Scott,

“I raised the point that America’s prosperity owes a great deal more to its economic integration rather than to any particular shared value system, and that this was part of logic behind the founding of the EU.”

That’s a challenging issue, I agree. From the perspective of the social sciences, I would ask: How can we tell?

Economists certainly argue that reducing trade barriers will improve economic welfare or, at least, potentially so depending on whether losers can be and are, in fact, compensated by those who gain.

The really interesting questions IMO are whether America’s value system is sufficiently diffused in America and distinctively different from Europe’s and, if so, whether that counts in the end?

I’m eclectic on this but for the sake of discussion I would argue that America is fundamentally different in respective of its significantly lower tax burden compared with virtually all EU countries - Luxembourg, Monaco and a few other places with small populations are mysterious. On all the data I’ve ever seen, America’s income distribution, both before and after tax, is more unequal than that of virtually all European countries - save perhaps for a few, small mysterious exceptions again.

America’s institutions are also significantly different from most European countries, notably so in respective of a legal system derived from a Common Law tradition, and in respect of the corporate disciplines imposed by a finance based capital market instead of the bank based and fragmented capital markets of most European countries. Europeans tend to have far more statutory employment rights than Americans. By the data, on average Europeans, or at least the western variety, take more holidays, work fewer hours a week, and tend to retire earlier than Americans who, incidentally, have more traffic accident fatalities per head of population than the citizens of west European countries. Very likely, the international readership here may think of more distinctive differences.

Economic and even political integration may not be sufficient to generally raise productivity and affluence in Europe to American standards - but then Europeans may not want to make the adjustments necessary to get there: there are those who live to work and those who work to live. For generations to come, European markets will continue to be fragmented by differences in languages, cultures and social security systems. So far, the launch of the Euro seems to have had little impact on cross-border price differentials in the Eurozone.

Bob, I would agree that there is no adequate sample size or sufficiently simple natural experiment to make an iron-clad case that some particular reason X explains why one country succeeds and another fails. Indeed, 99% of the time, I would argue that there probably is no single reason at all. However, there are quite a few individual cases which support the idea that integration has been a very big factor in Amercan economic growth and that lack of integration has been a problem for Europe.

One big one has been access to adequate capital. A big firm with a great deal of capital can undertake much riskier research projects than a small firm with less capital, even when both firms are equally productive. This has certainly been an important factor in deploying automation, which is a high cost, fairly risky investment. The robots they use to make cars, for example, are almost custom made and represent a huge investment in capital. It is unlikely that a small firm limited to a market the size of, for example, the UK’s could afford to commit enough capital to robot research and deployment to ever make the transition. A big Japanese or American firm can.

Even when these kinds of investments in productivity are finaced by banks and investors rather than out of profits, it is difficult to justify absorbing the enormous capital for new high-cost, high-risk research unless the potential gains are enough to justify it. Having access to larger markets makes it easier to claim that there are large potential profits in productivity enhancement.

This goes beyond just lowering or eliminating tariff barriers. It means that because GM is an American or global firm with access to large markets and large sources of capital, rather than just a Michigan firm that exports to other states, GM can invest in productivity far more than a smaller firm could. For Europe, that means continent-wide firms with continent-wide markets and access to capital sources commensurate with the size of their markets.

All of this is true quite apart from personal income tax rates or labour market inflexibilities. I do not have the impression that taxes on capital are particularly high in Europe. The capital gains tax here in Belgium is very small by comparison with the US, so income derived from investment is generally taxed a good deal less. I believe that this is generally true across Europe, although I don’t have specific figures for different countries. It would seem to me that that variable has far more effect on access to capital than income tax rates or the VAT, and that access to capital is the most important factor in financing investments designed to enhance productivity. Personally, I think Belgium could afford a higher capital gains tax and a more progressive income tax, but it undermines the idea that European tax policy is really a barrier to growth.

