Prof Dr Richard Kaufman, Director Bethseda Research Insitute, USA

I want to make three basic points in my presentation. First, after about a half century of progress towards economic integration, it is time to first replace the European bureaucracy dominance in policy decisions with more democratic arrangements. Second, we must reduce somewhat the primacy of economics to make room for other priority concerns including defense and national and international security. And third, we must accomplish this adjustment of priorities without abandoning the principles and programmes of modern social democracies. I am recognising the importance of other priorities such as the environment, public health and the needs of workers.

The possible future is for Europe to 'muddle through' with the present system towards what is called a free market model, or something in between. All of us 'muddle through' whether we like or not. None of us follow any pure model, least of all the United States. And I want to take an approach that does follow the middle ground (if not the muddle ground!) and not select a model or mix of models out of North America. I wish to approach the question topically and suggest what I consider to be an evolutionary and necessary change. For example, a look back at the progress of economic integration helps us understand where Europe's first pillars stands today and how it got that way and why some reconstruction is important.

Most of Europe's common successes have been economic. Although there are other factors to be discussed, it is the progress of economic integration that is most significant and interesting. As one reason, an American study argues: the nations of Europe ceded some of their sovereignty not to achieve some form of European nation but to gain some commercial advantages and to adjust to changes in the global economy. The European Union is seen from this perspective as the culmination, for the present, of a series of essentially commercial agreements and treaties that produce the common market and the European economic community among other accomplishments and now takes steps towards a central bank and monetary union. In this view, key commercial decisions-for example the German decision after World War II to become a major market for transform products or more importantly, the emergence of the European community-is more essential than any explicit objective to ensure peace on the continent or cold war politics. By the same token the impetus for monetary union was tied to German concerns about currency instabilities and inflation and general worries about the trade deficit.

It can be argued that politics was as least as important as economics in many decisions affecting Europe; politics was often paramount in fact. An example that is often cited is Helmut Kohl's determination to achieve unification at almost any price-certainly at the price of sensible economic policy, for example his policy not to raise taxes to pay for the costs of unification. Kohl subordinated economics to unification just as other leaders have made similar decisions for the sake of their political agendas. Such decisions by individual governments certainly have spillover effects on other nations and may indirectly influence Europe as a whole. But they differ from decisions made by the European Union through its institutions. Patrick McCarthy, an American Professor of European Studies, describes the EU as a union of nation states that co-operate on many levels and that has had a number of political successes. Most notable to him was the Franco-German political alliance and none would deny the other achievements. However, the political factors as well as social, cultural and other factors have also been important limitations on European integration. There have been powerful countervailing forces, preserving the institutions and the sovereignty of the individual nation states. Europe's overall development and economic integration, in particular in the second half of the 20th century, can be viewed as both an adjustment to globalisation and as a part of the globalisation process. Of course this has been a mixed lesson-as the growing decent and protest against globalisation demonstrate. Some of the same groups that demonstrated in Seattle took part in the demonstrations in Nice this past week-end.

Kenneth Arrow, the Nobel Royal economist, notes that a common characteristic of the institutions that form the infrastructure of globalisation is that they are all far removed from democratic control. He observes that similarly, the European Parliament is located far from the seat of administrative power where important decisions are made. Others have commented as well on a sharply circumscribed authority of the European Parliament and "the democracy deficit in the EU." Arrow refers to the European Central Bank as an extreme case of this monetary authority with no political authority.  (I believe the same point was just made by Dr Gusenbauer.) Dr Arrow observes that the long run implications of this trend in globalisation have not been thought through and the same can be said about Europe as a regional microcosm of the phenomenon of globalisation. To state the point another way: economic integration has been achieved administratively.

