Statist organisation entails a complex set of policy choice, rarely transparent, objective or liberally based. The challenges both endogenous and exogenous facing the EU are vast including the type of relationship it wants with the US and importantly its own security.(1) As one commentator stated, “Prosperity hinges on a world economy shaken by seismic changes not necessarily favourable to Europe….that Union is now embarked upon bold but hazardous experiments with monetary integration and territorial expansion. Its complex institutions are overstretched and need fundamental reforms.” (2) It is clear that in most areas including, defence, foreign policy, high politics and in trade the EU is far from a unified actor, but a variegated and multi speed entity.

There are worrying signs that even the internal market program is under severe stress. There is evidence that income gaps are growing in Europe and have accelerated since 1992. Excluding East Germany, the difference between the richest and the poorest regions in terms of the EU average per capita GDP, was 141 % in 1983, compared to 147 % in 1993 increasing to 155 % in 2000. In 1985 the poorest Spanish region was Extremadura, at 47 % of the EU average, and the richest was the Balearic Islands at 105 %. By the late 1990s these regions were at 54 % and 120 % respectively of the EU average. (3) The Spanish example has been duplicated across the EU. If we leave Luxembourg aside, the volume of the EU member countries' GDP per capita ranges from 64 percent of the EU average in Greece to 117 percent in Ireland. Other countries well above the average are Denmark, the Netherlands and Austria. France, Italy. Britain and Germany are close to the average, as are Sweden and Finland. Portugal and Spain, on the other hand, have considerably lower GDP volumes and per capita GDP. (4)

Given this trend in income inequality some analysts have stated the EU is not an ‘ever-closer union’ but a diverging one – a rich city centric core coupled with a poorer hinterland. Some experts feel that inequality between regions has increased in labour skill, income and wealth. Though the EU provides structural funds to alleviate regional disparity these policies are primarily aimed at the labour force and have minimal efficacy in reducing structural inequality. These funds have for instance no impact on people who have dropped out of the labour force or never entered it or who are in structurally under employed regional areas. Such assistance is also far too small to effectively combat labour inequality across the EU constituting a mere 0.3 % of EU GDP. (5) Most experts feel that microeconomic reforms in both the labour and product markets would ensure that integration in Europe and liberalization with its partners would continue while ensuring that more people enjoy the gains. Such reforms would benefit most groups in society but of course not all. Those left out would need retraining, income assistance and guaranteed welfare.

Labor market reforms should proceed in step with appropriate deregulation of product and capital markets. Improving workers’ access to financial and insurance markets is essential to make labor market deregulation politically acceptable, but wage flexibility and benefit reduction are vital for a more dynamic labor market configuration that may properly support the full integration of an enlarged EU. Some of these mobility-friendly reforms will require concerted action at the EU level. In particular, supranational authorities should remove the remaining legal, administrative, and fiscal barriers to the portability of supplementary pension rights across EU members and properly enforce the employment principle in providing social security to immigrants. This principle means that individuals can have access to the social security system of the country to which they relocate as long as they have had a job, with entitlements to social security based on the length of their contribution records.

Such micro economic reform might be hampered by the macroeconomic constraints of fiscal performance targets and the Euro. Individual nations no longer can manipulate the money supply and interest rates, and raise with impunity tax rates or spending to counter balance economic cycles, or create internal stability. National governments can no longer devalue and cheapen their currencies to increase export growth nor can they use overt protectionist devices to appease special interest groups. Deficit spending is curtailed by Maastricht and debt levels which are already excessive and which burden states with high interest payments are in need of reduction. Nation states are thus constrained when their economies need stimulation.

In such a monetary grouping these rigidities and constraints are exemplified by rising unemployment levels [as witnessed in France and Germany] and inflexible wages. If unemployment goes up, wages might fall, but given that wages are largely inflexible within EU member states, this rigidity would imply that capital would be invested elsewhere. As capital moves to other locales, and jobs are created workers can theoretically move to areas of capital and investment. However within the EU less than 5 % of citizens live outside their country of birth. Culture, language and most significantly the welfare state precludes any necessity of forcing labour to find capital. (6) Local disparities can theoretically also be alleviated through transfer payments organised and dispensed on a EU wide scale. This is currently the tool of choice for EU politicians. The problem with such assistance is that it does not solve underlying micro or macro structural problems, is far too small to make a noticeable impact on labour, and has no firm or fixed political structure.

