Solutions to regulatory competition in the EU?

In an op-ed piece in yesterday's Financial Times, a Belgian economics professor argues that "a flaw in the design of the eurozone" that leaves wages policies to be determined by the member states of the EU, rather than centrally, produces an unhealthy competition among the states. He cites the example of German wage restraints, which "improve Germany's competitive position at the expense of the other eurozone countries."

To stop "the downward spiral on wage increases set in motion by Germany," he sees two basic alternatives: either centralize policy in the EU or "further liberalize [EU states'] labour markets so wages are set by demand and supply instead of being dictated by government-sponsored cartels of trade uions and employers' associations."

An historian can't help noticing that the dynamic he depicts looks very "American" -- that is, it resembles the economic competition among the American states that first emerged in the 1850s and reached full force by the 1890s, producing what some scholars call a "race to the bottom" in state regulation. (The competition continues because so much economic policy remains in the hands of the American states. No one really disputes the existence of the dynamic, though assessments of it--good or bad?-- differ sharply.) In the U.S., the outcome of this dynamic was de facto liberalization of labor (and other) markets.

From this standpoint, the available solutions to the EU situation appear slightly differently: either centralize wage policymaking or let state-level competition do its work in liberalizing labor markets. But however one arrives at liberalized labor markets, the U.S. experience suggests that they won't prevent a downward spiral in wages, especially in the 21st-century context of global, inter-nation competition.

Paul De Grauwe, "Germany's pay policy points to a eurozone design flaw," Financial Times, 5 May 2006, 13.