Thursday, November 3, 2016

A Single Economy

Why are unemployment rates so diverse in Europe? Why is it 19.5% in Spain and less than 5% in Germany? Are Northern European hardworking and the Southern Europeans lazy? Not really. For example Greeks work the third longest hours in the OECD and yet they are in a huge crisis. Is bad weather conducive to productivity and the Mediterranean sun counter productive? Not really.

Then why are companies manufacturing mostly in North and Central Europe and not in the periphery? Of course there are factories in Portugal and in Spain but why aren't there more of them?

Are Southern Europeans well educated but not in the right fields?

Why are Ireland and Finland doing so well? Why does Malta have record low unemployment while Cyprus high (and it even higher during the crisis)?

Well, like in most issues, there are many reasons aka factors.

Some like to dismiss countries for not having the right work culture or for state corruption. That is superficial treatment.

The indirect cost of labour may be high eg in Greece but it is no that low in other EU members either. Why did auto makers from other continents invest and produce in the UK and not in Spain, Portugal or Greece? The simple answer is English and a flexible labour market. But what does one really mean by the term "flexible"?

All companies are not allowed to fire at will in the EU, there are caps on monthly firing volumes via EU directives. In some countries when you fire an employee you have to pay him/her off a high severance pay than in others, but multinationals in general like to send off an employee with a gift higher than what the law says.

Very few people have a thorough understanding of what it's like to do business in the EU 28 member states as well as outside the EU and they are usually not available to policy makers (because they are not sought by them). With Brexit, some governments have sent letter to corporations luring them with low tax rates. But when companies make location decisions they look at many factors. Infrastructure, hard and soft (human capital), logistics, etc. On the other hand cars and other equipment is being made in Asia and shipped to the EU and they are still competitive.

Why are so many companies locating in Ireland which is in the periphery? Is it just low taxation and the English language (as well as proximity to the large UK market, asset which is now being lost due to Hard Brexit)?

In a well performing economy each geo segment has some competitive advantages. Plus there is aid by the government (eg Wales by the UK). How well has east Germany adjusted in the 25 years since reunification?

The EU Single Market which started in 1993 required many regulations and directives. It was a major breakthrough. But it was not panacea. As a UKIP supporter argued in a recent debate, only 6% of UK companies export. For a large number of companies in the EU doing business beyond the national borders is still an orama not a reality. One has to look at the real life reasons for that and not rely on economic theories and traditional business analysis.

The EU economy is not doing badly but it is underperforming. People are not satisfied and blaming the EU, globalization, foreigners in addition to their national policy makers.

"It's the economy stupid" I have argued applies to the 2016 EU too. The Dutch have in the last few years seen cuts in their social security, the Germans had Hartz including mini jobs. Their unemployment benefits have been cut (yet they are still generous compared to those of the Greeks or the Polish). So of course they are easily upset by money given to Greece or other periphery members.

Germany wants convergence of tax rates (corporate ones) and seems to want France. It makes sense. But why will others agree? In a united states or federal republic of Europe maybe they would agree. But we are nowhere near that and many leaders across Europe think it is not feasible. A Gordian Know? Is there a need for a new Alexander the Great? Tusk is obviously not that. Delors conveyed a vision that may not have been shared in the UK but was largely effective. Of course the EU at that time had 12 members. Now it has 28 (soon 27).

So is "union of sovereign nations (or states)" the only feasible solution politically? It may be, but does it make economic sense?

A Single Economy will of course require further surrender of national sovereignty.

A single or converged tax rates for companies
A single VAT rate for all
Single labour laws/rules
Use of a single business language (!)
An EU IRS and EU personal tax rates

Can such endeavor be marketed to the people of the EU27 in 2016 or 2017? Maybe it can, when it is sold on the USP (unique selling proposition) of Jobs (more and better ones). An EU27 (or even EU26 or EU25) will be powerful as a Single Economy, inside and outside (in trade negotiations).

A single immigration policy (for refugees and economic migrants)
Single environment rules (we have them already largely)

Some say these will come, eventually. That it took centuries to build the US. True, but maybe the EU is now in a do or die situation. Why? Because like any half built house, it is not easy to live in.

Leavers in the UK are starting to realise that life outside the EU is not going to be that easy. Federalists have not been convincing in Marketing Europe.

If Europe does not move forward it will move backwards. A federal republic of Europe does not 460 mio, it can work with even 320, thus with 25 lander or less.

More Europe for more Economy and for more Jobs.

If the EU economy is doing so great at its core today why are AfD in Germany and PVV in NL doing so well?

Tomorrow: Argumentation for Less Europe

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