Nicolas Sarkozy used the French election campaign to resurrect the old whine about "fiscal and social dumping": the idea that impoverished eastern European countries are undercutting companies in the west through lower tax rates and poor working conditions.

There are at least three good reasons why the French president should stop stoking those fears. First, there is scant evidence that jobs are really being "delocalised" to low-cost destinations in the east in large numbers. Such cases that exist are usually well publicised precisely because they are so rare.

Second, Mr Sarkozy is not going to get anywhere in his campaign to force eastern countries to put up their tax rates (like Slovakia’s 19 per cent flat tax). These countries do not have France’s excellent public services or transport systems and have to compete somehow. Tax is a national issue, not a matter for the EU or Paris.

The third reason is highlighted in a fascinating (if extremely detailed) report by the European Commission on Wednesday on the EU’s social and economic cohesion. Or in plain English: the extent to which poor parts of Europe are catching up with the rich bits.

It shows how over a ten year period from 1995-2005 Ireland’s GDP per head went from 102 per cent of the EU average to 145 per cent. In the case of Spain it now stands at 102 per cent, up from 91 per cent. Even Greece has moved up to 88 per cent of the EU average.

In other words, in the space of a generation, economies which were once considered economically backward are now up there with the richest in Europe. All three countries benefitted from EU aid but also (to varying degrees) sound economic policies.

The lesson is that the EU can be an extremely good environment in which poorer countries can catch up the rest of Europe very quickly, in the process removing the threat of fiscal and social dumping which seems to keep some western politicians awake at night.

Mr Sarkozy may be sceptical, but a look at the Commission’s "wealth map" of Europe illustrates the point. It shows that Prague, the Czech capital, and Bratislava, the Slovak capital, both already have GDP per head above 125 per cent of the EU average. Over time that wealth will spread out across the two countries.

The fact that two capital cities which were behind the Iron Curtain less than 20 years ago are among the richest regions in Europe is a striking example of how quickly this catching-up process can happen. Incidentally, Prague and Bratislava are now richer than any part of France, apart from the Paris region.

May 30th, 2007 in Economic policy | Permalink