NZ-based analyst sees EU sliding into paralysis and inevitable decay.

Which is the more valid view of Europe: a haven of peace and prosperity that refugees are desperate to reach, or a quarrelling bunch of countries incapable of getting their act together and dealing with that flood of humanity in a civilised, collective way?

It is both, of course.

But if the European Union's institutions are incapable of addressing a challenge like the refugee crisis, what use are they?

And do the debatable benefits of monetary union justify condemning an entire country like Greece to an endless future of self-defeating austerity and gruesome depression?


A monograph by the New Zealand Initiative's German executive director, Oliver Hartwich, published this week provides a trenchant critique of the European project. Its title is Why Europe Failed.

"[Europe's] elitist structure of governance has locked its political institutions into paralysis," he says.

"Its economic model of a mixed market economy is unable to keep up pace with more dynamic world regions. Its demographic changes will test the limits of its expanding welfare state. And all of this is happening against a background of increased security concerns on Europe's borders with Africa, the Arab world, and Russia."

Europe is still one of the most developed, prosperous, and liveable places on earth, he concedes.

The four freedoms - free movement of goods, persons, services and capital - have been almost fully realised.

"Great strides too have been made in unifying European markets, increasing competition, reducing transaction costs."

But Hartwich says the policies which emerge from the EU's superstructure have at best tepid support among people who have seen falling average economic growth rates decade after decade and mass unemployment become a feature of their societies as entire industries are lost to developing countries.

In the face of this unimpressive economic record there is political quiescence, which Hartwich attributes to another element of the European malaise - high levels of spending on social welfare, defined broadly as public spending beyond the state's core responsibilities of defence, law and order, and certain public goods.

Last year the German Federation of Taxpayers calculated the difference between gross wages and net take-home pay, based on OECD data. To do this, it also included the effect of value-added taxes like GST.

"For families with two income earners and two children ... tax burdens in Europe range from 47 per cent in Greece to 29.4 per cent in the UK. The figures for Australia and New Zealand are 23.2 per cent and 15.5 per cent respectively."

But governments can only bribe people with their own money, Hartwich says, and their ability to do that is being eroded by ageing populations.

He is especially scathing about the EU's single currency.

The euro was a political project designed to weaken a reunited Germany. But it has strengthened, and the effect has been to damage Europe's economy and competitiveness.

Where previously differences in competitiveness among European states would have resulted in exchange rate adjustments, they now result in diverging unit labour costs and have led, in the case of the weakest eurozone members, to painful "internal devaluations", cutting wages and pensions and driving unemployment higher, with no guarantee that will suffice to restore international competitiveness.

"It was a mistake to introduce the euro before Europe was ready for it," Hartwich writes.

"But it is an even bigger mistake to pretend that this badly designed monetary union must be defended at all cost. It would be far better for the Europeans to cut their losses and give up on the euro."

Breaking up the eurozone and restoring exchange rate flexibility between European countries would help deal with persistent trade imbalances within Europe and help crisis countries export more, while requiring stronger economies like Germany to import more.

Hartwich is critical, in particular, of the European Central Bank's quantitative easing programme.

Buying governments' bonds and monetising their debt is, in effect, a stealth means of achieving what is forbidden under the German constitution, that is, pooling countries' sovereign obligations.

It shields heavily indebted governments from the interest rate consequences of their policies.

But it is fundamentally different from QE by national central banks like the US Federal Reserve, the Bank of Japan or Bank of England, in which only their own country's bonds are or were involved.

"Such tactics may well violate EU treaty law," Hartwich says. "They lack any meaningful democratic legitimacy. They are certainly unpopular in those countries most likely to foot the bill."

But the ECB is free to do this without the blessing of any national government or parliament.

Hartwich sees such outcomes as typical of European institutions which are remote and unaccountable, intent on the heedless pursuit of an agenda supported only by elitist Eurocrats over the heads, or behind the backs, of populations who still identify not as Europeans but as Dutch, Spanish or whatever.

He quotes Canadian writer Mark Steyn's observation that Europe's core problem is that it is impossible to convince Swedes that Greeks are not foreigners to them and vice versa.

"It would be optimistic to say Europe is at the crossroads today," Hartwich concludes.

"At least that would suggest it has a choice between reform and decline.

"But it increasingly looks as if there is no such choice and Europe's inevitable future is one of decaying power, wealth and influence."