Dark Clouds Over Europe

By: Hans F. Sennholz | Sun, May 8, 2005
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At a meeting in Lisbon in 2001 the leaders of the European Union proudly proclaimed that the Union would become, by 2010, "the most competitive and dynamic knowledge-based economy in the world." They obviously were boasting of tomorrow because they could not brag about the past. Today they speak but little of the future as most members of the Union failed to live up to expectations. No matter what set of statistics we may consult, they all reveal that "old Europe" is stagnating and even staggering under a heavy blanket of social constraints and obligations. French, German, and Italian economic growth rates are barely positive but reveal continuous growth of government and public debt.

Leading French and German politicians never tire proclaiming "European solidarity" by which they mean a feeling of unity of social and economic standards. They orate on union and harmony that bind all Europeans and on responsibility and compromise between employers and workers. Unfortunately, their real world is rather different; it is deeply divided into large classes of economic beneficiaries and victims. Millions of workers are condemned to chronic unemployment while other millions benefit from their rejection. In France, the present rate of unemployment is given at 12.1 percent, in Germany at 10 percent, and in Italy at 9.6 percent. In the French-speaking part of Belgium it is 19 percent, and in the European Union capital city of Brussels an astonishing 22 percent. If we were to add the underemployed and de facto-unemployed in public make-work schemes, the rates would be even higher.

Most European politicians refuse to pay heed to market principles of employment and economic growth. They are woefully ignorant of unhampered market wages that assure not only full employment but also equitable wage rates reflecting the value judgments of consumers. They are enamored with doctrines of conflict, relying on compromise, adjusting the differences, and meeting halfway. Economists who observe the European scene may draw the conclusion that exploitation and class-conflict doctrines continue to shape European thought and policies some 150 years after Karl Marx first expounded them.

Labor law and regulation condemn workers to a life of idleness and waste yet Western Europe needs an influx of immigrants simply to fill basic service jobs. It needs "guest workers" who take the places of native workers on welfare and unemployment doles. It needs immigrants whose numbers are rising steadily while the native population is shrinking with birth rates below replacement levels. Longevity continues to rise, which places increasing care burdens on the young. It cannot be surprising that young immigrants are welcome throughout Western Europe.

It is ironic and yet so plausible that the EU countries with the highest rates of unemployment also attract most immigrants who render the services which the natives do not choose or are prevented from performing. Since the fall of the Berlin Wall and the disintegration of the Soviet Union, many nationals of the former satellite countries managed to find their way to the West. In 2004 the European Union consisting of a club of 15 Western European countries opened its doors to 10 new members eight of which had been parts of the former Eastern European communist bloc (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia). The new members increased the number of EU citizens from 370 million to 455 million. But the number of migrants from the east to the west is minuscule when compared with the millions who streamed into Western Europe before the breakup of the Soviet Union. More than 20 million people from North Africa and the Middle East managed to settle in Western Europe. Most of them are Muslims believing in the teachings of the Prophet Mohammed. Five to six million are estimated to live in France alone, three to four million in Germany, two million in Britain, one million apiece in Holland and Italy, and half a million in Spain and Austria each.

The European Union is in the process of basic transformation and modification. The old welfare states that are attracting the immigrants are declining in economic position and political preeminence while new members are rising in economic productivity and political position. Some actually are reducing their tax burdens and business restrictions while the old members basically distrust unregulated markets and favor government intervention to equalize incomes and maintain living standards. Some newcomers prefer to look to Washington for guidance and support rather than to Paris, Berlin, and Rome, which is bound to strain and weaken the Union. In fact, the basic differences between "old Europe" and the new members searching for new ways to the light cast a dark cloud on the future of the European political union.

While labor law and regulation give rise to mass unemployment of native labor and to extensive influx of foreign labor, they also prompt business capital to seek more hospitable conditions abroad. Massive amounts of French and German capital have found their way to friendlier climes not only in other EU member states but also in East Asia and the United States. It raises labor productivity and wage rates wherever it goes and lowers them wherever it leaves. In coming years French and German capital can be expected to move to new EU members in the east, in particular to Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia, and wherever it is welcome. Of course, French and German politicians can be expected to explain the outflow of capital in terms of employer greed and labor exploitation.

