Reinventing subsidiarity in the European Union

Published in Italian in: Tito Tettamanti, Quale Europa, Una polemica liberale, Torino 2020, p 295 – 300

From a classical liberal perspective, the institutional separation of economics and politics is essential. This does not mean, however, that politics cannot or should not learn from the fundamental experiences of the “homo oeconomicus cultivatus”. The market is a school of life – and competition should be seen not simply as an aggressive struggle but as a productive learning process in the global exchange of ideas, goods and services. Based on many years of experience as a globally active entrepreneur in the financial sector, Tito Tettamanti has repeatedly examined the European Union (EU) through a critical lens. The following summarises the key messages of the author’s numerous articles on this subject.

A free order based on private autonomy, private property and globally open markets is a far cry from today’s reality in which the framework conditions for economic activity are highly regulated by states and international political organisations. Around the world, economics and politics are intertwined – albeit to differing extents in different jurisdictions. Nevertheless, an open society with a free economy is anything but a backward-looking utopia. Technological and sociological development tends towards more freedom, more flexibility and more diversity, and life will punish those who choose to ignore this fact.

A “social”, welfare-state-oriented order based on traditional egalitarian ideas is not only patronising, but it contradicts a dynamic development towards a globally open society of free, self-determined and self-responsible individuals who exchange goods and services in a variety of ways via open markets, achieving productivity that is superior to any planned economy. Socialism and etatism are relics from a time when industrial production depended on the forced disciplining and collectivisation of large numbers of people.

Ever since the emergence of nation states and colonial empires, for leftist and rightist regimes alike, political order has been based on the primacy of politics. Nations and their national economies have competed for political and economic supremacy, often resorting to violence in the form of armies, fleets, tanks and bombs to achieve these ends. In a scenario where a cultivated and globally open, freely networked economy has primacy, acts of military violence become a losing proposition for all concerned. An open society based on open markets, on agreement and exchange, and on peaceful competition is well placed to overcome not only the industrial age but also the age of wars for supremacy in a politically dominated world.

The market knows no central regulation but is based on competition which cannot be directed by any central authority. Competition between nations and smaller political units does not entail a battle of each one for itself and against all others, with exclusive power going to the strongest. Rather, we are dealing with an open learning process in which that which is successful can be imitated by all and that which is unsuccessful avoided by all. In an uncentralised, marked-based system, all stand to benefit, and even the worst can at least serve as bad examples. Those who are small and nimble have a better chance of learning than those who are big and clumsy.

From the classical liberal point of view, the state itself is subsidiary: a necessary evil. Within the state, responsibility is borne first by the local level – the municipality, that is to say, the least central organisational structure – and delegating matters up to the central authority is only advisable when the local municipal government is no longer able to solve a problem autonomously. This proceeds up the ladder until, in the case of the EU, the most central authority in Brussels ultimately takes responsibility. But what happens if even this central authority can no longer solve the problem? Then it must once again be cut up into smaller pieces.

Subsidiarity should not function only as a one-way street from bottom to top, but also from top to bottom. It is not a case of eliminating the principle of subsidiarity, but of understanding it radically – from its roots – and of discovering or reimagining it as a method of decentralisation. In short, subsidiarity needs to be reinvented.

Political power induces sloth and inertia because those in power are not forced to learn. The market, on the other hand, is an open economic and cultural school of life without teachers. It teaches through the experience of reciprocity, and the more open and free it is, the more all can benefit and learn from one another.

The basic call for less state and more freedom and self-reliance is the foundation of a classical liberal policy suitable for the future. All centralised political systems which combine redistribution, indebtedness and the majority principle, run into trouble sooner or later, regardless of the party or coalition in power.

However, classical liberals have no reason to gloat, as in politics – regrettably – a general level of suffering does not necessarily produce those learning processes which would help to avoid past mistakes. Indeed, very often, past mistakes are replaced by new mistakes, mistakes which may be even more devastating.

Political transformation is a race against time

Politics is an experiment performed by people on people, and lasting change is only possible through mutual learning processes. In politics, it is easy to criticise the status quo (Situation A). Nearly everyone does this, right across the political spectrum. Politicians are continually searching for supporters or voters who are dissatisfied with the same things as they themselves are. And of course, they need to present a plan for a better state of affairs (Situation B). It is relatively easy to postulate a Situation B based on another theory or doctrine, or simply on experience and comparisons. The prospect of reaching Situation B is what politicians typically dangle in front of us on the political market; it is what we, the electorate, are promised if we vote for them. The hard thing in politics is invariably the real-world execution process, or transformation. One not only needs a goal, but also a strategy for reaching it. By far the greatest challenge is finding a workable path from the relatively unsatisfactory Situation A to the better Situation B.

When politics is based on the majority principle and on relatively short legislative terms (the norm in most countries today), political transformation becomes a race against time. Voters must give governments the time they need to get from an unsatisfactory Situation A to a better Situation B.

New Zealand under Roger Douglas, Great Britain under Margaret Thatcher and the USA under Ronald Reagan are more the exception than the rule, and in all three cases liberalisation remained “unfinished business” (the title of a book by Roger Douglas, in which he describes the reform process in New Zealand). This book contains much that could be instructive in the current situation.

Charismatic politicians often follow Napoleon’s dictum “on s’engage, et puis on voit” (act first, then see what happens). In other words, they cultivate trust in their personality, which then becomes their political programme. This worked relatively well for the three liberal reformers mentioned above. But from a classical liberal viewpoint, it is still very risky.

