Oliver Hartwich concludes his assessment of what whent wrong in Europe with the lessons for New Zealand

Oliver Hartwich concludes his assessment of what whent wrong in Europe with the lessons for New Zealand

This is the eighth and final chapter covering Oliver Hartwich's essay "Why Europe Failed", an analysis of an ageing Europe, burdened by the size of its welfare state. He draws cautionary lessons for New Zealand's policy makers. You can read the full version here.

This eighth section is titled "European lessons for New Zealand". Part I is here. Part II is here. Part III is here. Part IV is here. Part V is here. Part VI is here. Part VII is here.

By Oliver Hartwich*

This essay was meant to draw a rough sketch of Europe’s current problems and put the grand European integration experiment into its historical context. In doing so, it discussed the result of a power play in European politics that started during the Cold War and embraced Germany to control it.

But the European integration project always suffered from an inherent flaw. There never was a European demos to drive the political and economic integration. European integration has always been a top-down, elite driven project. National interests have not been superseded by a European vision. On the contrary, national interests and egotisms are still alive in Europe. Though this integration project has never been too popular with ordinary voters, any dissent has been sedated by the stunning growth of the welfare state.

Despite these shortcomings, the EU has achievements to be proud of. The biggest one is the creation of a common market in which people, goods, capital and services can cross borders easily. The Schengen Agreement allowing for passport-free travel across the continent is another success. A once war-torn continent has been politically stable and strife free for 70 years.

But Europe is also battling socio-economic realities on many fronts. Its governments are heavily indebted, and its populations are ageing and shrinking. The euro crisis has brought many of Europe’s previously hidden economic problems to the fore.

For us in this part of the world, the tyranny of distance from Europe has finally turned into a blessing. Now we have to make sure we do not repeat Europe’s mistakes. But what are those European mistakes that can be avoided in New Zealand? And what are the lessons we can learn from Europe’s integration disaster?

Fortunately, there are some elements of the European experience that will never have an equivalent in a New Zealand context. New Zealand’s geographic isolation means it will not enter into any arrangements that will undermine its sovereignty and democracy as a nation-state. The only exception is its special relationship with Australia, which has become more integrated over the past three decades of Closer Economic Relations. But even in New Zealand’s relationship with Australia, integration is unlikely ever to pass the threshold of shared political institutions or monetary union (even though it used to be discussed in the past).

New Zealand should nevertheless pay close attention to two aspects of the developments in Europe. First, the way in which elites have captured the political decision-making process should be avoided here. Second, the rise of the European welfare state is a cautionary example.

Seen from the outside, the degree to which European affairs are not controlled by the peoples of Europe but by a narrow political elite is shocking. European voters are not presented with a clear choice on the course of European integration.

One should be careful not to equate democracy with good governance, the rule of law, or even individual liberty. Having said that, a well-functioning democracy can support all of these goals. Europe’s democracy, however, can only be called deficient. European integration meant that an extra level of decision-making has been placed between Europe’s citizens and their leaders. Ordinary Europeans are far removed from the most important decisions affecting their continent. They have no direct or meaningful say on issues such as Europe’s monetary union, agricultural policy, or foreign relations. There are simply no elections that would be fought over such issues.

New Zealand would do well to avoid letting its political elites from becoming as distant from voters. In a small country such as ours, this temptation may be easier to resist than in a densely populated continent such as Europe. But it is not just size that matters but attitude. Europe’s leaders have shown an elitist streak that we should never let any politician get away with in New Zealand.

The more we can strengthen the connection between citizens and their representatives, or rather citizens and political decision-making, the better. This means more elements of direct democracy and greater devolution of political power to the community and local government. Seen in this light, the creation of the Auckland super city and further attempts to amalgamate councils are all steps in the wrong direction. They remove government from the people it is supposed to serve. Europe’s first lesson is to distrust the distant political elites.

