Time to leave a broken Europe

The idea of a unified Europe is a great one. All countries under the same trading arrangements, where all people are allowed to travel freely and are able to do business without any barriers is a concept that brings prosperity to all. However, great ideas can become warped and twisted in politics, as is the case with the EU.

The greatest part of being in Europe is free trade. Since countries operate on a relative level playing field in Europe, it means that countries can specialise in certain industries, trade more and produce more. But this level playing field need not cost as much as it does.

The Cost of Europe

From 2007 to 2013, Britain will contribute €103bn, in return it will receive €46bn in benefits, the net benefit being -€57bn. Every man woman and child in Britain is paying -€937 just so we can be in the EU.

Where does all the money go?

The EU has an annual budget of €120bn, much of which goes on development programs to Eastern Europe, which, in fairness, cannot be criticised as it is an investment into Europe’s future. However the largest single item on Europe’s bill is on agriculture!

CAP

The Common Agricultural Policy (CAP) is an agreement where the EU will buy any unsold crops that the EU lists. It was a policy developed after WW2 to ensure farmer’s incomes were supported and their means of production were kept in place. If the farmers went out of business, there was a perceived risk that Europe might go hungry, something which is no longer relevant today.

Since the farmer knows he will get money back for the crop he will produce, he will produce as much of it as he possibly can. The EU is therefore left with ‘butter mountains and milk lakes’ at a cost of around €50bn a year, a large proportion of which is poured away or buried.

 

The farmers are paid to produce things that no one wants, and then what they produce is thrown away. It would be better just to give them the money.

What’s more, why are farmers, who are some of the wealthiest people in Europe, receiving most of the EU budget? Farmers represent less than 2% of the EU and yet they receive 50% of the budget. Why not schools, hospitals, or even another industry?

The truth is, changing anything in Europe in nigh on impossible. There are so many members that any changes are likely to impact one or more nations negatively. Since several members possess a veto, they are able to block any changes they don’t like. France in particular has a very strong farmers union, which has a great deal of political clout. Any adverse effect to them would put such a great pressure on the French government that they would be likely to veto any reform.

The Euro

The Euro was an audacious but smart idea. The most effective way of removing trade barriers between nations is to remove any currency exchange uncertainty. If you run a business that exports to another nation, there is a risk that all your profits could be wiped out by adverse movement in exchange rates. By having that risk removed (or reducing the cost of risk reduction), there is encouragement for trade.  

For the Euro to function correctly, it requires governments to change they way the operate. They would no longer have control over interest rates or have the ability to print money. Governments must try to harmonise their budgets with the rest of Europe so that the monetary policy can be applied in the correct way.

Rules were set up stating that no Euro Zone country’s budget deficit should exceed 3% of GDP and no National Debt should exceed 60% of GDP. These rules were crucial for the long term stability of the Euro and yet they were ignored by most of its members.

Eventually money markets realised that the high levels of debt the Euro zone countries were accumulating was unsustainable and since they cannot print money, they would default on their debt.

Even though a clear prerequisite was set, leaders failed to play by the rules. This is the case with many EU ideas, the principles are sound, but are rarely acted upon correctly by most nations.

The Political Game

As soon as one country breaks an internationally agreed law or rule, others can either point it out, or allow it to occur unchallenged.

A self defeating cycle comes about because if you allow the breach of law to go unchallenged it means that you will be allowed to break a law in return. When France broke agreed deficit limits not one single country protested, instead they themselves ran large deficits as well.

This week the EU gathered to try to reset these laws, but this time they mean it. There will be automatic sanctions against all those who have too high deficits (which will impact most of the Euro Zone). They also wanted to impose tough financial regulation and set the ground for a tax on all international financial transactions (80% of which occur in London). David Cameron vetoed Britain’s involvement as it was not in the UK’s interest (which it isn’t). But the greater question Mr Cameron should be asking himself is why does free trade cost Britain €103bn and why are we in the EU in the first place?