It is now time for the EU

It is now time for the EU

This article was featured on the Sunday Times, February 12, 2017

This is the first of two articles by Dr John Vassallo, former Ambassador of Malta to the EU, President of the Malta Business Bureau, former EU Affairs Director and VP with GE and Microsoft and chairman of AMCHAM EU. Today Dr Vassallo serves as a strategic adviser to the Microsoft Corporation.


Globalisation did raise global wealth in all parts of the world from the poorest nations to the richest ones in an unprecedented manner.

How many times has the EU been at a crossroad? It is also said that European leaders always procrastinate and avoid taking decisions until the train is at the very edge of the precipice.

And here we are once more; on the brink of another precipice. Can we solve the crisis this time?

We have just had the second informal EU Summit here in Valletta following the previous one in Bratislava dealing with the future of Europe and the EU.

Have they tackled the issues facing Europe and the world? Yes they are beginning to tackle one or two of the issues like immigration and further EU integration and structures following Brexit.

But what about the other causes for dissent and disillusionment of citizens leading to the rise of nationalism?

This time the crisis appears to be the most serious one ever, this time it is an issue concerning the very existence of the EU and the very fundamental nature of the project.

Citizens, Member States, allies are expressing doubts, challenging the basic principles and seeking something else.

I am convinced that there still must exist a large majority of citizens who for many reasons would express belief, trust and confidence in the continuation of the project. They only need to be reminded of the real achievements of the past 60 years, the real improvements to their daily lives that this brought about, the contribution to peace in international relations led by this union of like-minded European countries. One also has to remember the impact on international trade, environmental protection, labour relations, human rights and development aid that the EU has been able to force upon other nations or blocs as a result of its size and weight.

There are different reasons for these doubts.

I will try in this essay to identify these reasons. I will then try to list the virtues of the European project that started in 1957. I will describe the potential for further improvements in the structures of this project so that Europe can continue to grow in relevance in international relations and trade, bringing  improvements to the quality of life and economic and social situation of all Europeans, and to  stand up to the forces of fascism and nationalism that are rearing their ugly heads.

In my opinion, citizens in the EU, like those in the US, have seen the wealth of their countries grow as the new world trading order after World War II opened up markets to the entire globe. Globalisation did raise global wealth in all parts of the world from the poorest nations to the richest ones in an unprecedented manner. There is no denying the fact that millions of Chinese, Africans, Indians and Asians have been taken out of the poverty trap and that a large middle class has grown in places like China, India, Indonesia, Thailand and Nigeria.

Theresa May returning from Washington recently reminded me of Chamberlain coming back from Munich in 1938, waving the silly paper and thinking he had defused the threat of Hitler

This happened as industry and business moved labour intensive jobs from Europe, US and other developed countries to these regions which were offering abundant labour at very low rates. The EU, through its weight, has promised to ensure that the opening up of trade to these new markets was conditional upon adoption of rules to ensure  that abuse of workers be  reduced, that  respect of the environment and safety of products and other standards be enforced. Access to our markets has brought us cheaper goods and services and brought them incomes and work.

Industry and business thrived; share prices on Wall Street and other exchanges rose; shareholders, bankers, consultants all became wealthier. In fact GDPs of all countries, rich and poor, rose together.

The theory of the case for globalisation is unchallenged. The larger the bloc one belongs to, the greater the negotiating power of that bloc in establishing rules for trade and movement of goods, services, capital and people becomes.

Europe had the advantage during this 60-year period of growing from a small bloc of six countries in the 1950s with a trade weight of 180 million people and a value of GDP of €720 billion, to a bloc today before Brexit of 500 million people and a GDP value of €15,000,000 billion (a growth of 280 per cent in population and of 2,000 per cent in GDP). The EU is the largest unit in the checkerboard of world trade. The EU is a market that all want to sell to, to trade with and to live in.

It has great social systems  with free or affordable healthcare for all, cheap schooling and universities, high-standard housing, great roads and infrastructure, open communications, rule of law, respect of human rights, equality before the law, little racism and high environmental and labour market standards.

But why the discontent then? Have we not also benefitted from 60 years of peace in our region?

The reasons for discontent stem, in my opinion, from the way globalisation was left unencumbered by controls. In a recent article in the New York Times last November, entitled ‘When borders close’, Ruchir Sharmanov, chief global strategist to Morgan Stanley, said that in the last wave of globalisation, between 1830s and 1914, similar trends were taking place. Wealth was generated, the world was trading but then, like, now, the growing trade and global exchanges displaced many millions of people from agriculture or basic industries in the richer colonial countries. Jobs were shed there and moved to the poorer and raw materials richer countries.

The displaced people saw the new wealth but did not benefit from it. They were angry at becoming poorer while industry barons, shippers and bankers got richer. The latter got so much richer that even then, as now,  one per cent of the world population owned more than the other 99 per cent together. This led to the rise of nationalism, the closing of borders, the race for colonies and raw materials, World War I and then World War II with its atrocities.

Does this sound familiar? It should. This is exactly what we have let happen once more in our present wave of globalisation.

Millions of miners, ship builders, car makers, clerks, back office workers, IT software programmers, book printers, factory workers in the US rust belt, in Poland, Wales, France, Italy and Greece were displaced.