The second lesson is to be watchful of the rise of the welfare state. In Europe, the welfare state was a means of buying political power. Of course, the bribed electorate always paid for its own bribes. However, the arrangement worked for as long as new spending commitments could be financed through higher taxes, more debt, or indeed a combination of both. As government spending has now reached around 50% of GDP, and as the debt load stands at worrying levels, the European welfare state model has reached its limits. Europe’s demographic change will make it even harder to maintain the welfare state in the future.

New Zealand needs to avoid a replay of this ‘welfare state and debt’ disaster. Fortunately, our own spending and debt levels are substantially below Europe’s. But our society will age too, and there is always a temptation for politicians to buy their way to power through the welfare state. Europe shows where such policies can lead to.

In their report Guarding the Public Purse, Bryce Wilkinson and Khyaati Acharya have shown how demographic change will affect New Zealand’s public finances over the coming decades. One of their observations was that under current policies, government spending on social welfare, including health and education, was projected to rise from 24.6% to 28.2% of GDP between 2011 and 2061, due to ageing alone.21 This would move New Zealand to levels currently experienced in Europe.

In New Zealand we have the luxury of being three or four decades behind Europe’s demography curve. But this does not have to mean that we will be experiencing Europe’s problems 30 or 40 years later. It should mean that we have 30 or 40 years of finding ways to prevent a European replay by finding different answers to the challenges facing Europe today.

Conclusions

The standout reasons for Europe’s decline are its elitist political system and its inflated welfare state – and the interrelations between these two.

Europe no longer rules the world. Nor can it hope to regain the dominant position it once enjoyed. Europe’s decline is entirely self-inflicted. It is a continent that first destroyed itself in two world wars. It then weakened itself by inflating the activities of the state while creating a bureaucratic, isolated, and elitist superstructure in the form of the EU. It also wrecked its monetary system by introducing a common currency that was never going to work and caused more problems than it ever solved.

In many ways, Europe is a case study in how not to conduct one’s economic and political affairs, which makes it all the more worthwhile to pay attention to European affairs so we do not repeat their mistakes here. But don’t hold your breath. Short-term political gains through welfare spending is too tempting for politicians anywhere and too beguiling for voters.


21. Bryce Wilkinson and Khyaati Acharya, Guarding the Public Purse, Wellington: The New Zealand Initiative, 2014.


Oliver Hartwich is the Executive Director of The New Zealand Initiative. Before joining the Initiative he was a Research Fellow at the Centre for Independent Studies in Sydney, the Chief Economist at Policy Exchange in London, and an advisor in the UK House of Lords. Oliver holds a Master’s degree in Economics and Business Administration and a Ph.D. in Law from Bochum University in Germany.

This is part VIII and final installment of a serialisation of his essay "Why Europe Failed". Part I is here. Part II is here. Part III is here. Part IV is here. Part V is here. Part VI is here. Part VII is here. You can read the full integrated version here.

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Very interesting series. Once again thank you. It would have been interesting to hear Oliver's view on what practical, do-able changes could be wrought to rescue them from their mess, because as he says there is a lot of good that is worthy of saving. Or is the best way to change something to let it completely break down then start again? The consequences of this approach could be unpredictable and disastrous, but on the other hand are the political elite who are so embedded in the power system capable of doing what is required?

Perhaps Europe's decline is not completely self-inflicted.

According to this article the US also had a big part to play.
Maybe it's because the US sees the Euro as a competitor to the US$ and it's reserve currency status, who knows.
Interesting read:

U.S. is Destroying Europe

http://www.strategic-culture.org/news/2015/08/07/us-is-destroying-europe...

Is this a veiled plea not to become a republic? Helen Clarke was a fan of that idea, but I always thought it was because she wanted to be President (and General and King of the Sea!). The removal of the privy council and replacement by the Supreme Court looks like a way for the elites to firm up their control. This idea could be upon by stealth if we are not awake to the pollies motives! Through this series, and before for people who watch politics, it has been clear that a developed welfare state is just a bribe to the masses. George Orwell would be proud! While I do believe there is a need for basics of welfare, too many people have became way too dependant on it. The question now is how to reverse the flow to a more sensible level?

