Corruption's bad for your wealth

The scale of fraud in Brussels has swept away complacency about the probity of EU officials

WHY IS the European Commission so corrupt? There may be a mass sacking this week of the 20 Brussels commissioners, if the MEPs vote by a two-thirds majority on Thursday in favour of a no-confidence motion. Whether or not they do, the new attention on the scale of fraud and corruption in Brussels has suddenly swept away any complacency about the probity of the European Union's civil servants.

But why on earth should this have happened? Why should the ethical standards be so much lower in Brussels than they are, for example, in Whitehall? Anti-Europeans will declare that fraud is just an inevitable part of the whole European Union rip-off - that it is part of the European culture to cheat - but that sort of response does not really carry much credibility. There must be something structurally wrong, too, for Europe is, by global standards, a relatively uncorrupt continent.

I have just been looking at the latest figures compiled by Transparency International, the Berlin-based pressure group that seeks to identify corruption and tackle it. The interesting thing here is that most European Union countries come towards the top of the corruption league - or, more properly, the corruption perception league. Transparency measures how corrupt people feel their countries are, rather than calculating an absolute level of dishonesty. Denmark, Finland and Sweden are seen as relatively uncorrupt, with the Netherlands, the UK and Luxembourg not far behind. At the bottom of the EU league comes Italy, followed by Greece, Belgium, Spain and France.

But even the most determinedly corrupt members of the EU pale into insignificance beside some non-European nations. If you want corruption delivered in true industrial quantities, go to the bottom five in the league: Cameroon, Paraguay, Honduras, Nigeria and Tanzania. In Cameroon they regard their place in pole position with a certain bravado: in a survey of 800 people in Yaounde and Douala, no fewer than 77 per cent of the people questioned agreed that their country was the most corrupt in the world.

I wonder what the burghers of Brussels would say if asked a similar question about the commission. It is notable that a Spaniard and a French commissioner are under the darkest clouds, while the chief whistle-blower was a Dutchman. However, since even the Finnish and Swedish commissioners are being criticised too, I don't think we can attribute a propensity to be perceived as corrupt to national characteristics, however tempting that may seem. Besides, it was an Italian MEP, Rinaldo Bontempi, who carried out the report on corruption which was adopted by the European Parliament last October. So perceived corruption in Europe cannot be attributed to individual nationalities. There must be something wrong with the system.

Just what that is, will gradually emerge over the next few months. Do not expect any simple, single structural failure to be revealed. Instead, what will probably come out will be a combination of detailed auditing failures and evidence that a culture of "other people's money" has been allowed to develop. I would be less concerned about the auditing failures than the cultural failure, for the former is much easier to correct. You just beef up the auditing system. The more deep-seated problem is that EU funds, taken indirectly from a taxpayer in a country hundreds of miles away, do not need to be spent with the same care as national funds.

Step back a moment and consider the EU's financial probity not as an ethical or moral issue, but as an economic one. There is a tacit assumption among many people in the business community that a modest level of corruption does not really matter too much.

We had an extreme example in London a few years ago, with the Lloyd's insurance market, where corruption was so deep-rooted that the people involved did not even realise that they were doing anything wrong. More recently, some people have tended to ignore evidence of corruption among the East Asian tigers, explaining it away on the grounds that it was part and parcel of economic systems that delivered rapid growth.

One of the side-effects of the East Asian economic crisis has been a rethinking of the costs of corruption, in particular a focus on the weakness of "crony capitalism". That is a start. Far from encouraging a better economic performance, all the aspects of crony capitalism - government contracts to friends of the regime, close links between lending banks and borrowing companies and so on - have been shown to inhibit it. The East Asian system resulted in the wrong investment decisions and the wrong allocation of savings, and the countries ended up poorer as a result.

Now look at Europe. The European economy occupies part of the top portion of the world economy. Of course there are fine distinctions to be made between different countries, but, taken as a whole, Western European companies deliver high levels of quality in both their products and their services - similar to those of North America, Japan, Australia and the other parts of the developed world.

But we are in a world where it is hard for the commercial sector of any developed country, or any developed region, to maintain much of an advantage over another. Any good ideas are quickly copied and applied elsewhere. As a result, the one thing that countries will increasingly compete in is the quality, efficiency - and, crucially, honesty - of the public services.

So corruption in Europe, and, in particular, at its core in Brussels, will become a grave economic disadvantage, hobbling European countries in their competition with other parts of the developed world. Look at the table. Rich countries are honest; poor countries are corrupt. Corruption impoverishes, for it gets in the way of an efficient economy.

If the European Commission wastes hundreds of millions of euros, as its auditors believe, that is hitting the European economy with a double whammy. First, those resources are not available for bettering the lives of European people - they could have gone into better pensions, or allowed a higher standard of living. Second, the waste encourages misallocation of resources, making the economy less responsive to people's needs and so less competitive.

I don't think European people realise how tough it will be to improve living standards over the next generation, given the adverse demographic headwind blowing across the developed world. We are going, in one generation, from four workers for every pensioner to a situation where there will be two. Productivity will continue to rise, but most of the gains will be absorbed in caring for the old. In a situation like that, corruption at the heart of the EU becomes an even less tolerable burden.

The structure of the European bureaucracy has developed in a world of plenty: relatively rapid economic growth, favourable demography, increased economies of scale. So a bit of corruption could be absorbed in the general increase in wealth. Those conditions cannot be relied on in the future. Leave aside the moral case on corruption: the economic imperative is for the commission to clean up its act.