments for maintaining the countryside and producing high-quality food.

Today the Common Agricultural Policy still guzzles 40 percent of the EU budget. Don't count on that level of spending falling significantly before 2020 in negotiations on the next seven-year budget framework due to climax later this year.

The same pattern can be observed with the single European currency, launched in 1999 initially with 11 members, to provide currency stability for business and consumers and give Europe greater power on global foreign exchanges.

The eurozone's one-size-fits-all interest rate provided an irresistible temptation in countries such as Spain and Ireland to build and buy homes that people had never been able to afford before. Wages rose faster than productivity in poorer peripheral euro countries, fuelling a consumer boom but sapping their economic competitiveness.

Governments were lulled into excessive borrowing by the fact that for nearly a decade, bondholders accepted almost the same return when lending to Greece and Portugal as they did from economic powerhouse Germany.

But there was no going back to first principles. The euro was the EU's highest achievement of economic integration and the only way out considered by policymakers was fast forward.

The European Financial Stability Facility, the temporary bailout fund created by eurozone countries, is the ultimate Rube Goldberg machine. Each member state has a veto on all its actions, and loan guarantees are national, not joint.

The dysfunctional decision-making system is a major reason why the eurozone has been behind the curve in responding to the sovereign debt crisis since it began in late 2009.

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