You could view this whole housing issue in the light of entrenched and undesirable welfare dependency. Lack of affordable housing leading to permanent tenancy and dependency on the welfare state for the rent supplement. This reduces a large swath of the population to permanent servile dependency and at the end of the day the welfare cash flows straight into the pockets of the landlords who are the governments mates. The sad thing is that a Labour government probably would be no different.

The welfare going into the pockets of landlords renders them the recipients of that welfare, no more, no less. Among those bludgers will be foreigners.

Free markets and competition are the answer.
They work best for society
Trouble is business hates free markets and competition is hideous and hard work

I would suggest that the "free market" experiment is essentially a failed one as bigger and more wealthy elites take over the market and manipulate economies. I would suggest that there is evidence to suggest that regulation provides a fairer and more balanced economy.

Murray. I think we would benefit from the application of markets. But we don't have them and it is the daily task of the big corporates to make sure we don't have them. Regulation is certainly what we need, but to ensure we do have open markets. We don't need regulation that tries to make economic decisions or 'pick winners' etc.
The example of supermarkets is a great one. Their economic success is not derived from giving consumers what they want or even efficiency. It derives from reducing competition as much as possible and controlling their situation. Note the limited range of goods they provide. Note the limited range of producers they buy from.
Indeed there would be a great range of innovative startups in the food industry if we did not have supermarkets. But you really are not going to get a foot in with your new product.
Business is stifled. Consumer have limited variety. How does that happen.

How does that happen? Free market capitalism is how that happens, it is a natural result and pretty much the endgame of it. Has that never occurred to you?

yes it has occured to me. Try reading the comment again.

Accept that. And it doesn't contradict what I was thinking. The regulation doesn't remove people from the market, it just stops them manipulating or controlling it. I also suspect most people's living standards would increase somewhat if the regulation managed to put a cap on greed.

The Government's interpretation of "Free Market" is one without regulation. How this presupposes competition. At what level is it considered that there is not enough competition to ensure a "free market" is working efficiently? And at what point should regulation step in to compensate for a lack of competition?

In the meantime the big multi-nationals led by the banks, and helped by the Government do control the markets and are bleeding us dry. English's comment re Silver Ferns Farms is a case in point - the Government not willing to act to protect NZ'rs from foreign predatory corporate with boat loads of cash.

Putting a layer of technocrats a layer removed from the popular vote is not a bad thing, on the contrary it allows decision making in a very complicated environment to proceed uninhibited by ignorant parochial concerns. Populist and nationalist (self-centered) votes pertaining directly to such matters are to be avoided. After all as we all know (?) Hitler was elected democratically (the National Socialist seizure of absolute power only came later).

The comparison of EU high level politics and technocratic policy with Auckland City is ridiculous. What on earth is the author on about. How does a single small Pacific city even begin to compare with the entirely of a vastly powerful and wealthy continent full of competing interests and dangerous conflicts?

Auckland suffers enough from the usual low level bickering and fiefdom defending of any council politics, without further dividing it up into yet more parties to get into conflicts with each other. As it is the national government needs to take a harsher attitude to dealing with Auckland, and its abrogation of responsibility on issues like the property bubble is appalling. This wouldn't be any better with Waitakere councilors egging onward and upward their property portfolio whilst baying for Manukau to implement sensible housing policies, or vice versa.

"After all as we all know (?) Hitler was elected democratically ...". This is simply not true. In the last free election in November 1932 Hitler's party received 33% of the vote and he did not have a majority in parliament.

Hitler was appointed (!) as head of government in Jan 1933 by senile president Hindenburg, following intense backroom wheeler dealing - the type which is now at the heart of the EU.

The last elections which Hitler actually did win in March 1933 were no longer free, as he had in the meantime imposed emergency laws which got many opposition politicians into jail.

Never mind the facts ... the only and obvious mechanism which can protect us from dictatorial type rule which is wrecking the EU is simply to follow the Swiss model of direct democracy.