Friday, February 1, 2013

My Analysis of the Single Market and European Organizational Sclerosis

On November 10, last year, I was invited by the Bruges Group in London to deliver a speech on the “Single Market”, to which the organizers of the conference wanted Great Britain to “say no”.

I used to be quite in favor of a single market that I saw as the continuation and deepening of the “common market”, thus leading to increasingly competitive markets in the EU.

But in the process of thinking the topic over I came to realize that the Single Market, a notion invented in1986 by Jacques Delors and the eurocrats in Brussels, was quite different from the Common Market created by the Treaty of Rome in 1957. Apparently, thirty years had not been enough to open the national markets in the European Community, in spite of the suppression of tariff and non-tariff barriers to trade, and more action was needed.

What Delors wanted actually was a suppression of political and regulatory competition within the EU. This, I realized when writing “Euro Exit”, amounted to a big boost for European wide cartels, intended to replace defunct national cartels that had been stripped of their market power by the opening of the national economies, both within Europe and by globalization. Indeed, when regulations are centralized, business firms have a strong incentive to collude in order to negotiate from a common position with the regulatory authority. And the distance is short from collusion to cartelization.
Thus it appeared to me that the suppression of regulatory competition, the political centralization and the cartelization of the European industries were just one and the same transformation.

The result, as I see it, is a growing sclerosis of the organizational structure of state and firms in the EU as large and centralized units are reinforced while the underlying trend of the information society is towards fragmentation of large hierarchical organizations and general decentralization.

This is what I call the “European organizational sclerosis”. While the official diagnosis and current conventional wisdom is that labor market rigidities constitute the main obstacle to growth, I now think that excessively large public and private organizations – and thus taxes and rents - are the real barrier to growth in Europe. At the same time as I explained elsewhere, the devastating effect of high taxes on growth is not so much that of taxes on capital, but of taxes on labor, the various forms of payroll taxes that have been growing massively during the last three or four decades.

A policy to stimulate growth should thus focus first on the overall organizational structure of European countries and on realistic plans to reduce the labor tax.

Meanwhile the process of continuously expanding centralized regulation should be halted and a return to diversity would favor economic and political competition within the EU.

The text of my London speech is now available on my homepage here.

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