Liberalism Needs Central Power

Op-ed in the Financial Times

July 4, 2007

Two hundred and thirty-one years ago today, the Continental Congress declared American independence. While the US constitution was in place 13 years later, much of the subsequent two centuries have been spent fighting over the locus of economic policymaking. The initial battles between the states and the federal government were of course driven by slavery, but the economic aspects of the dispute over federalism went on independently and far outlasted the civil war. Having a constitution settled nothing in this area.

So today is a good opportunity to take a longer view on the implications of the recent European Union summit agreement for economic decision-making. Often, eurocrats use historical comparisons of European integration with the early years of the United States as an excuse: "Look how far we have come in so few decades. What more could you expect?"

Yet what the US experience demonstrates is that the question of whether or not the recent agreement leads to something that resembles a constitution matters far less than many think. In the United States, the power of the centre relative to local politics in economic policy has varied for more than 200 years, even though there have been few constitutional amendments. The European Union's new agreement leaves the European Commission much too weak vis-à-vis the member states.

Importantly, the US conflict has been over how much authority the central government has, not about the size of government or the degree of intervention into the economy per se (each side had advocates for protection, subsidies and the like, that waxed and waned). When US economic policy decisions were left to the state level, they tended to be reactionary, just as they were on civil rights.

The irony for those who have been congenitally suspicious of excessive power being concentrated in Brussels is that the more the central body has had authority over economic policy, the greater the liberalizing influence-whether it was the United States breaking down barriers to interstate commerce or the European Commission implementing the single market. Where and when the member states have retained dominance over regulation and enforcement, as in insurance or property in the United States, or in state aid to favored companies or professional certifications in the European Union, the results have been illiberal and economically harmful.

The alternative to a strong Brussels is not a decentralized free market and minimal government interference. It is greater political capture of economic policymaking and abuse of authority by member states and subnational governments. Politicization is more likely and more obstructive to market competition when done by local or member governments than when the federal authority has competence. Subsidiarity is in many cases an invitation to corruption, entrenchment of incumbents and horse-trading of handouts. Too many political veto points equal too many opportunities for extortion. Look at the United States' most glaring economic failures: primary and secondary education, healthcare, infrastructure (as seen in Hurricane Katrina and the response to it) and fiscal indiscipline. These are all areas where we leave too much discretion to local and state governments, or to their representatives in Congress, and too little authority to the federal government.

Clearly, abuse of excessive executive power can occur, as the current Bush-Cheney administration has repeatedly demonstrated, but so can stagnation and injustice when local politicians strangle real liberalization. Only a strong central government can be a deregulating and liberalizing force of the kind seen in Margaret Thatcher's Britain or Junichiro Koizumi's Japan. Any such force for progress has yet to emerge out of the supposed effects of competitive pressures from member states with differing systems within the European Union-otherwise, there would have been a great deal more convergence in economic approaches than we have seen in the past 50 years.

In fact, the European experience shows that enforcement of market integration, competition policy, disclosures and transparency are what really brought the economic benefits of European union-and that enforcement came during the periods when and in areas where the Commission had competence independent of the member states' specific wishes. When Brussels has been strong, it has been liberalizing, at least internally within the European Union, and that has paid off. When the member states have taken away authority from Brussels, the effect has been reactionary horse-trading and back-scratching, as in the series of deals on allowing state aid or ignoring fiscal targets cut between Germany and France in the years before the current cyclical recovery.

Thus, the real message from both US and EU historical experience is a warning about the costs of a lack of sufficient central decision-making authority in economic matters. The absence of a strong central state to standardize and enforce the rules of commerce is harmful for liberal values and economic performance. The United Kingdom and Poland may claim otherwise, but their own economic advancements in the past 20 years-shock therapy, disinflation and monetary independence, privatizations, labor market reforms-all came through exercise of executive authority and would have been impossible had there been too much devolution from the national government. It is not an accident that economic performance has been among the worst in the European Union, and the pace of reform the slowest, in Belgium, Germany, and Italy with their semi-sovereign weak national governments.

Life and liberty are, of course, as safe in the European Union as anywhere in the world. The pursuit of happiness through liberal economics, however, requires a government strong enough to enforce the rights and rules that make that individual freedom possible. In this light, Europe does not really suffer from a democratic deficit. Europe suffers from a governance deficit, particularly on economic matters, and the voting rules however resolved will do nothing to close this gap. While the spin is that the European Union has moved toward greater political unity with the summit deal, the relative power of the member states over the Commission regarding economic policy is not only undisturbed, but on a rising trend. The success of Nicolas Sarkozy, France's president, in altering the competition language of the Union's basic goals is just one obvious manifestation of this reality.

As a result, the current political situation in the European Union will probably erode the foundations of economic performance and will certainly divert the economic agenda away from microeconomic integration, which has been the only source of real economic benefits from union. The UK and Polish governments may feel that they were justified in having fought hard once again against excessive centralization, but they will end up unintentionally with a Europe too weak to enforce, let alone promote, economic liberalization-especially in today's political climate.