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Friday, October 29, 2004

Meet the new boss: Same as the old boss

As one of ten new countries to join the EU this year, Poland saw their ascension into the Union as an opportunity to compete in the greater European market. Qualifying for EU membership is no easy feat. Candidate countries must satisfy a number of arduous standards, in addition to alleviating trepidation on the part of current members. Poland was no exception. Their entrance to the Union was met with apprehension on the part of some EU members who still doubted the former communist state’s economic viability. This uneasiness towards Poland was not without reason.

The last few years have seen tremendous reform in Poland. Under a communist regime until 1989, the country has since made great strides to transform its economy into a formidable competitor in the free market. During communist reign the Polish economy was completely nationalized, creating vast levels of inefficiency and corruption. Poland has worked tirelessly to privatize industry and modernize government regulation in an effort to form an affable commercial environment. But an overzealous faction of EU states is now threatening all the progress the Poles have made.

With the intent of attracting new foreign investment from overseas business, Poland cut their corporate tax rate by 30% in the year leading up to their ascension. Following Poland’s lead Slovakia, Hungary, Latvia, and the Czech Republic all cut their rates by double-digit levels as well. The rationale is that tax cuts not only attract outside investors to these markets, they also stimulate job creation, boost consumer spending, and generate momentum for Polish firms entering the European market. These common sense approaches to economic growth, however, were not well received by some in the EU.

France, Sweden, and Germany are demanding that Poland, along with other Eastern European countries, raise their corporate tax rate. They have also proposed additional regulations as to how EU states implement accounting standards, adding to an already bloated European bureaucracy. Fearing that countries to the east may become an attractive alternative for tax-laden corporations within their own borders, Western European countries are hoping to rig the system to their advantage.

The socialist governments of France, Sweden, and Germany have crippled their own economies with detrimental labor policies, intrusive government oversight, and copious welfare benefits they can’t afford. Firms who operate in these countries are unable to compete in the face of such inhospitable conditions, and now Poland is being coerced by these three nations to follow the same disastrous policies. Having experienced the ultimate result of socialist doctrine while under Soviet rule, it should be no surprise that Poland has scoffed at these demands.

Poland’s strategy is not rooted solely in their acrimonious experience with the Soviets. The “economic miracle” realized in Ireland also lends credence to the Pole’s approach. Ireland joined the European Economic Community in 1973 with a per capita GDP of 62% the European average. By cutting top tax rates from 40% down to 12.5% the Irish were able to realize an economic boom, and their per capita GDP is now 131% the EU average. This stunning achievement on the part of the Irish was the result of laissez-faire economics. The example set by Ireland, however, has been mostly ignored in Europe.

Many in Europe stubbornly clutch to the pipe dreams of collectivism, refusing to recognize economic reality. For instance, Sweden is touted as the preeminent socialist state in Europe. However, Sweden’s nationalized healthcare system and generous retirement pensions are only made possible by a corporate tax rate that reaches 60%. Sweden’s economy is barely surviving and it’s reflected in the labor market. While Swedish unemployment is just under 6%, non-employment (an index that accounts for persons not included in the unemployment rate, such as participants in government programs that pay people to simply look for work) is at an astounding 23%.

The economies of France and Germany are struggling as well, with unemployment rates of 8.9% and 9.7%, respectively. Like Sweden, the French and German economies have become prisoners to a swollen welfare system. Unable to curb spending, both countries violated the Maastricht Treaty criteria in 2002 and 2003 by allowing deficits to climb above 3% of GDP. The violation was supposed to have been met by a fine of 0.5% of each country’s GDP. Nevertheless, indicative of Franco-German pomposity, both countries asserted their intention to suspend the rule. True to form, France and Germany have already announced they will break the cap again this year.

Each country has their own unique set of circumstances, but the pattern is unmistakable; the welfare states of France, Germany, and Sweden cannot compete in today’s global market. Like the Soviets, they view economics as a zero sum game where wealth can only reach those without it through redistribution. Politicians pillage corporate earnings to make good on grandiose promises, bureaucrats strangle innovation with egregious regulations, and labor unions extort firms for whatever meager profit they may have earned throughout this contemptuous process. Meanwhile, investors go elsewhere, growth stagnates, and entrepreneurs throw in the towel. There’s little wonder why these countries view Poland as a threat, the ship is sinking and firms are looking for a life raft.

The EU is at a crossroads. Europeans have the opportunity to develop an economy that could easily rival that of the United States. In fact, the evolution of the EU has been very similar to the US; elimination of interstate tariffs, the implementation of a common currency, and a central government to protect the rights of each state. But the economic success enjoyed by the US is not the product of a powerful government, nor have our technical innovations been the fruit of intrusive bureaucracy. Our success was born from the principle that a people shall never be subservient to one another or their government.

Poland is all too familiar with the turmoil brought on by collectivism and authoritarian government. They’ve seen with their own eyes the corruption and squalor that grows from an overbearing authority. They survived the Soviet Union. Will they survive the European Union?

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