Two conflicts with the potential to increase European welfare

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

epa06540154 People hold banner reading 'Stop the deportation to unsafe Afghanistan' during protest against the deportation of refugees to Afghanistan in the center of Utrecht, The Netherlands, 18 February 2018. [EPA-EFE/BAS CZERWINSKI]

The answer to two major European conflicts, Brexit-induced financial problems and the refugee crisis, could be welfare-enhancing. Only after implementing solutions to those problems can Europe start to reform governance and boost innovation, writes Karl Aiginger.

Karl Aiginger is a professor at the Vienna University of Economics and Business and the director of the Policy Crossover Center, Vienna- Europe.

These weeks, EU policy looks hopeless. In discussing the financial consequences of Brexit, such as €14 bn lower net contributions, member countries quickly split into a group favouring higher taxes and another calling for the reduction of expenditures.

As far as refugees are concerned, all countries favour stricter border controls and higher military expenditures, but some members call for and others oppose their redistribution via country quotas. Both conflicts overshadow necessary governance reforms and the need to boost innovation, education as well as decarbonisation.

Additionally, Europe is neglecting “rising Africa”, where China has started to dominate, while in the meantime Russia, Iran, and Turkey seek to regain their old strength.

However, there exist welfare-enhancing solutions to both problems. Let us start with Post Brexit Finance.

It is fairly clear that Europe should not raise its overall tax burden. It is, even now, the region with the largest public sector and heaviest tax burden in the world. Half of GDP is required by the government in many countries, which would qualify these as “mixed economies” instead of market-oriented ones.

But it is also evident that the community budget – at about 1 % of GDP – is not sufficient for excellence and cohesion. Looking for new revenues to meet future challenges is therefore justified, as well as that member countries reduce their national expenditures and taxes.

Requesting that “Brussels” cut revenues in general if it loses one member is not the optimal reaction. The better solution is to redistribute expenditures.

Spending half of the Community Budget for agriculture – most of it depending on size, not quality – is as stupid as is tolerating 28 national military systems which together are as expensive as the Chinese plus the Russian military complex, but unable to adequately control its borders.

It is time to restructure expenditures on the community level, as well as to cut national triple bureaucracies. Member countries should stop financing pork issues and instead make their public sectors more efficient. As a result, there will be money for future investment, even with lower national taxes and a somewhat higher contribution to European affairs.

As far as the refugee crisis is concerned, we have to start with the fact that the workforce is expected to decrease by one fifth over the next two decades in several member countries. European growth is therefore predicted to be lower than that in the US, and Europe’s share in world output will decline quickly.

Firms will stop to choose Europe for investment or location. Inward migration is a must for Europe, but it should not only be steered by problems in the country of origin (war, drought), rather also by demand in Europe.

Migrants tend to go where wages are highest and former migrants already live. If the new inflow is concentrated in a few countries, then the burden will be higher than the benefits.

Quotas would, therefore, be an improvement. But governments reject them because the voters fear to be swamped by migrants from another culture. Populist rejection of European “interference” is a vote- catcher. The welfare-enhancing, as well as a politically feasible solution, would be to tender migration on the sub-national level.

Regions and cities that agree to accept migrants would qualify for additional money for investment, schools and business start-ups. Regions in which the population is already shrinking (often by one third, as it is in some parts of all Central and Eastern European Countries), and in which schools and shops are on the verge to be closed and houses abandoned, may be eager to get a second chance instead of downsizing dramatically.

Regional decisions and strategic choices will reduce opposition by the national governments. The regionalisation of the distribution of refugees is a win-win solution, as migrants move to locations where they are needed and people accept migrants as the solution to their problem of shrinkage. Regions and cities that do not need or do not want migrants will not be swamped.

So both problems have welfare-enhancing solutions. Improved tax and revenue structures, as well as cutting of national expenditures instead of higher overall taxes, could be the result of Brexit-induced financial problems.

The distribution of migrants according to regional demand and decentral decisions would reduce opposition to migration and reduce labour supply problems caused by ageing and depopulation. Then Europe can start to reform governance, boost innovation and pay attention to its dynamic but unstable neighbourhood.