Acton Commentary

Europe's Economic Cage


Since early 2006, Western Europe has experienced an economic turnaround. With annual GDP growth-forecasts of 2.3% across the European Union and with the Euro-zone recently experiencing the fastest growth of the world's three major economic areas some believe that Europe's sclerosis is diminishing and that the region may be turning a corner.

Careful analysis of recent European political developments, however, suggests it is questionable whether meaningful change is occurring in Europe's fundamental economic settings.

Much fanfare accompanied Sweden's recent election of a center-right government. Yet the center-right's success involved jettisoning proposals to systematically reform Sweden's increasingly unaffordable welfare-state. In short, the Swedish center-right has morphed into a Social Democrat-lite movement.

Likewise, the British Conservative Party--Margaret Thatcher's party--has disassociated itself from proposals to seriously reduce state economic interventionism. Its leaders are, for example, unwilling to commit a future Conservative government to tax cuts and recently praised Britain's fiscally-bankrupt National Health Service.

In Italy, Romano Prodi's 2006 budget was characterized by protectionist policies and higher taxes. This included reinstating death-taxes on the wealthy (defined by Italy's center-left government as anyone earning over 40,000 euros annually). To the north, Austria has elected a Socialist-led government disinterested in continuing the outgoing Schüssel administration's extremely modest economic liberalization efforts.

Turning to France, unemployment recently rose to 9 percent. Yet, with the possible exception of Nicholas Sarkozy, no major politician on the French right or left appears willing to contemplate major economic change.

Across the border, Angela Merkel's grand-coalition government has implemented some of Germany's highest-ever tax increases. Its only change to Germany's profligate welfare-system has been raising the pension-entry age from 65 to 67.

Then there is the subject no European politician likes discussing: Western Europe's hidden unemployment levels that, some estimate, double official unemployment rates. Given, for example, Belgium's 13.9 percent official unemployment figure, is it any wonder politicians ignore this issue?

Naturally, exceptions exist. Thus far Spain's Socialist government has spared the previous administration's economic reforms from its otherwise radical-left agenda.

In the end, however, no matter how dire the situation, many Europeans seem unable to contemplate a state not engaged in extensive regulation and welfare-provision. Alternatives to this intellectual iron cage are routinely dismissed as “neoliberal.”

Yet this was not always the case. An example of Europeans' rethinking government's economic functions may be found in those thinkers whose work inspired West Germany's transformation from post-war rubble to a “miracle economy”: the Freiburg Ordo-Liberal school.

Relatively unknown outside Germany, this school consisted of intellectuals associated with the University of Freiburg in the 1930s. Strongly anti-Nazi and anti-Communist, Freiburg scholars wanted to define the essential institutional rules that promoted liberty and prosperity (hence, the phrase “ordo-liberal”).

Drawing upon Christian natural-law and Scottish Enlightenment insights, the ordo-liberals shunned anarcho-capitalist fantasies. Instead they asked what would constitute government's economic tasks if the objective were freedom and economic abundance for all.

To this end, they identified the state's economic responsibilities as upholding rule of law, property rights, and contractual freedom and liability; ensuring open markets and competition; and, lastly, preventing inflation. Beyond these areas, ordo-liberals warned, governments should hesitate to tread economically.

In reaching these conclusions, ordo-liberalism was influenced by the Weimar experience, in which rampant hyperinflation, protectionist cartels, and trade-union labor monopolies contributed to the Nazi seizure of power and Germany's subsequent moral catastrophe.

Ordo-liberalism was also skeptical of welfare. Given that leading ordo-liberals such as Walter Eucken and Wilhelm Röpke were Christians, they were unwilling to abandon the needy. Nevertheless they regarded state-welfare as usually counter-productive. Such matters, they argued, were better addressed by voluntary associations. For ordo-liberals, a state's formal commitment to economic equity inevitably compromised market-mechanisms and the rule of law, with the poor experiencing the worst effects.

Ordo-liberalism's greatest success came in 1948. Acting on advice from Eucken, Röpke and others, occupied-Germany's de facto finance minister Ludwig Erhard abolished Nazi-era price and production controls throughout West Germany when the new Deutschemark currency was introduced.

Within weeks, entrepreneurial activity soared, goods shortages ceased, inflation fell, and the black market vanished. Further reforms followed, with Erhard reducing tariffs and facilitating a strong private capital market.

Unfortunately for Germany, only parts of ordo-liberalism's program were implemented. It was also compromised by West Germany's adoption of the worker co-determination policies currently inhibiting economic reform, as well as Germany's embrace of fiscally unsustainable welfare services.

Contemporary Europe differs greatly from immediate post-war Germany. Nonetheless ordo-liberalism's method of identifying government's economic responsibilities according to principles of liberty and prosperity provides a refreshing contrast to third-way European policies that have for decades attempted to realize something unjust and impossible--equality of outcome.

Perhaps there is, after all, a way out of Europe's iron cage.