In coming months European voters will be asked to accept an 800-page constitution that will have superior sanction to the ordinary laws of the member states. If accepted by the voters of all 25 countries, it will enlarge and strengthen both the EU bureaucracy in Brussels and the European Court of Justice in Luxembourg. But it is highly unlikely that the voters of all member states are ready to surrender their legal systems and submit to a superior law contrived by foreign politicians and interpreted by foreign judges. French voters who are asked to approve the constitution on May 29 may be the first to reject it. They may be followed by the voters in the Netherlands and surely the United Kingdom. If any one country should vote "no", the constitution will not become law.

It is doubtful that 455 million Europeans are ready for a meaningful constitution that may gradually equalize the benefits and privileges currently bestowed by national laws and regulations. Most voters happily partake of their social benefits but are loath to share them with foreigners no matter how destitute they may be. Surely, French and German politicians would not dare to suggest that their voters share their benefits with the people of Estonia, Slovakia, or Poland who earn one-seventh to one-sixth of their incomes. And even if they would and the 800-page European constitution should become the basic law of Europe, most member governments would pay little heed to its provisions - as many European governments have done to their constitutions throughout the 19th and 20th centuries.

Monetary Union

The political world is failing to realize the hopes and aspirations of many Europeans. In contrast, the world of money is promising much and may actually deliver some benefits. At a meeting in Maastricht, the Netherlands, in December 1991, the members of the European Union agreed to adopt a common currency to be issued and managed by a central bank. The treaty, which subsequently was ratified by twelve countries either by parliament or by popular referendum, stipulates certain membership criteria - namely, a budget deficit of no more than 3% of gross national product (GDP) and public debt of no more than 60% of GDP. To enforce these basic conditions a Stability and Growth Pact of 1997 gave the European Commission the power to levy fines on member states that violate the agreement.

It is interesting to reflect on the monetary thought that guided European policy makers who created the supercentral bank. They obviously are convinced that they must issue and manage money because the people are unfit to manage their own, that government must mint coins, issue notes, define "legal tender," establish central banks, conduct monetary policy, and then manipulate the price level. In short, money is a political issue which is a domain of government. Monetary freedom is a faint memory of the distant past.

The European Central Bank, which is located in Frankfurt, Germany, is a quaint structure of political control and command. It is headed by a president who is elected by EU heads of state. He is assisted by two governing bodies, the Executive Board which implements the monetary policy, and the Governing Council which is composed of the Executive Board and the presidents of all member national banks. It is to shape monetary policy by majority vote, holding the rate of inflation to 2% or less. Another committee consisting of the finance ministers of the Union is in charge of the euro's international exchange rates. In short, the Council shapes monetary policy but EU finance ministers may fix euro exchange rates toward the U.S. dollar, the Japanese yen, the Chinese yuan, and others. One committee manages the causes, another may dictate the effects. The finance ministers obviously are unaware of the laws of the market that ultimately determine the effects.

The euro, the single European currency, came into being at the beginning of 1999; it was readily accepted by 12 member states but rejected by Denmark, Sweden, and the United Kingdom. Since then, the three biggest members, France, Germany, and Italy have consistently violated the conditions of the treaty and managed to avoid the fines. Their governments continue to suffer large budget deficits which drain European capital markets and thus keep productive investments and labor productivity lower than they otherwise would be. The average euro area growth rate barely reaches 0.2 percent. The French, German, and Italian disregard of the Stability and Growth Pact obviously annoys and troubles all other members of the currency union. They are fearful that they would be held to higher standards if they would dare to violate the treaty. But, sooner or later, they may dare to imitate the violators and join them in the pleasures of deficit spending, which undoubtedly would turn the 0.2 percent growth rate into a 0.2 percent decline rate. There are countries which, by their policies, lead other countries; France, Germany, and Italy surely do not lead the way.

Most Europeans nevertheless welcomed the euro; it simplifies intereuropean transactions, increases competition, encourages the flow of capital, and opens many markets. Internationally, it may even challenge the U.S. dollar's preeminence in world trade and finance. The Monetary Union is likely to continue to expand and exert its helpful effects on European economic conditions. Estonia, Lithuania, and Slovenia are scheduled to join in 2007, followed by Latvia and Cyprus in 2009. In time, other member states may get their financial houses in order and qualify for membership.

No matter what we may think of national central banks, that is, monopolies in which there is only one provider of legal-tender money, the combination of several into one superbank actually checks their power. It confines their propensity to inflate and depreciate the currency within average bounds. And the European ambition to compete with the United States limits the temptation to inflate and depreciate the euro to the inflation and depreciation rate of the U.S. dollar.