There has been much discussion at Nice about voting among large and smaller states. There is a need to reduce the bureaucratic control over policy decisions in the EU institutions. The democracy deficit in the EU is of course curable. Steps to achieve this result should be high on the agenda. One remedy on the discussion by many outsiders would be the adoption of a written constitution. "The Economist" recently noted that the EU doesn't need to have constitutional arrangements but they are woven in so many lengthy and complicated treaties that nobody can remember and understand all of them. A codified or new comprehensive statement would articulate for the EU the basic principles of democracy and constitutional government. These principles, needless to say, were first and best expressed by European thinkers over the ages. Interesting proposals have been advanced, for example to subordinate the European Commission bureaucracy to the European Council and to introduce more transparency and accountability to policy decisions. Regardless of the specifics, it seems odd that the European nations would tolerate for so long a governing arm of their own creation that ignores the democratic principles on which they themselves are based. That they would bring into this largely undemocratic organisation the former communist countries which have been stimulated by the west to make the transition to democracy.

I want to shift out to a discussion of defense and national security, which I believe is related to what we are discussing here. The proposed EU rapid defense force, as important as it is in itself, also points to a major reason for the past success of economic integration and the economic development of Europe. In addition it suggests a possible path for Europe to become more independent and a more constructive and effective actor globally. Europe decided earlier in the Cold War to reject the idea of an integrated military force, a European army, and instead to depend in large measure on the US for its defense against the Soviet military threat. Among other reasons for this decision, the Europeans simply did not take the Soviet threat as seriously as the US. The policy of recalcitrance irritated Washington as the decisions of the European governments to spend far less proportionately for defense than the US. This led to complaints by Washington that it was carrying too much of the Cold War burden. Not all Americans, I should add, agreed with official Washington's conclusions. Some in the US thought the Europeans were right about the appropriate level of military effort and that the way to solve the burdenship was for the US not to spend so much. In any event, the relatively low level of military spending allowed Europe to devote more resources to the economy and more effort on the pursuit of integration than otherwise would have been possible.

Now the European leaders are turning towards self-defense in a serious way. But they need to be candid about the requirements for and the purposes of a rapid defense force. For example, they said that Kosovo demonstrated how dependent Europe is on the US for modern combat weapons, logistics, intelligence and communications and that the Europeans were humiliated by how little they could bring to the war and that the new proposed defense force is needed to make up the deficiencies and again close the gap. These conclusions about Kosovo need to be placed in perspective and corrected. It is true that the US brought much more military force to bear than Europe but to what effect. The US aerial warfare was a visual failure. And the precision guided attacks outside of Kosovo were, for a large segment of world opinion, misguided. The on-the-ground post-war damage assessment by NATO in Kosovo showed that very few tanks and other equipment were actually destroyed by the aerial bombardment. Only 14 tanks and 12 self-propelled were counted. Compared with a much larger number explained earlier. Further, the US Intelligence system, apparently so envied by European leaders, caused the mistake in bombing the Chinese Embassy in Belgrade and failed to anticipate the Russian military move into Kosovo and the near confrontation between Russian forces and NATO. Most of the targets destroyed by US precision weapons were in fact fixed civilian facilities in Belgrade and elsewhere in Serbia. Now which of those capabilities would the European like to have? Hopefully, Kosovo on reflection will not be looked upon by European leaders as a model for future action.

On the other hand, the idea expressed in Nice that the rapid defense force will be used solely for humanitarian crisis management, peace keeping and peace making purposes is laudable and deserves support. I would also hope that this force would work in concert with UN peace operations. The UN has stepped itself up to establish a standing capability for emergencies. It seems more than a coincidence to use language similar to the UN's expressed aim for a force that would be "rapidly deployed." The stated objectives for the EU force are modest. If it succeeds it could conceivably be expanded to take on greater responsibilities for Europe's self-defense. A European self-defense force would reduce to zero the contribution from the US and would probably cost more than Europe presently spends, although it need not cost a great amount more. There are areas of large protection of large potential savings in the present European defense programme. One area is procurement and production, which needs to be restructured. Finally, one should not expect economic gains from greater military spending. Defense on balance and over the long term is correctly viewed as an economic burden. It is no accident that they say the US achieved its longest sustaining economic expansion in its history in the 1990s when military spending was sharply reduced and a peace dividend was allowed to work its way into the economy.

