The European Union and the Free Market

Lithuania’s integration in the EU is speeding up. Lithuania has officially been invited to begin membership negotiations and has appointed the chief negotiator. The country is also shaping its negotiation positions and bringing its legal system in line with the EU acquis communautaire. What is there in store for free market principles and values in the EU? Is there a chance that these values will be accepted, or is there a danger that they will be displaced with planning and regulations?
The Free Market
Private property and free exchange are the conditions necessary for the free market to function. Private property means that an individual is the owner of his own body and property and is free to use them as he chooses, as long as he does not infringe the rights and property of other individuals. From the principle of private property originates the principle of free exchange, implying that an individual can freely exchange his property. The free market allows diverse interests to be matched and diverse goals to be achieved in the most effective way possible. Several interrelated principles can justify this proposition. First, people exchange goods for their personal gain. Second, they exchange something of a lesser value to them for something that they value more. Third, in this manner prices are established on the market that reflect people’s scale of value, and both parties are better-off as a result of the exchange. Fourth, if the market is replaced with regulations, this order is upset, people do not achieve the highest possible effectiveness, and recourses are wasted.
The Free Market and the European Union
The relationship between the European Union and the free market is not clear. The common space means that certain geographic restrictions are removed. This, of course, is praiseworthy. People are able to freely travel and trade. The establishment and development of the EU expanded the boundaries of geographic freedom as prior to the founding of the EU this freedom was realized only within the boundaries of one country. On the other hand, unless there is more freedom to interact with the rest of the world, this may be the question of “the size of a prison cell.” Euro-protectionist feelings, which have subsided markedly in the last two decades, are still quite strong. Sadly, the European Union is prone to fence itself off from competitors with customs duties, standards, anti-dumping measures, and restrictions on the mobility of the labour force.
The level of redistribution within the EU is another aspect reflecting the relationship between the free market and the European Union. At present, the level of redistribution within the EU (excluding member-states) is not, at least relatively, large – approximately 1.6 per cent of GDP. But that’s not all. Obviously, this 1.6 per cent would not be instead of but in addition to the existing 40-percent rate of redistribution in Lithuania. In addition to that, EU regulations require from the member-states some further redistribution. It should be noted that redistribution that takes places at the level of the EU (the Common Agricultural Policy and the Regional Policy) is inexpedient, ineffective and bureaucratic.
Now let us look at regulation. Life in the EU is extensively regulated: regulations include quality standards, labour safety requirements, restrictions on advertising, etc. Only in rare cases is regulation applied to the government so as to prevent it from expanding its powers and authority. Sadly, it is the consumer who carries the burden of regulation. In addition to being bureaucratic, restrictions are often tailored to benefit one or another interest group rather than the whole society.
The Free Market and Lithuania
What is Lithuania’s position regarding the free market and what are its prospects in the context of EU integration? In order to answer this question, we must look at the above-mentioned aspects – redistribution, regulation, and opportunities for international co-operation – in Lithuania.
At first sight, Lithuania does not seem to have barred itself from the rest of the world with whopping customs duties. We can even hear quite often that, of all the countries in the region, only Estonia has lower customs duties than we do. But the real situation appears to be much worse. Entrepreneurs regard customs procedures in Lithuania as the most bureaucratic. Minimal marginal prices are still used in customs valuation. Lithuania has so far failed to join the WTO.
Though not higher than in the EU countries, the level of redistribution in Lithuania is quite high. The worst of it is, redistribution in Lithuania is carried out with a great deal of negligence and entails painful consequences. In addition to that, the existing redistribution in the EU countries evolved over a long period of time, while Lithuania reached its level very rapidly and didn’t stop even during the crisis.
In some cases regulation in Lithuania is stricter than in the EU, in others it is looser. But, worst of all, Lithuania fails to do away with the old Soviet regulations while being overzealous in adopting EU regulations. This mess is the most evident in the area of standards. “European” and “Soviet” regulations are being supplemented with quite unique “Lithuanian” regulations. Take, for example, mandatory minimum working hours. This requirement is not only absurdly illogical and damaging to the labour market and businesses, but it also looks extremely “unique” in the context of the EU. Annual declarations of capital gains are another example. These are but a few examples out of the huge mosaic of regulations.
The Free Market and Lithuania’s Integration in the EU
In Europe, some champions of the free market are optimistic about the integration, while others are not. A similar situation exists in Lithuania. Why is this so? Logically, Lithuania’s integration in the EU will make Lithuania similar to the EU. Both euro-scepticism and euro-optimism of free-marketeers depend on the opinion and expectations of further developments of the EU and Lithuania. There may be four variants of these expectations: 1) both Lithuania and the EU will progress towards the implementation of free market principles; 2) both will develop in the opposite direction and reject free market principles; 3) Lithuania will develop towards the free market and the EU will go in the opposite direction; 4) Lithuania will expand bureaucracy and curtail liberties, while the EU will become more liberal.
Depending on the expected scenario, the champions of the free market see EU integration as a particularly important factor that might affect the building of a free market in Lithuania. In other words, their attitudes depend on how they evaluate the Lithuanian government and those of the EU member states and what actions they expect from them. Euro-pessimism is grounded in the belief that Lithuania will take a new course towards people’s rather than the government’s liberation. Euro-optimism is based on a disbelief that the Lithuanian government will ever “get better.” In practice, in some cases the EU acquis communautaire has palmed the Lithuanian authorities with new regulations, while in others it has shielded Lithuania from new restrictions. A general course of action does not exist.
Lithuania’s integration in the EU will inevitably bring changes. What would they be if Lithuania changed solely because of the integration and the EU remained exactly the same as it is today? This would allow Lithuania to enjoy the four freedoms with respect to the EU: the free movement of goods, services, capital, and labour. Goods would be carried from Lithuania to the EU and vice versa without any restrictions. People who acquired qualifications in any EU country would be able to seek employment throughout the EU. However, all these freedoms would be valid only within the EU, while restrictions applied to other countries (customs duties, for example) could be increased. Equally essential would be regulation-related changes. Lithuania’s integration into the EU would expand regulations in many areas (and in some cases they already have due to the adoption of the EU acquis). In the EU, regulations are often enforced in order to limit the governments’ intervention in the market, speed up the privatisation process, and do away with monopolistic privileges.
If Lithuania is committed to joining the EU, how will decisions adopted in Lithuania affect the future of free market principles? Most EU directives are mandatory only as far as the goals are concerned. The choice of specific measures to be implemented is entirely a matter of the national law. In addition to that, a number of directives leave some room for arbitrary decisions, but, sadly enough, Lithuania often fails to exploit such opportunities. Also, the EU acquis does not regulate all areas of life, therefore many business and living conditions will be, in a way, independent of the EU regulations for some time to come.
Willingness or reluctance to join the EU is inevitably based, not only on rational arguments, but also on many unknowns and expectations, likes and dislikes. Most importantly, we should not forget that the outcomes of Lithuania’s integration in the EU will depend largely on our own ability to act responsibly and coherently. Therefore, decision-makers and negotiators should be as rational as possible in managing the process, and we should do our best to make sure that Lithuania takes over from the EU rules that are consistent with the free market and neutralises those that are not.