Labour rigidity is not solely a reflection of cultural and language differences, after all, in the 1950s and 1960s workers did move more around Europe, both within countries toward cities and industrial areas and across borders. Rather, the relative immobility of Europeans reflects the same institutions that underlie slow inter-industry mobility. Continental European systems of industrial relations and social policy tend to maintain employment in declining areas and fail to reward mobility with the wage differentials and easy job finding opportunities that motivate Americans to migrate toward booming regions.

In the EU linguistic differences are also complicating cross-country labour flows, and the 11 languages used at present will increase to 21 following full Eastern enlargement. Furthermore, the lack of institutional coordination across EU members puts a de facto tax on labour flows. For example, different national regulations on supplementary pensions and the absence of harmonized taxation rules for retirement savings can significantly reduce the pension wealth of workers moving between EU members. Health care systems also vary widely among countries and those joining a new system may incur extra costs.

Rigidity is further aggravated by the fact that many nation states including Germany and France, presently and beyond are in danger of breaking the fiscal targets of the Stability Pact, and as such domestic stimulus is not an option. National politicians blame the unfavourable business cycle and depressed world markets. Other Keynesian analysts cite that the Stability Pact and fiscal mandates should be disregarded or removed altogether. (7) Given that the EU needs reform it is hard to understand how removing fiscal targets and prudential deficit control would aid the EU to become economically more flexible and responsive.

More relevant for policy makers is that the potential growth for the EU is declining. Productivity is now significantly lower than it was 10 yrs ago. From 1975 to 1990 productivity averaged about 2.3 % per annum. During the 1990s and into 2002 it has slowed to 1.3-1.4% per annum. (8) This lowered productivity illustrates the declining competitiveness, flexibility and wealth creationism in the EU. Germany and France are both struggling with high unemployment, large public debts, and large pension liabilities and declining productivity illustrating the rigidity of the welfare state. (9)

With declining productivity, government control of the economy has increased during the past 10 years. The average share of government tax revenues as a % of GDP is just over 50 % throughout the EU. This does not include regulatory costs, which according to some experts add another 10-12 % of GDP share for governments. (10) Fiscal imprudence, rising government economic control, labour and market rigidity and manipulation of treaty regulations are serious issues that point out the need for liberalisation within the EU. Without some sort of responsible fiscal approach the EU’s economic and monetary power will not be augmented even with the ongoing development of the Euro. Complicating these issues is the creation of a EU Constitution, which will try to centralise more power and control in Brussels. The Constitutional process will impede rather than allow needed reform.

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(1) - ‘Disoriented’ is not an apt description of America’s economic or political framework, under Bush Jr. It was more appropriate during the drifting years of Clinton’s Presidency.
(2) - D. Calleo, Rethinking Europe’s Future, p. 1
(3) - Tiersky, pp. 250-3. The Improvement in Extremadura was due to emigration.
(4) - EU Accounts.
(5) - Since the mid 80s regional income transfers policy of choice. EC doubled its spending under the structural funds adjustment from 87 to 93. goes to regions with per capita GDP below 75 % - does it work
(6) - Regional labour mobility is much lower in Europe than in the United States. According to the European Community Household Panel, which surveys a large sample of households representative of each EU member and asks the same questions about education, jobs, families, and incomes, 1 out of 200 EU citizens (0.5 percent of the total) change residence every year. In contrast, in the United States around 6.7 million people (2.5 percent of the population) move across state boundaries every year. Even though U.S. states are more numerous and, on average, smaller than EU members, the difference in mobility rates is striking.
(7) - The Economist magazine made this point repeatedly in 2002.
(8) - Centre European Policy Studies, Articles February 10 2002 and June 06 2002.
(9) - See Economist various reports 2002 and 2003.
(10) - Germany 2003 will run a deficit of around 3.5-4.0%. Its GDP growth might be only .5 % to 1 % in 2003. If its productivity rate is 1.5 % (potential growth) there is a structural deficit of close to 3 % of GDP.