This leads me to the conclusion that it is the lack of a genuinely integrated market that has been a bigger barrier to productivity growth in the EU than labour market flexibilty or tax policy. The Euro has already helped in this respect by eliminating currency risks in the establishment of pan-European firms and creating a pan-European investment market. In the five years since the introduction of the Euro (the fixing of the exchange rates, not the introduction of physical currency) has brought about a substantial increase in cross-border investment in the EU. It may well take some time before this begins to affect consumer prices directly, but it is already reducing business risks for companies like mine, which can now charge clients across Europe in Euros without taking on any risk from currency fluctuations or imposing them on our clients, and can seek out capital across Europe without our investors having to accept that risk.

This is beginning to pay off in productivity growth in my industry and I expect it is for others too. One of our clients is a Dutch bank that has been buying banks in other EU countries, because they can now operate from centralised back offices without regard for local currencies, raising the efficiency of their operations quite sharply. I might also note that the prospect of a merger between Air France and KLM is also driven in part by the ability to set a single set of prices across the EU in just one currency, without having to factor in currency risks.

I note that there is a good argument that being able to set your own interest and exchange rates also offers gains. However, I am arguing that this has to be set against gains derived from having large enough stable markets, both for things and for capital, to make investments that lead to real growth. I should think that for folks who believe that productivity growth is driven by investment in risky ventures - which was the orthodoxy I learned in college - support for the Euro would be fairly obvious. I do think the EU can grow to the level of affluence the US has. For the bottom 90% of the population of the countries immediately around me - France, Germany and the Low Countries - it already has. Although there may well be a case that labour market inflexibilities hamper productivity growth, I haven’t seen anything to suggest that this is a factor comparable to access to capital in explaining differences in productivity growth.

As for the language issues, I think the costs associated with language barriers are overestimated when compared to more mundane issues like different regulatory schemes and jurisdictions. They are magnified in the minds of managers because of their own lack of experience working in multilingual markets. Besides, the EPO is a good example of how a trade off that raises language related costs but creates single regulatory schemes can pay off spectacularly. My job is entirely about lowering these language related costs anyway.

I think that American econmic integration is made possible (and is reinforced by) individualistic religious/cultural doctrines of British origin -- individual salvation and wealth as the visible sign of grace. This means that most Americans are easily recruited into a pure competitive-economic way of life.

My own home state, Minnesota, along with neighboring states, has a very low Anglo-Saxon-descended population; it’s overwhelmingly Lutheran or Catholic German or Scandinavian. Minnesota and Wisconsin were not coincidentally the centers of socialist and even communist resistence to law-of-the-jungle capitalism.

Midwestern populism had a rightwing streak too. In 1936 a Minnesota Farmer-Labor third-party Congressman was the only one to vote to support the Spanish Republic. In 1942 or so, a different Minnesota Farmer-Labor Congressman (Ledeen or Lundeen; don’t remember the first guy’s name) was implicated in America First lobbying by the Germans.

Benefits of scale. You can’t beat that.

Mats,

“Benefits of scale. You can’t beat that.”

Exactly so but then how come Canada and Australia do so well in terms of national per capita GDP with their own national currencies and national populations of, respectively, only 30 and 20 millions? It seems the size of national markets isn’t all that matters.

Besides, just how many industries are there where national markets of the size of, say, Britain cannot sustain plants of minimum efficient technical scale? The Cecchini Report on the Single Market (1988), as I recall, looked into that. The obvious examples are the motor industry, civil airliners and military equipment.

Where the extent of *market access* certainly effects returns to capital is with those products with huge front-loaded costs, like computer electronics and operating systems, movies, pharmaceuticals and telecommunications equipment. But then the likes of Taiwan and Singapore do nicely making computer products while European markets will continue to be fragmented by differences in languages and national cultures. So far, the launch of the Euro seems to have had little impact on cross-border price differentials in the Eurozone, the principal indicator of the extent to which monetary union intensifies market competition across borders.

My personal theory is that some Europeans are more enthused by visions of a politically integrated Europe being more able to flex muscle on the international scene, which is why we are getting these proposals for a European defence capability independent of NATO and the recent kite flying exercise: “The domestic governance of foreign countries has now become a matter of our own security.” - from (courtesy of Airstrip One): http://politics.guardian.co.uk/eu/comment/0,9236,1068985,00.html