A few good men

Demographic changes are pressing Western governments to reform their welfare states, in particular their benefits for the elderly. This will prove nearly impossible because senior citizens are politically powerful; they are well organised, contribute money, lobby hard, and vote regularly. Real reform, however, will inevitably mean trimming back their benefits. Governments will have to make hard choices, resist the temptation to pander, and enact policies for the long run. The only possible way that this can be achieved in a modern democracy is by insulating some decision-makers from the intense pressures of interest groups, lobbies, and political campaigns — that is to say, from the intense pressures of democracy.

It is already happening. The rise of independent central banks, like the US Federal Reserve, over the last few decades is the clearest example of this trend. In most advanced democracies, the government’s most powerful economic lever is now exercised by an unelected body. And it works. Though they have their flaws, by and large independence of central banks has resulted in more responsible monetary policy. In part because of this discipline, the business cycle, which was once sharp and severe, has increasingly been smoothed out…

Central banks are not the only example of this phenomenon. There is much hand-wringing in Europe about the undemocratic nature of the European Union (EU), often criticised as the ultimate example of undemocratic policy-making. But the awkward reality is that the EU has been effective precisely because it is insulated from political pressures.

By the 1970s, Europe’s statist economies had become dysfunctional, their governments paralysed by powerful interest groups, most of them protectionist, all of them hostile to change. Over the last decade Europe has been able to make significant reforms — fiscal, monetary, and regulatory — only because of the power of the EU. When the EU has not changed its policies it has been because of its democratic member governments.

Not one of Europe’s major parties has had the courage to advocate the structural reforms that they all know are necessary for the continent’s long-term prosperity. ‘‘The EU is the chief, indeed the only, agent of free-market reform on the continent,’’ says Joseph Joffe, editor of Germany’s Die Zeit. ‘‘Without Brussels we would not have deregulated any of our major industries.’’ Without the fear of missing the EU’s budget targets, countries such as Italy would never have moved toward lower deficits…

In the Anglo-American world the EU is presented as a caricature. To the extent that Americans — and Britons, who are currently agonising over whether to adopt the European currency, the euro — have views, they are strong and simple. The EU is big, bloated, and undemocratic and is snuffing out the charming diversity of European life…

The critics of Europe in the UK and the US are most often those who fervently support capitalism and free trade. But the opponents of the EU on the European continent — where it operates most fully — are people of the opposite persuasion. Denmark is famously sceptical about the EU and the euro. But Poul Nyrup Rasmussen, an economist by training and former prime minister of Denmark, explained that most Danish opponents of the EU were ‘‘people who fear globalisation: low-skilled workers, women, public employees. For them, the EU is just part of this new world of global capitalism and free markets’’.

That is why the EU and bodies like it are here to stay. However much one criticises them, the reality is that in today’s world countries cannot set interest rates or make antitrust policy by plebiscite…

Institutions like the EU that are often condemned for being all-powerful and remote, in fact are neither. To begin with, the EU’s powers are vastly exaggerated. Brussels’s budget is just over one percent of the EU’s total gross national product. Andrew Moravscik, one of the best American scholars of Europe, points out that once you exclude translators and clerical workers, the European Commission employs 2,500 officials, “fewer than any moderately sized European city and less than one per cent of the number employed by the French state alone.’’

As for its undemocratic nature, any new law it wishes to pass needs more than 71 per cent of weighted national government votes — ‘‘a larger proportion than that required to amend the American Constitution.’’ The EU, Moravscik argues persuasively, should not be thought of as a superstate but rather as an international organisation.

Extracted with permission from Penguin India Ltd