Dark Clouds Over Europe

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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 inter-European
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.

May
23, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

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