Demographic Changes

What we look for may not come to pass. But we always live under the shadow of future events. Europeans live under the cloud of economic stagnation and mass immigration that may affect their future. More than 20 million immigrants from North Africa and the Middle East who are likely to multiply in coming decades may, in time, affect economic, social, cultural, and religious conditions. Most of them are Muslim. A half-century ago, there were but a few mosques in Europe, today nearly every country has a thousand, with five to six thousand each in France and Germany. At the present rate of growth, there may be tens of thousands by the end of the century.

Most Muslim immigrants undoubtedly come with hope for gainful employment and a better life. Per-capita annual income in Morocco, Algeria, and Tunisia, all former French territorial possessions that are launching the flood of immigrants, is a fraction of French per-capita income, $1,320 in Morocco, $1,890 in Algeria, $2,240 in Tunisia, and $24,770 in France. Similarly, Germany with per-capita income of $25,250 attracts millions of Muslim immigrants from Turkey with per-capita income of $2,790. Surely, the economic incentives for migration are considerable. They came legally and illegally. And thanks to their high birth rate and the sub-replacement birthrate that is the norm among native Europeans, the demographic fact points toward great changes to come.

Economists explain the glaring differences in incomes as an inevitable consequence of different economic thinking, social and political mores, and religious beliefs. They are convinced that man is productive wherever he is free to pursue his own ends and where the fruits of his labors are safe and secure. Most Europeans have enjoyed variations of such an order for more than 200 years. Most countries of the Muslim world, in contrast, are lingering in deep want and poverty because people are severely limited in their freedom to pursue economic ends. They are poor because their governments limit them in their economic activity. Governments administer law and conduct policies in accordance with the teachings of the Koran which limits all believers to just two types of income: wages and charity dole. In Europe where most people profess a Christian faith the population may be free to pursue all four conceivable types of income: wages, interest, profits, and the dole. Wages are payment for services rendered. Interest is payment for the use of property in the passage of time. Entrepreneurial profit is the return of business that meets a need hitherto unknown and uncovered. Dole is charity income distributed by government or individuals.

The Koran limits all believers to just one form of earned income, to payment for services rendered. It prohibits interest payment (riba) over and above the account of principal. "Believers, do not live on usury, doubling your wealth many times over. Have fear of God, that you may prosper, guard yourselves against the Fire prepared for unbelievers." (Koran, Sura 3:131). Similarly, it prohibits any economic activity that involves uncertainty, risk, or a speculation (ghara). Option and futures contracts that may yield entrepreneurial profits are prohibited as are foreign exchange transactions that aim at profits.

Any society that limits economic activity to just one form of earned income is condemned to eternal poverty with all its despondent symptoms and consequences. In Muslim countries such as Afghanistan, Pakistan, Indonesia, Iraq, Mali, Niger, Chad, and Sudan, national income per capita is estimated at less than $1,000 a year, which compares with some $44,000 in Luxembourg, $40,000 in Switzerland, and $37,000 in the United States. In Kuwait and the United Arab Emirates, the two wealthiest Muslim countries, per-capita income is less than one-half of average American income despite bountiful oil resources. And even this amount does not consider the lofty emoluments of government officials, the emirs, sultans, and princes, whose shares obviously reduce the average income of the common populace.

High birthrates and low investment rates may aggravate the poverty. After all, levels of income and standards of living are determined by labor productivity which is a primary function of the amount of capital invested per capita. An increase in investment per head increases productivity and income; a decline lowers them. High birthrates and stagnant investment rates obviously lower the investment per head and depress the levels of living. They are eating away at living conditions throughout the Muslim world and increasing the pressure to emigrate. Sunni Somalia with a population of some 8 million is estimated to grow at an annual rate of 4.2 percent; by the middle of the century it may be bigger than Italy whose population is shrinking continually. Yemen with a population of 20 million is growing at a 4.1 percent rate; it may surpass Germany by the end of the century. Iraq with a population of some 25 million is growing at a 3 percent rate and soon may exceed the number of native Frenchmen.