We Swiss are realists and do not readily believe in miracles. We are so sceptical towards politicians with strong personalities that we have limited our President’s term of office to a single year. The office rotates among seven ministers chosen by Parliament, who come from different parties. More than half of the Swiss population is not even aware of who the current President is.

Redistribution, subsidiarity and majority rule

Local authorities, financed from “above” or by the centre, are usually dependant and corruptible. Time and time again, we witness situations in political life where “dirigiste” steps and policies achieve the very opposite of what they were designed to achieve. The subsidiarity principle is thus often misused to “justify” a transfer of power upwards to find a “better” solution.

Things get even more difficult when increased centralisation is “justified” by a member state’s inability to provide sufficient financial backing for a task. A centralised system of taxation will obviously deprive the lower level of regional and local taxation, and it is obvious that such impoverished communities and regions will find themselves unable to raise their own taxes to fund their own tasks.

A route to centralisation of tasks is thus opened if we start by centralising the tax system. It is obviously incongruous if a system collects money centrally and only decentralises the tasks.

Perhaps the worst solution in this case would be a federal system for the accomplishment of tasks in which an arbitrary decision from the centre determines the distribution of money among the lower levels. The best solution, then, is not to centralise the taxation system at all and to allow the lower jurisdictions to manage both the expenditure side and the taxation side. Failures on this score have often discredited the principle of subsidiarity.

Subsidiarity means giving priority to smaller or private units. It calls for decentralisation, privatisation and deregulation. The concept of subsidiarity must be defined more precisely and radically to meet 21st-century challenges. It must evolve in such a way as to enable greater decentralisation. In practice, this means higher jurisdictions will need to return powers and responsibilities to lower jurisdictions closer to the root of the problem.

Non-centralism and taxation

A sound tax system is built on four principles: no taxation without representation; the more concerned, the more involved; no representation without taxation; and no tax spending without tax paying. The tax system, the monetary system and the social security system are the real basis of any political system, and legislation on these matters is often more important than political participation.

Given the crucial role that systems of taxation have played in the past and continue to play in the present, it is shocking how little (genuinely comprehensible!) material has been written on the subject. Whole libraries have been filled with technical expositions on the most efficient ways of taxing the population, on the best strategies for maximising yield, and on the most effective legal, semi-legal and non-legal ways of evading taxation from the other side of the barricade. What usually goes unnoticed, however, is that at least 50 percent of political history is also the history of systems of taxation, and that most revolts and revolutions originally started as revolts against a system of taxation. Peaceful civil societies are characterised by a relative absence of explicit rules and technical prescriptions about social infrastructure; they are communities in which conflicts are typically solved privately under the rule of law between those responsible and those affected.

There are three ways to reduce the tax burden: reduce interpersonal redistribution, reduce interregional redistribution and instigate fiscal competition.

The financial system is an all-important part of the political and economic system, and one whose fundamental role is often underrated. The aim of the entire exercise of devising a system of taxation is not to create some improvised patchwork from year to year, but to provide sufficient funds for a given year.

The classical liberal objective is to limit access to fiscal revenue and thus arrive at the best possible method of reducing the scope of the state and improving the health of the economy as a whole. The bulk of the tax burden could be drastically reduced by lowering interpersonal and interregional redistribution, and by fostering fiscal competition between municipalities, regions, states and federations.

Admittedly, non-centrality can also have its disadvantages. The least efficient player is worse off in a competitive field than he would have been under a centralist, averaging system which seeks to “harmonise” well-being. In the classical liberal scheme, there may indeed be some painful deficiencies in so-called “underdeveloped areas”, and the price of inequality may be quite high. Diversity and inequality always go hand in hand. However, again and again history shows us that such underdeveloped structures turn into modern and more effective ones in the end, bringing in their wake a welcome rise in general well-being. Under a centralised system, on the other hand, there is a risk that all jurisdictions, all parts of a federal system, will be “aligned” with the very latest scientific and political trends, even if these turn out to be misguided, erroneous – or worse.

Classical liberals, or free marketeers, do not assume that they have a monopoly on the truth or on “correct” solutions, but they advocate a system made up of small, competing units that commit many different (but small) errors and mistakes. In this kind of system, there is a chance for learning by comparing. This may pose less of a risk than a highly centralised system, where big errors and mistakes are more dangerous. Learning by doing, learning by comparing, learning by taking risks and committing and admitting errors should be our common goal. The smaller the units embarking on this adventure, the greater their chances of success and of avoiding large-scale, centralised blunders!
True convalescence comes from the local community and the civil society. It does not function from the top down, but from the bottom up. We must create tiny islands of truth in the vast sea of collective political error, and repeatedly draw attention to some core, unchanging principles – notably that there is no such thing as a free lunch, that everything one consumes must be paid for and that going into debt merely shifts the problem onto the shoulders of future generations.

Other articles on the topic (with references):

Robert Nef, In Praise of Non-Centralism, translated from German, Ideas on Liberty, Liberales Institut der Friedrich-Naumann-Stiftung, Vol. 3, 2004

Robert Nef, Local Autonomy and Subsidiarity as Prerequisites for the Proper Functioning of Direct Democracy, in: Konrad Hummler / Alberto Mingardi, Europe, Switzerland and the Future of Freedom, Essays in Honour of Tito Tettamanti, Torino 2015, p. 319 – 340

Robert Nef, Subsidiarity. An ambivalent principle, in: Balancing Competences, Charlotte Lockefeer – Maas (Ed.), elf, European Liberal Forum, Brussels 2018, p. 23 – 39

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