Here I want to differ somewhat what was stated earlier about the nature of the US expansion in the 1990s. There was indeed a major fiscal initiative that contributed to the US economic resurgence, which was the major cuts in defense spending that occurred most of the decade of the 1990s, until the last two years when military spending has begun to rise once again. I think it is again no coincidence that Americans are now foreseeing a period of not only a levelling off and slowing down, but a possible downturn. If the trends and developments I have discussed take place the European Union will be changed although it will not be transformed in any radical way, nor should it.

I want make a few observations on what has been said generally. First I would like to comment on what Prof. Dinh said earlier about the nature of business cycles-that they are by nature changeable. The US economy has gone through this very long sustained expansion period, but most of us can remember when downturns were rather recurrent and serious in the US and we doubt that they won't occur again. The one thing that perhaps Europeans can learn from the US is the phenomenon of low unemployment and low inflation that characterised the US economy in the 1990s. It was thought to be a universal law that there was a natural rate of unemployment which was considered to be at one point 4%, at another point 5% and in the period of the 1980s, thought to be as high as 6%. This view was expressed even by the former chairman of the Council of Economic Advisers under Richard Nixon Alan Greenspan, who professed in hearings before the committee (that I was associated with among other things) that if one went below this natural rate of unemployment which was 6%, then it would stimulate inflation.

Now we've had a decade that demonstrates the opposite and to his credit, Alan Greenspan was the first who revised his views on that particular question. I mention it because it is believed, especially in America, that there is something of an obsession in some European countries about inflation, and that steps must be taken at whatever cost to hold price increases down. If that means living with high rates of unemployment, so be it. One of the most important results of recent American economic experience is that the viewpoint has been disproven.

The other comment I want to make has to do with the statement Dr. Dohnanyi made earlier, which I believe is a very useful and important statement. When he raised the question: is money all that counts? In America I don't think anyone would even ask that question. It is widely assumed that it is. Most people live their lives according to it. That might count for a certain dynamism in the American economy, at least at the present stage, which I must emphasise which is only temporary of the business cycle. But there is a heavy price to be paid for that: the loss of not only a sense of community but also a certain cultural deficit that exists on our side of the Atlantic.

That's why in fact many Americans like to come to Europe: because it is different, in most ways a much richer culture. Whether you are in an industrial region such as Wales in England or metropolitan areas like Vienna and Paris, it is more interesting, at least to many Americans, and seen as a superior way of life. Now it is very difficult to convey the depth of this cultural disparity. Americans assume that yes, money is what really counts; you have to have it to live to have a good standard of living and that's all there is to be said on the subject. There is a sense of superiority that goes along with that when Americans compare their standard of living with those of other countries. Of course they use their own measures of standard of living and it is naturally favourably to the US. Cultural indicators are left out of that measure. While America and the experimentation that goes on in the various states seem enviable to Europeans in some respects, there is something to be said about European society and politics-or the model, whatever you want to call it-that has resulted in what I consider to be an enviable cultural situation.

The other final point I want to make is that with all of our regional and state-by-state experimentation we are in most respects a unified state. The federal laws and regulations trump, as they say, what goes on in the states, including taxation. There is a variability of state tax laws, but everybody has to pay federal income taxes. The federal income tax component of total taxation is by far the largest component. The variability of state taxes is really not such a large factor. It is true that the states can offer certain tax advantages to corporations as a way to compete for new industry, but to use Prof. Dinh's earlier phrase, this has resulted in something of a race to the bottom. These tax advantages seriously reduce the tax revenues of those states that offer them and you have to pay for that somewhere and somehow. The way it is normally paid is by reducing the public benefits and therefore state expenditures. Education, transportation and various other public benefits are quite a bit less in many of the states, particularly those in the south that have been able to attract industry from the north through tax benefits.