Some 20 million Muslims already have settled in Europe. At a 4% growth and immigration rate there will be 140 million by the middle of the century and several hundred millions by the end of the century. Christian conversion to the Nation of Islam would further increase the number. Thousands of Christians in Europe marry into Muslim families and join the Nation each year, but the number of Muslims turning Christian is rather small. It takes extreme courage and stoutheartedness to renounce the world of Islam. Converts stand accused of apostasy, a transgression against Islam, the consequences of which may even be deadly. Apostasy is punishable by death in Afghanistan, Iran, Mauritania, Pakistan, Saudi Arabia, Sudan, and Yemen. It is merely illegal in Jordan, Kuwait, Malaysia, the Maldives, Oman, and Qatar. In Christian countries converts enjoy the protection of the law but face common dangers. They are ostracized and rejected by their own families and threatened by Islamic fundamentalists. After all, Muslims everywhere and at all times are under the obligation to enforce the "integrity of Islam" of which the punishment of apostates is an important part. Individuals all over the world are killed for deserting Islam, many more are abused and assaulted, and many are driven underground in their new faith. It is safer by far to leave Islam for atheism or agnosticism than to turn Christian.

Large numbers of Muslim immigrants readily assimilate and become French-Muslim, German-Muslim, and Italian-Muslim. Muslim religious life flourishes in Europe as is visible in the rapidly growing number of Mosques. But there also are immigrants who reject the very idea of integration into mainstream European life and instead strive toward Islamic separation. Muslim pressure groups, political lobbies, and religious charities cooperate effectively everywhere in Europe. They readily confront any group, party, or government that ignores or questions Islamic values and standards.

Many Europeans who are clinging to the old creed of "passive tolerance" toward all newcomers are frightened by the political activism of some Muslim immigrants. Appalled by the savage attacks on the World Trade Center and the Pentagon on September 11, 2001, by the bombings of four packed commuter trains in Spain on the morning of March 11, 2004, and the assassination of several critics of Islam, they are sensing a deepening conflict between the West and East, even a "clash of civilizations." The pacifists in their midst who watch the trend and count the numbers are ready to yield and surrender. In their eyes, Europe is being Islamized; by the end of the century Europe will be Muslim.

Economists who cannot take their eyes off economic income, economic productivity, and standards of living strongly disagree with such deductions and conclusions. Surely, the ethnic and religious trends may favor the world of Islam, but human nature and the inexorable economic principles of economic life do not. For obvious reasons mentioned above, the economic limitations imposed by the Koran condemn most faithful believers to dismal poverty and hardship. Their levels of labor productivity and standards of living are significantly lower than those in Christian Europe as are average life spans and functions; they would soon fall to Muslim levels if European nations were to labor and live by Muslim rules. It is rather unlikely that many Europeans will readily and peacefully suffer such reductions in the name of Allah.

Many more millions of Muslims may stream into Europe and make their voices be heard before EU politicians will recognize the economic dangers of Islamization. Many are socialists who favor their particular brands of an economic command system. After all, socialistic or social democratic parties presently lead or participate in 13 of the old 15 EU member governments. All 10 new members that joined in 2004 are quasi-socialistic, having emerged from decades of communistic or socialistic domain. European socialism and the realm of Islam undoubtedly bear many similarities but differ significantly on the very nature of their command systems. Will it be secular or religious? And who will be in command? These very differences are rarely ever solved amicably and peacefully.

* * *

Fireworks were lighting the skies of Europe when, on May 1, 2004, the old east-west division of Europe came to an end. Eight new states from the former communist bloc together with Malta and Cyprus joined the European Union. The president of the European Commission, the Italian Romano Prodi, expressed a common joy of fulfilment: "Five decades after our great project of European integration began, the divisions of the Cold War are gone once and for all .... The new members bring to the Union the cultures and diversity of 10 countries with distinct historical roots stretching back through the centuries."

What the joy of fulfilment is to some Europeans is an affliction to many others. Jubilant Europeans hail the removal of all restrictions on the movement of economic goods, services, business capital, workers, and tourists. They welcome the fresh air of individual freedom and all the benefits it may bring. Many Europeans, however, have feelings of fear and distress. They bewail and oppose the removal of political restrictions that have given them not only much protection from foreign competition but also special boons and favors. And finally, a few economists who would like to join the jubilation are alarmed by the growing encounter between the West and the world of Islam. They are mindful of the demographic facts as well as the religious and ideological fervor that suggests a continent ripe for Islamic advances. They now brood and wonder whether the ancient conflict between Europe and militant Islam will flare up again.


Author: Hans F. Sennholz

Hans F. Sennholz

Copyright © 2002-2007 Hans F. Sennholz

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