Niall Ferguson: Let no one doubt it - this is one of history's Good Things

Now we are 25: New EU, but bigger doesn't mean richer
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The Independent Online

If the world still thought about power the way the Victorians did, yesterday would have been a black day for the American empire. For at a stroke, the accession of 10 new members to the European Union significantly increases its size in territorial and demographic terms. As of this weekend, there are more than one and a half times as many EU citizens as US citizens.

The growth of the EU has been, until now, a gradual affair, with new members quietly joining the original six in groups of two or three per decade - beginning in 1973, when we were admitted with Ireland and Denmark. This is more spectacular. At a stroke, the EU's area and population will increase by a fifth. Its new neighbours will be Russia, Belarus and Ukraine.

Eurosceptics used to delight in pointing out how little of Europe was actually represented by the EU - no Switzerland, no Norway and a great territorial hole between Austria and Greece, in the heart of which terrible wars raged during the 1990s. Such scepticism becomes harder now. What is more, this enlargement is by no means the last. Romania and Bulgaria are next in line. Turkey's long-standing bid for membership suddenly looks like a serious proposition. That would take the EU as far as the frontier of Iraq.

No one should be in any doubt that this is one of history's undisputed Good Things. It is not just a question of making a reality of the rhetoric about European reunification that was heard so often after the collapse of the Iron Curtain in 1989. Western Europe also has some large moral debts to countries such as the Czech Republic, Slovakia and Poland that go back further than the Cold War - to the dark years of 1938 and 1939.

Moreover, the world has reason to celebrate the integration of such countries into an institution that explicitly stands for democracy. As independent states between the wars, many of the new member states - notably Poland and the Baltic nations - failed to make a success of democracy. Now we can regard them as permanently democratised. EU membership is a powerful incentive for political good behaviour.

Why then does the US seem unworried by European enlargement? Why do so few American analysts share the anxiety of Charles Kupchan of Georgetown University that the EU is "an emerging pole, dividing the West into American and European halves"? After all, any other political entity that trebled in size in just over three decades would surely set the alarm bells ringing in Washington. The answer is simple. Americans do not measure power in terms of territory or demography. They measure it in terms of economics and technology - especially military technology. And by those measures, it is far from clear that enlargement will significantly help the EU.

For in the eyes of Americans, Europeans are not merely military wimps (though the surrender monkeys eat tapas rather than cheese these days). In 2002 Robert Kagan proclaimed that Americans were from Mars and Europeans from Venus. He forgot to add that, in economic terms, Europeans are from Saturn - the god who, in ancient mythology, represented old age - while Americans are from Mercury - the god of high-speed communications.

Because the new member states are relatively poor - their average per capita gross domestic product is less than half that of the old EU average - enlargement has only a minor impact on aggregate EU output, raising it by little more than 4 per cent. Depending on how you measure total output - particularly how you adjust for changing exchange rates - that keeps EU and US gross domestic product within sight of one another. But many Americans are confident that the gap between their economy and the European economy can only widen in the years ahead. Here's why.

First, European productivity growth has, for the first time in the post-war, period, been below that of the US since the mid-1990s. Second, Europeans are, for a variety of reasons, working a lot less than Americans. Unemployment is higher; the labour participation rate is lower; above all, working hours are shorter. In the early 1970s, the Germans and French worked about as many hours per year as their US counterparts. Since then, Americans have grown more industrious - working nearly 2,000 hours per year - while Europeans have taken longer holidays and had shorter working days. Today the average Frenchman aged between 15 and 64 works around 35 per cent less, in hours, than the average American. That explains why in only one year of the past 10, EU GDP growth has been higher than that of the US.

But the third, and biggest, problem facing the EU is that it is a union of senescent societies. By 2050, according to the United Nations, the median age will be above 40 in all pre-enlargement EU members countries and above 50 in Austria, Greece, Italy and Spain. In these countries, about one in three citizens will be 65 or over. When Donald Rumsfeld spoke scathingly about "Old Europe" last year, he didn't know how right he was.

It is not immediately obvious why acquiring 10 poor countries - some of which (notably Latvia) are a lot poorer than the old members - should help the EU close this widening economic transatlantic gap.

There are those in Britain who fear that enlargement will open Western Europe to the proverbial "flood" of economic immigrants. In recent months, newspapers like the Daily Mail have worked their readers into a frenzy on this score. Whether large-scale East-West migration would be economically good or bad is a moot point, but it is also an academic one since it seems unlikely to happen. According to forecasts published this year by the Institute for Public Policy Research, migration to "Old Europe" from the new members will amount to between 3.2 million to 4.5 million over 25 years, increasing the population by 1 per cent. The really striking finding of the IPPR study, however, is that two-thirds of the migrants will go to Germany.

What about the cost of enlargement to West European taxpayers? Previous enlargements involved less of an income gap between established and new members. Yet here, too, there is little reason to get excited. Total enlargement-related expenses for 2004-06 were capped at the Copenhagen summit at just over €40bn (£27bn) - a trifling sum.

The real economic question raised by enlargement has nothing to with migration or subsidies. It takes the form of a dilemma. The new members are low-productivity economies. They compensate for that by paying low wages, working long hours and charging companies low taxes. As a result, they are attracting an increasing volume of foreign investment and are consistently achieving higher growth rates than the old members. A rational West European policy would be to leave well alone and let these dynamic economies be the Irelands of the East. But already noises can be heard from the German and Belgian governments, grumbling about "tax dumping" and threatening to press for tax harmonisation - which means, of course, levelling corporation tax rates upwards, not downwards.

In an ideal Europe, a dynamic Eastern periphery could help fund Western Europe's mass retirement by attracting Western investment and aiming for rapid economic catch-up. Unfortunately, the real Europe is all too likely to seek to limit the flexibility of the new members' labour markets and tax regimes. Worse still, there is a plot afoot to resurrect the Exchange Rate Mechanism, forcing the new members to spend two years with fixed exchange rates as the price of converting their currencies into the euro. Given the amounts of capital currently flowing into countries such as Slovakia, the idea of trying to peg exchange rates can only be described as economic idiocy - just as insisting that the new members fulfil the Maastricht convergence criterion on the size of fiscal deficits can only be described as rank hypocrisy, given the suspension of the Stability and Growth Pact for existing eurozone members.

Europe has cause to celebrate the accession of 10 new members. But for enlargement to pay real economic dividends - of the sort that might actually impress the US - the EU will have to learn to love the new laissez-faire order on its periphery.

Niall Ferguson's new book, 'Colossus: The Rise and Fall of the American Empire', has just been published by Penguin

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