Weekly Briefing: The EU's flawed heart
Plus: what AI doomers get wrong, free markets v Iran and the hidden taxes on your house
Are you ready to fight against Britain’s decline? Karl Williams wrote a stirring call to arms this week – and applications for his successor as Research Director for the CPS close on August 17.
If you’re a seasoned research professional who wants to fight for a high-growth, low-tax, small-state Britain built on personal and economic freedom, then I have just the job opening for you.
My pick of the week goes to Mani Basharzad, who argued that the Ceuta border crisis exposes a structural flaw at the heart of the EU. You can read his argument in full below.
Elsewhere, Alan Hibben revealed the hidden policy costs inflating the price of every new home. Charles Amos criticised Reform’s Deliveroo law for adding red tape to hiring, Valentin Boboc took on the AI doomers and Joseph Dinnage showed how far the UK has strayed from the path to prosperity. Juno Chowla-Song made the case for liberalising the Gulf’s labour markets as a defence against Iran, and William Tittensor wrote that more prison cells won’t fix the prisons crisis.
Sam Williamson, meanwhile, looked at how New Zealand solved its equal value pay crisis in just three days. On The Capitalist, I sat down with economist Alex Tabarrok of Marginal Revolution to discuss Britain’s own problems with equal value pay claims, and why complaining about market prices makes as much sense as suing the weather. Listen here.
Marc Sidwell
Editor, CapX
Ceuta exposes a flaw at the EU’s heart
Mani Basharzad
The EU was born to ‘screw’ the US. That’s what Donald Trump told reporters in 2025: ‘That’s the purpose of it, and they’ve done a good job of it. But now I’m president.’ But that wasn’t always the United States’s view of the EU. As historian Andrew Roberts wrote, the American State Department ‘enthusiastically signed up for the European project thinking it the economic counterpart to NATO’. It is the current US administration that has a problem with the EU, alongside its suspicion of the World Trade Organization, international courts and the United Nations. Why? Many point to the usual suspects, namely populism and nationalism. But Trump’s attacks also gain traction because the institutions concerned have not earned the trust of the public. Labels like populism dismiss these real failings. In the case of the EU, they offer no answer to important questions, such as what just happened in Ceuta, Spain.
One country’s weak border control becomes every member state’s problem because of free movement
Starting on July 30, some 72,000 illegal migrants crossed into Ceuta from Morocco. Most left voluntarily soon afterwards, but thousands remain and dozens died in the chaos. Even the most fervent Remainer ought to view this with relief that Britain is no longer bound by the EU’s right to free movement. Italy, meanwhile, responded by suspending its Schengen free-travel arrangements with Spain for a month. The whole episode is quite a reversal for the Spanish Prime Minister Pedro Sánchez. Less than three months ago, I bought the New York Times weekend edition to read, and the front-page story was a massive appraisal of Sánchez, titled ‘Spain’s Leader Is Trump’s Nemesis, and He’s Winning’, arguing that in a world turning away from the EU, from mass migration and from progressive agendas, Sánchez offered a successful counterexample. It didn’t age well.
The EU, at its heart, has an incentive problem. Take fiscal policy, for example. Imagine you are a small member of the EU facing a huge budget deficit and a debt crisis. The EU bails you out. But what if you are a member state with fiscal discipline and low debt levels? You are expected to bail out the fiscally irresponsible ones. Why? John Cochrane explains in his book ‘Crisis Cycle’:
A monetary union without fiscal union leads to an obvious temptation: Member states might borrow and spend more than they can repay, and then call on the central bank for a bailout using newly printed money.
The system of monetary union without fiscal union creates an incentive structure for irresponsible fiscal policy, but that problem isn’t limited to money.
In immigration, one country’s weak border control becomes every member state’s problem because of free movement. Members which follow strict fiscal discipline and want to implement strong border controls are not immune to countries following another path, like Spain’s scheme to regularise the status of more than one million undocumented migrants.
This incentive structure risks one of Niall Ferguson’s ‘Killer Apps’ of the West: competition among states. One of the main reasons for the rise of Europe was small nation states competing with one another. If taxes went up in one country, people could move to another. That system created an incentive structure for better governance, unlike the EU, where your bad policy becomes every other member’s problem.
To regain that system of competition, there are two options. The first is creating one body of policymaking for the whole of Europe, combining fiscal and monetary union. But that would create a bigger problem: there would be no policy trial and error, and no competition among member states.
The alternative is for the EU to impose responsibility on bad actors. Otherwise, as Cochrane writes, ‘The incentives for governments to tax and spend wisely, reduce debts and reform is much reduced.’ Why should you reform your policies when someone else is paying the bill?
This second solution requires conditionality. Free movement, a single currency and the free movement of capital all have benefits, but you should benefit from them only on the condition of following the rules. For example, if a country faces a debt crisis, a bailout should be considered on the condition of economic reforms in that country. On immigration, free movement should be conditioned on a sufficient level of border control. This is a plan for reforming the EU which creates both competition among member states and gives them the benefits of belonging to a bigger bloc, on the condition that they do not free-ride on others’ resources.
The founders of the European Central Bank gave it one mandate, and that was price stability. At the start it worked: it wasn’t involved in bailouts or buying countries’ sovereign debt. It didn’t have these problems because ‘Nobody in the 1990s foresaw advanced-country sovereign debt problems or a financial crisis.’ After the crisis, the flaw became clear. The EU had no crisis mechanism, and it still doesn’t have one.
On a matter of principle, the EU is a liberal project on the side of ‘freedoms’. But freedom comes with responsibility, and the moral hazard created by the EU limits the potential of the bloc for serious reforms.
And if you want more…
– Nimby Watch: Hendon’s last pristine wilderness? (James Ball)
– Are linkers a good deal for taxpayers? (Damian Pudner)
– Britain’s pharma policy is a gift to Ireland (Marc Goldfinger)
Can we make CapX better?
Or reply to this email to let us know your thoughts.
We’ll be back on Monday.
The EU - rules based ? How long has France ignored the 3% budget limit ?