Podium: James Forder: Protectionism may follow the euro

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The Independent Culture
James Forder

From the annual Politeia Lecture by the economist at 2 Carlton House Terrace, Pall Mall, London

THE ADVOCACY of European integration has gained much from its alliance with the free trade doctrine derived from Ricardo, and which proved such a powerful intellectual weapon in the 19th century. Even before the creation of the European Economic Community, the European Payments Union was designed to facilitate trade. Then the Economic Community itself had as one of its major initial objectives the removal of tariffs between the members. Although this was strikingly - and speedily successful - it soon became apparent that "non-tariff barriers" - meaning, principally, product quality and safety regulation - were imposing costs in trade of the same type as tariffs previously had.

Thus the Internal Market Programme, or the "1992 Project" as it came to be known, was devised to remove these barriers as well. Monetary Union should be seen as a further step along this road in two respects. First, the removal of transactions costs in trade eliminates one further barrier. But second, it has become commonplace in Continental Europe to argue that the completion of the internal market makes monetary union urgent because in its absence, countries are likely to seek to use exchange rate depreciations to increase their export market. Thus, exchange rate protection is seen to be the new threat, once non-tariff barriers have been removed. The same basic argument is applied to the Social Chapter, and most recently to tax harmonisation.

One can hardly fail to be impressed by these developments in Europe. The achievement of such a high degree of free trade is impressive in its own right and - at least from a certain perspective - one must be impressed by the depth of integration which has proven so welcome to much of the Continent. However, the outlook for free trade may not be so positive. On the course on which the European Union is heading, it is in danger of playing into the hands of protectionist elements. This is by no means exclusively a consequence of monetary union, but it is significantly so, and the dangers of a substantial move towards protectionism grow as integration deepens. Nor is there anything uniquely European in the dangers. Nation states are subject to many of the same pressures, but I believe the European Union is poorly placed to deal with them, and consequently, more likely to be susceptible to them.

The history of European integration reveals that the member states continue to perceive an interest in protectionism. In the celebrations that attended the success of the 1992 Project's removal of non-tariff barriers, a question rarely asked was why such a programme was necessary. Or alternatively, why had non-tariff barriers not been removed along with tariff barriers in the early 1960s, if they were agreed to be equivalent in their effects?

The answer is that non-tariff barriers only became a substantial problem after the removal of tariffs. It does not take much imagination to see that they also became a problem because of the removal of tariffs. The problem was that the means of protection (tariffs) had been removed, but the motives for it (whatever precisely they may be) had not.

So it should be recognised that the creation of the Customs Union - although surely desirable - operated in part in the manner of treating symptoms. The underlying causes of protection remained.

Europe has been blighted by unemployment throughout the 1980s and 1990s. The causes of this can be argued about. One popular view is that a "rigidity" of labour markets is to blame. I find it difficult to take that seriously since the extent to which any European labour market is more rigid now than in the 1960s must be very limited. An alternative explanation is that the policy framework adopted by most countries early in the 1980s, and subsequently written into the Maastricht Treaty, has done more or less permanent damage to labour markets - and such excessive concern with inflation is to be avoided in future.

Whatever the explanation of unemployment, however, one cannot escape the fact that it creates the political circumstances which are favourable to protectionism. In recent years, most of Continental Europe has been heading towards monetary union, and in most countries this has been a popular objective. Political elites have succeeded in arguing that the pain of the Maastricht process must be endured in order for the prize to be won.

Well, the prize is about to be won, and it will certainly not result in a quick fall in unemployment. It remains to be seen what the popular reaction to this will be, but it is difficult to rule out a great deal of pressure for protectionism to safeguard jobs and create new ones.