Just last week Marine Le Pen launched her anti-globalisation campaign in France on the slogan ‘Products produced by slaves being sold to the unemployed’. She may be right because we have let this happen but this should not have been the outcome of globalisation. It can still be corrected and only the EU is strong enough to make this happen.

The theory is that as jobs move to poorer regions, this will make products and services cheaper for the richer countries. The increase in jobs in the poorer regions brings more prosperity there, turning these countries into new consumer markets for the richer regions, thus increasing the earnings of companies in the richer regions.

The losses of jobs in the richer regions would be compensated for by upgrading the richer regions’ labour force, from simpler manual jobs to higher qualified jobs through the use of increased tax revenues created through the growth of global markets as described above, a virtual circle should thus be created.

The theory should work when the increased sales and lower production costs of corporations that benefit from globalised trade and global supply chains declare their increased revenues to their countries of origin to allow tax, corporate tax and income tax on shareholder dividends or capital gains to be collected. Ethical companies and their owners should pay a fair share to the public coffers, in order to redistribute that revenue back to the local labour market. Retraining and the creation of higher qualified jobs should have been the result.

The gains made by increased production, lower costs and higher volume of sales and profits have not been subjected to the normal tax regimes of the countries of origin of corporations.

Profits have been retained outside the home country of multinationals. Costs increased artificially through transfer pricing from low or zero tax countries of manufacturing to reduce profits declared in the higher tax home country. Registration of HQs of multinationals in low tax countries where through various artifacts and structures declared revenues are reduced or spirited away to far away zero tax countries.

These and other methods have so severely reduced tax revenues in the US and in the EU, that globalisation’s  negative effects have not been corrected by the governments of the richer EU Member States and the US, leading to discontent.

Our politicians have either been the cause and accomplices of this tax evasion by playing on the tax competition keyboard and creating ways to spirit away revenues in exchange for some small number of jobs created by multinationals in their countries, or they have been simply afraid to tackle the issue head on since many of their own national champions practiced this tax reducing methodology and party financing depended on this, or simply there was no appetite or courage.

Citizens who have suffered loss of jobs and not been retrained and seen the excesses of the crisis of 2008 lead to austerity measures on their pensions and incomes are beginning to revolt and to be interested in extreme political movements.

It is not tax rates themselves that are the cause of discontent. Tax rate competition is healthy. What is not healthy and potentially immoral and unethical is the lack of collection of tax through wily schemes concocted by countries happy with small returns and helping large amounts of taxable income to be taken out of circulation and hidden away in faraway tax havens. I have been arguing that there is a notion in the minds of most normal citizens and workers of ‘the Ethical Company’; a company that pays between 25-30 per cent tax on its taxable income, i.e. on the revenues after deduction of real costs and depreciation, somewhere in the world. The unethical companies will become the subject of boycotts by consumers sooner or later.

There is now an OECD process that could come to grips with the issue of tax evasion. There are also EU-wide attempts to revise tax systems such as country by country reporting by multinationals that could lead the way to taxing transactions at the place of sale rather than at the place of corporate ownership domicile

But is this too little too late to avoid the discontent of citizens suffering the adverse effects of globalisation from breaking up the EU and going back to nationalism and restricting free trade?

This time the crisis appears to be the most serious one ever, it is an issue concerning the very existence of the EU and the very fundamental nature of the project

Even where there has been proper repatriation and taxation of revenues created by globalisation another recent negative effect on the labour markets of our region has been automation. This even when our Member States put in remedial efforts to retrain or upgrade the labour force, there are few or no new jobs because these are taken by robots or replaced by labour free disruptive technologies. Our politicians have been completely unable to find a response to this type of difficulty.

There certainly are ideas being floated about how to tackle the displacement of labour by automats and robots. Some have proposed putting a social security cost on robots that would be equivalent to the social security cost of the number of labourers that the robot replaces. Yes, this would make robots more expensive to run than they are today, and what about robots outside the EU? Well the social cost is much lower than the salary cost of labour, so that cost to industry would still be lower when using robots.

If robots are outside the EU, then a border tax equivalent to that social cost in the country of location of that robot could be raised to keep a level playing field. The EU is such an attractive large market that all companies wish to export to it or to be located in it for market access. These revenues could be used to supplement pension rights of people laid off as a result.

A third and more recent difficulty that has angered citizens already unhappy because of taxation and robotisation is the influx of large numbers of uncontrolled immigrants. With these three major causes to job losses within the EU and the US what have been the answers? The rise of nationalist parties, the move towards isolation and block free trade like the UK chose through its Brexit referendum and the US with the election of Donald Trump. It is these people, vulnerable in their loss of income and self-respect that a steady job provides, and reduced to the dole or at worst to crime, that able fascist and nationalist politicians, demagogues and fear mongers have turned to seek support. The solution they offer was that of 100 years ago in 1914.

Then it was communism and fascism, dictatorship, closed borders, nationalism, the rule of might is right and bullying on the international stage. Now it’s déjà vu all over again. Theresa May returning from Washington recently reminded me of Chamberlain coming back from Munich in 1938, waving the silly paper and thinking he had defused the threat of Hitler. She even offered a State visit to the person who represents the greatest threat today to the chance of healthy and managed continued globalisation and the greatest risk of the world lurching once more into isolationism, nationalism and war.

Yes, war is not excluded.

Is this what we all want?