Has economic liberalism been at the heart of the European Project?

This was a formative essay for a module in Policy Making in the European Union, part of my Masters in Political Economy of Europe at the LSE. Got a distinction, so thought I should share!

Introduction

Contemporary debates about the state of the European Union frequently pit a ‘social Europe’ against an apparent ‘(neo)liberal Europe’. While economic liberalisation — in the removal of tariffs and non-tariff barriers to intra-European trade — has often been a result of European integration, it would be an oversimplification to say that economic liberalism has always been at the heart of the European project itself. Too many other variables have been at play — political rivalries, path-dependency and joint decision traps, to mention just a few.

In this essay I will explore the key elements in the forging of the European project, citing key policy developments. Firstly, we will explore the prevailing paradigms during the building of the European project: Post-War Keynesianism through the ‘Golden Age of Growth’, and Monetarism/Neoclassical economics following the collapse of Bretton Woods. While these paradigms appear to be opposed to each other, they both prescribed key features of economic liberalism: private property, distribution primarily by the market, competition, open trade. The second part of this essay will explore where the case for the economic liberalism as the heart of the European project is strongest. For instance, in some areas — such as the building of the Single Market, or the empowerment of the European Commission to doggedly pursue competition policy — economic liberalism has evidently held significant sway. Yet even these examples have significant limitations. In the third part of this essay, we will explore aspects of the European project that seem to have little or no consideration for economic liberalism. Of note, the Franco-German relationship: anxieties over the return of an overbearing Germany must not be underestimated in understanding the drivers of the European project. What will emerge is a view of European integration as a mixing pot of different ideological, economic, and security instincts — economic liberalism being but a small ingredient among them.

Definition of Economic Liberalism and the paradigms of European political economy

Since the beginning of the European Project with the Treaty of Rome (1957), two paradigms have prevailed in European political economy. Immediately post-war, the Keynesian system which operated under the Bretton Woods agreement, and from the 1980s, the Monetarist/Neo-Classical order of flexible exchange rates but rule based monetary policy. Both of these paradigms — despite being markedly different — can be considered essentially economically liberal. For the purpose of this essay, we understand economic liberalism as the philosophy promoting an economy built upon private property rights, competition, with distribution ultimately carried out through a market system, rather than central planning.

The Post-War paradigm, that lasted until the collapse of Bretton Woods in 1971 constituted discretionary monetary policy by governments, which was proactive and counter-cyclical to manage employment and GDP growth, among an environment of stable exchange rates (Eichengreen, 2008). And while it was a departure from earlier Laissez-Faire economic liberalism, it retained the key features outlined above. As F. A. Hayek wrote in The Road to Serfdom — Nothing has doomed liberalism so much as its “wooden insistence” on laissez faire (Hayek, 1944). The ‘neoliberal’ paradigm which has prevailed from the 1980s, more obviously, also constitutes a type of economic liberalism. While it departed from the Keynesian paradigm in terms of stable or flexible exchange rates, and the role of monetary policy, the key criteria outlined for economic liberalism above clearly persist (IMF, 2014). While the European Project may not have had economic liberalism at its heart, economic liberalism in whatever form has been prevalent throughout its history, and has undoubtedly shaped and influenced policy makers, economists, and politicians alike (Hall, 1989).

The influence of Economic Liberalism

The Single Market is often seen as the core of the modern Europe Project — and is a clear example of economic liberalism, both as a source of influence and as a result. The Delors Commission proposed 279 (Egan, 2001) measures to bring the Single Market to fruition — resulting on the freedom of movement of Goods, Services, Persons and Capital. The European Commission now has a reputation for, and this is one of the key criticisms levied against it, as committed to liberalisation wherever possible. The Commission’s objective to tackle State Aid, for example, is a very clear example of the influence of economic liberalism. In challenging State Aid — as in the recent case of the European Commission challenging Ireland’s tax arrangements with large international firms such as Apple (The Economist, 2016)- the Commission aims to enable markets to operate more freely, without distortion from Member States incentives and their ‘champions’.

Competition Policy is a key instrument of the European Commission, and is a clear example of the influence of economic liberalism on the European Project. The EC’s policy competency in this area covers: antitrust (e.g. price fixing), merger control, and State Aid (European Commission, 2017). While this gives the EU considerable power — both supranational and within Member States — competition is vital to economic liberalism. “The great threat to freedom is concentration of freedom” wrote the great liberal economist Milton Friedman, who puts forward an authoritative case for government action to tackle monopolies and promotion competition in ‘Capitalism and Freedom’ (1962, Ch.8 — “Appropriate Government Policy”).

More contentiously, the European Union’s move towards a ‘regulatory union’ (Hix & Hoyland, 2011, ch.8) in many ways allow for the freer movement of capital, goods and services. Whether by mutual recognition, as in the Casis De Dijon Case (1979) or by harmonisation through Directives, removing barriers to trade is a clear sign of the influence of the economic liberalism on the European Union and its predecessors, especially in cases of so called ‘negative integration’ (Scharpf, 2009)– whereby integration serves to remove barriers (as opposed to building new structures — positive integration).

The development of Monetary Union can also be seen as evidence of economic liberalism in the European project: The Euro is yet another example of an agenda to remove transaction costs and barriers to trade between Member States. The design of the Euro along the ‘Frankfurt Consensus’ (De Grauwe, 2014) for example, shows the influence of Monetarist and neoliberal thinking. This entailed a strict mandate for the European Central Bank to focus on price stability — seen as the major threat to the economy by the Monetarist school.

