- The Washington Times - Friday, December 16, 2011

ANALYSIS/OPINION:

The latest European summit ended with Britain isolated. That’s not a bad thing. The remaining 26 countries forged ahead with plans for increasing fiscal cooperation to try to control exploding debt. If markets are any indicator, there is little belief this preliminary agreement will have any significant impact on the two-year-old and ever-deepening debt crisis. As the European Union spirals out of control, Britain is better off at the fringes of the European Union than at the heart. Prime Minister David Cameron was right to keep Old Blighty out of the agreement.

The sticking point for Britain was the possibility of a tax on financial transactions - the so-called Tobin tax, the unholy grail that has been so long sought by EU bureaucrats. The financial-services industry is enormously important to the British economy, constituting 11 percent of gross domestic product and employing 1.3 million workers. Such a tax would have a significantly adverse effect on Britain’s economy by making financial services that much more expensive.

A nation enjoys a comparative advantage in the production of a good if it can produce it relatively more cheaply than its competitors. Generally, the principle is more easily understood when applied to physical endowments such as Colombia’s comparative advantage in the production of coffee or Saudi Arabia’s in oil production. But legal rules and institutions, including the tax regime, can and do affect comparative advantage. In the case of Britain, these rules have contributed to the development of a vibrant financial-services sector. In America, we’ve got pharmaceuticals and software.

On the flip side, bad legal rules and regulatory institutions can wipe out a “natural” advantage. When Greece joined the eurozone, the value of its currency went up, and it lost a significant part of its comparative advantage for its major industry - tourism - which has contributed to its current problems. Mr. Cameron is wise to avoid a similar burden on a major British industry. The imposition of a tax on financial services has nothing to do with regulating the banks anyway. The real problem is the banks in Europe, particularly in France, are too closely connected to government, which means they are susceptible to bureaucratic pressure to continue bad policies to cover for stupid laws.

The current EU agreement further centralizes power but fails to address the root cause of the debt crisis: too much spending by too many governments. Germany already has started significant reforms of the welfare state, including liberalization of the labor market and cuts in unemployment benefits. Small countries like Slovakia have endured fiscal austerity and are only now coming through to the other side. Britain is finally trying to deal with its spending problem, and the Brits are, quite rightly, not willing to underwrite the profligate programs of their southern neighbors.

External rules and accords, like the new Brussels agreement, will inevitably be ignored or abused unless the heavily indebted countries are willing to accept they have a problem, and the problem is spending. Until then, Britain is better off staying on the periphery of the continent where it belongs.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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