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The EU: Criticizing a Good Economy

by James N. Markels

With better than 8 percent real GDP growth per year for the last five years, an unemployment rate of only 3.6 percent and the lowest taxes among the twelve members of the European Union, Ireland’s economy has overcome a stubbornly high inflation rate to be the fastest growing economy in Europe. But Ireland has a labor shortage that may threaten the boom, so the government has proposed to cut taxes even more in order to stem union demands for higher wages and attract more foreign workers. Little did Ireland expect to be reprimanded by the EU itself for daring to do such a thing.

“Sorry, but sometimes the teacher has to punish the best pupil,” said Romano Prodi, the president of the European Commission, which is the executive branch of the EU. Prodi’s attitude is common amongst the other, larger EU nations. Sure, little Ireland has a good thing going, but the managers in Germany and France think they really know how to go about economic growth, even as Ireland outperforms their economies year after year.

The EU expects tax cuts to worsen Ireland’s inflation rate, which is already twice what the European Central Bank recommends for its members, and that might cause problems for other EU nations. But Ireland is different from the other EU member nations in that it is extremely reliant on imports from a non-member, the United Kingdom. The main cause of Ireland’s inflation isn’t too much money chasing after too few goods, but instead the result of trading with a nation that has a stronger currency than the euro. As the euro’s value falls, the price of UK goods go up. Ireland’s productivity has been growing at a fantastic rate. There’s no reason to assume that a tax cut will cause inflation.

Most likely the real impetus behind the EU’s public scolding is summed up by Pedro Solbes, the EU’s commissioner for economic and monetary affairs, when he said, “People have to accept peer pressure and adjust their economic policies accordingly.”

You see, when a country joins the EU it’s considered to be part of a team. What becomes important is not the individual successes of any one nation, but whether the EU as a whole benefits. The EU’s original proponents insisted that the new economic alliance would not hinder sovereignty in any way, but over time that has given way to a busybody posture that frowns upon countries doing what is best for its people.

Fortunately, Ireland is having none of the criticism. Irish Finance Minister Charlie McCreevy notes the success of Ireland’s economy and has indicated an openness to the suggestions from the other EU members—as soon as they prove capable of matching Ireland’s feat.

But Prodi noted to The Economist this month that the EU feels more and more like a government, and that means there’s a push to create an EU authority that might be able to lob more than mere criticism toward a rebel member like Ireland. Already there is discussion about the creation of a constitution for the EU, forming legal institutions with authority over some areas of the member nation governments. One of these areas would probably be taxation, in fact, so as to make tax rates more uniform and prevent competition between nations for workers and businesses. A future EU government in the fashion that Prodi envisions wouldn’t just reprimand Ireland. It would tell Ireland what its tax rates are.