Estonia must resist EU-stupidities

At last Europe is whole and free. People and businesses in old Europe welcome all the 75 million new members with great joy. But we had hoped that our leaders would have given you a warmer welcome. The Chirac doctrine – that new members are supposed to shut up – has poisoned the atmosphere. And so has the temporary restrictions on labour from the new member states.

But even more problematic for the long-term are a couple of insulting remarks on taxation. The Swedish Prime Minister Göran Persson recently accused Estonia and Poland of not taxing its rich sufficiently. German Chancellor Gerhard Schröder calls for increased taxes in the accession countries, and he gets support from the Christian Democrat opposition. Many other European politicians agree.

Why would taxation in Estonia be any of their business? The reason given by Göran Persson is that Sweden is not interested in sending regional and agricultural policies to countries in order for them to avoid taxing their rich.

This argument doesn’t make any sense. Subsidies are not being sent to countries because they fail to finance these measures out of their own coffins. They are sent because the regions are poorer than others. And the best way for Persson to stop paying funds to Estonia is to encourage liberal policies and low taxes, because they promote growth.

We have already seen this in the old member states. Since the late 1980s, Ireland reformed its economy rapidly. For example, the Irish top corporate tax rate has been reduced from more than 40 percent to 12.5 percent. Even though it is just one percent of the euro-zone market, Ireland receives almost one-third of the American investment in the EU. Ireland has also seen its per-capita income grow from 62 percent of the EU average when they joined in 1973, to 121 percent today.

In 1970, Ireland was the 21st richest country in the world, according to the OECD statistics. Thirty years later it was the 5th richest. Sweden, with its high taxes, fell during the same time from place 4 to number 17. Because of its progress, Ireland has been deprived of the most generous subsidies and will soon be a net contributor to the EU. If countries are supposed to interfere with the tax policies of neighbours, it should be Estonians who complained to Sweden that if we continue with our high-tax policies, Estonia will soon be forced to pay our subsidies. 

So why are Persson and Schröder complaining of low taxes when they result in economic progress? Precisely because of that. They know that the high levels of regulations and taxes in Sweden are threatened when they face competition from other countries with more liberal and growth-friendly policies. People and businesses will go where it is well treated. 

Therefore, their outrageous remarks are not at all surprising. In the literature, this is known as “the strategy of rising rivals’ costs”. And we can see it again and again in federal structures. Those with high costs want to stop the institutional competition from those with lower costs. That would be a disaster for many of the new members, for whom liberal policies and lower costs are the best way to compete.

Luckily, tax harmonisation cannot take place in the EU unless all member states agree to it, everyone has a veto. So far. But a country such as Sweden is not to be trusted. Even though the government has said no to tax harmonisation, it would probably welcome a minimum tax rate in the future. And in countries such as the UK and Ireland, we don’t know what future changes in government policies might mean. Small countries might also be intimidated into accepting centralisation, by depriving them of regional aid if they don’t agree. That is not a conspiracy theory dreamt up by some far-out EU-sceptic – it is a real proposal from the Belgian Prime Minister Guy Verhofstadt!

This turns Estonia into a key player in the European power-play. By setting an example with growth-friendly economic policies, Estonia is in a much better position than other new countries to understand that good policies at home are preferable to European hand-outs and subsidies.

Deal-making in the EU is not very transparent. Ad hoc-deals and log-rolling in the corridors are more important than formal positions. The more progress Estonia achieves the more innovative old Europe will be in luring them into tax harmonisation with tempting baits and harsh words. No matter what it is promised and no matter how it is threatened, the Estonian government must never give up one of its best advantages in the global economy. To refuse is also the only way to save the European idea, since one of the biggest benefits of free movement is that it puts pressure on countries to improve their policies.

When asked what is the greatest lesson to be learned from the Communist period, the Polish poet and Nobel Prize winner Czeslaw Milosz replied: “Resistance against stupidities.” That is an attitude that will come in handy when dealing with the EU-centralisers.