Bribery is no way to reform Europe

European leaders have started a discussion on German-inspired “contracts for competitiveness and growth”. The idea, to put it bluntly, is to bribe reluctant governments into changing their economic policies. It may backfire – and a better approach is available.

The proposal put forward by the European Commission is that instead of exhorting governments in vain, and before a country reaches the point where it needs the IMF, the EU would support its reforms with temporary conditional transfers. It would agree with the government on a policy agenda and give grants in exchange for its implementation.

There is a case for such an approach. Reforms, even those most beneficial for society as a whole, are often opposed because they erode what economists call “rents”.

Fighting against change

Those enjoying rents – for example because the market for their product is kept closed – have every reason to fight against change. Those who would benefit from reform are more numerous but unorganised, so they do not fight for it. To overcome resistance, buying off the rents may be an advisable option. However, countries in need of reform generally also suffer from weak public finances. Hence the idea of relying on other countries’ money.

From their point of view, it may be better to pay a bit now rather than a lot later. Lack of reform hinders growth and competitiveness and is likely to create financial trouble. Yet there are objections. Buying off rents may be very costly. The politics of the proposal are awful. To negotiate domestic policy with international bodies is a humbling experience no government is likely to be keen on, unless forced to do so by markets.