As much as the Euro may have served to free up trade between the Member States, however (and whatever its drawbacks) other factors were certainly vital to its development. For example, French concerns over the newly re-unified Germany were highly significant. Reunification resurrected fears of a dominant Germany, and French officials saw German acquiescence to the new currency as a sign of German commitment to peaceful European integration. German politicking, too, played a key role — and perhaps one that favours the view that economic liberalism was important to the European project at this stage. German policymakers considered Monetary Union as a way to ensure other Member States — in particular France — maintained fiscal discipline (De Grauwe, 2014). German ‘Ordoliberalism’ therefore influenced the design of the Euro and its infrastructure: a Central Bank committed to price stability (as opposed to GDP growth or employment), and National Governments committed to a 3% deficit ceiling (European Commission, 2017: SGP). The power of economic ideology alone, however, did not determine the spread of this Ordoliberalsm mentality: Germany’s heft is what made this possible. As in many other areas of the European project, what we see at the heart of the European project is the power balance of the Franco-German relationship, with economic liberalism being just one of a number of smaller factors in the melting pot.

What has been at the heart of the European Project?

Robert Schumann, considered to be one of the ‘Founding Fathers’ of Europe, argued for European economic integration so as not to make war between Germany and France unlikely, but impossible. (Schuman, 1950) This has been one of the most vital dynamics in the building of the European project. The inclusion of Coal and Steel in the first item of the European Project, for instance, was strategic: pooling the resources of the original Member States most relevant to preparation for war. If Germany were to think about re-militarising, coal and steel would have been vital. These concerns seem irrelevant to economic liberalism.

Likewise, certain EU programmes seem almost entirely contrary to what economic liberalism would prescribe. For example, the Common Agricultural Policy — which provides income support and subsidies to the eleven million farms across Europe (European Commission, 2017). The CAP has been subject to several reforms, and is now a long way from the system of production subsidies that resulted in “mountains of cheese and lakes of butter”. This earlier iteration was anathema to the principles of economic liberalism — and while the reform process may hint at a move towards economically liberal ideas, CAP still falls short.

CAP not only fails on the test of economic liberalism due to its distortion of markets within the European Union, but on its implications for Free Trade. Free Trade is an important principle of economic liberalism, in whatever form. But the heavy protection of EU Farmers — both due to subsidies as well as tariff and non-tariff barriers — give EU Farmers an unfair advantage over international producers. The EU, for instance, levies a “20% or higher” tariffs on animal product imports from third countries (Bungay et al, 2012, TPRC, p.12). In addition, (and as highlighted by recent controversy over the Transatlantic Trade and Investment Partnership with the US), the EU imposes relatively strict regulations on agricultural produce (BBC, 2015). These policies reveal the limits of the European projects commitment to economic liberalism. As in other policy areas, and as with other political entities, the EU is subject to numerous competing political interests.

On balance, the European project is not a non-economically liberal entity. It is certainly not a Socialist European Project, for instance. Other countries across the world which are ranked as having a high degree of economic freedom, for instance, similarly have a degree of protectionism. For example, Heritage ranks Hong Kong as the country with the most economic freedom in the world, but even it does not have a perfect score (Heritage, 2017). While the European project, therefore, may not have perfectly economically liberal credentials, it would be wrong to say that it is entirely irrelevant to it.

Another element behind the European project, related in many instances to economic liberalism, though not synonymous with it is the desire for growth. This desire for growth — in GDP and in employment — is firstly a matter of welfare maximisation, and secondly as a source of legitimacy. For example, as outlined by A. S. Milward, European integration in the immediate post-war period was seen as a stimulus for rebuilding war-torn Member States (Milward, 1992). In addition, it was thought that delivering high living standards in the form of high employment and rising wages (something which was achieved during the ‘Golden Age of Growth’ in the 1950s and 60s) would serve as a source of political legitimacy — preventing the rise of nationalist and populist parties at the national level, and preserving peace at the intra-European level.

Conclusion

The European project in its multiple guises — from Coal and Steel Community, to Single Market, to Monetary Union — has not been driven by economic liberalism alone. While the economic liberalism has been a significant influence, as the philosophical backdrop to policy choices at the least, it has often been dwarfed by other considerations. The European Project has always been a melting pot of competing interests. These have been national and subnational; civil society, local governments and corporations; and electoral and technocratic. While the Member States have often had competing interests and visions, one axis repeatedly emerges as important: the Franco-German relationship.

French anxiety over the return of a dominant Germany helps us understand both the formation of the European Coal and Steal Community (IN) as well as the impetus to design the Euro. And likewise, the concern of German governments to be (and to be seen to be) as a ‘Good European’ helps us understand the willingness of the otherwise mighty Germany to pool sovereignty and so restrain itself.

The proposed drivers of the European project listed in this essay are not exhaustive, but do demonstrate the limitations to the claim that economic liberalism has always been at the heart of the European project. As the European Union finds itself under threat and begins its next bout of soul-searching, the question of the ‘heart’ of the European Project is relevant like never before. Economic Liberalism has not and probably will not be that heart. Perhaps its heart will become that which Jean Monnet envisaged: not the “forming [of coalitions] between States, but [a] union among people” (Monnet, 1978).

Bibliography

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