Do the right thing not just anything

After the Smoot-Hawley Act of 1930, which raised US import tariffs on some 20,000 goods, a global trade was began, which led to a decrease in global trade by two thirds in five years. US jobs were certainly not saved by it; unemployment increased from 8 per cent in 1930 to 25 per cent in 1933. The entire global economy spiraled down and social unrest led to support for extremists throughout Europe.

The G20 countries sensibly agreed in November not to raise traditional trade barriers. But the specter of protectionism can take many forms. The most common current form is subsidies from governments – or, rather, tax-payers – to companies. The governments of Spain, Belgium, Britain, Italy and Germany have sent packages of various shapes to car makers. The price tag will be billions of euro.

The subsidies usually have attached demands from the politicians. This was apparent in the French package, running to several billion euro, for example that salaries for the leading staff have to be frozen at their current level. President Sarkozy also went further, demanding that car producers repatriate factories from other European countries. This has now been modified, but such initiatives are a threat to the single market as much as to the recovery.

Forecasts of global GDP development are repeatedly being revised downwards. In the latest IMF forecast, global GDP is expected to develop slower than any time during the last 60 years. Investment flows to developing countries are expected to be a quarter of what they were the previous year. The crisis will lead to a setback for global trade and prosperity as it is; it certainly doesn't need political assistance.

During the past quarter-century, global trade has quadrupled, global GDP per capita has increased by 50 per cent, and extreme poverty has been cut in half. The economic and social benefits throughout the world from globalization – where trade and investments form central parts – have been spectacular. Now actively decreasing this economic freedom within and between countries is indeed an equivalent to flushing out the baby with the bathing-water.

Every country launches a fiscal stimulus package. But governments that want to give an impression of action by launching massive fiscal stimuli rely on an illusion. Since governments don't have any money, especially these days, they take it from somewhere else. Increased public consumption will decrease private consumption, and why would politicians know better how to invest and consume? And the money has to be paid back.

Certainly we know what we should not do: Don't erect trade barriers. Don't subsidize old factories. Don't keep interest rates very low for too long. But what should we do?

First, support the global trading system and make a new attempt to reach an agreement within the Doha framework. Few things would benefit global confidence more than an agreement that creates a trustworthy framework for freer global trade. Since seven out of ten employed Europeans work in the services sector, it is especially important also to open up trade in services. The EU could unilaterally initiate agriculture policy reforms, to

kick-start the process.

Second, realize that the old companies, products and jobs sometimes have to go. The car makers employ 2 million people in the EU, but 90 million are employed by SMEs. If we protect the old, we will prevent a lot of the new from emerging. Britain was the world's leading car maker in 1955, but the decline could not be saved by massive subsidies and today car making is limited in Britain. Britain is a much wealthier country today.

Third, defend and extend the European single market. It has brought increased prosperity to European citizens, and led to the restructuring of the European business sector, which has made it more competitive. The single market is threatened when it should be expanded to more countries and new sectors – like health care.

Fourth, implement a general bank guarantee and introduce better regulation of financial markets. A bank guarantee is necessary to reinstate trust in the market and get lending going again. Financial markets need to be regulated, but simple and light. To a large extent, after all, the financial crisis was ignited by excessive regulation and government interventions in the US housing market.

Fifth, make way for the new. The global restructuring of production and employment is intensified in the crisis, and as the old inevitably goes, we have to open up for the new. The entrepreneurs that may create the new gazelle companies must no longer suffer from an overload of public bureaucracy and punitive taxes. Part of this must be increased spending on research and development – vastly better than car or agriculture subsidies.

Certainly, governments can act, but it has to be the right actions. Those who will do anything play with fire.

Gunnar Hökmark is member of the European Parliament for the EPP-ED group. Johnny Munkhammer is research director of the European Enterprise Institute.