Tuesday, July 12, 2005

Living in Eurowonderland

Christian Noyer, Governor of the Bank of France, in an interview in the FT was asked about eurozone break up.

But financial markets now talk about the eurozone possibly breaking up?

”To me, that is an absurd scenario. From an economic point of view, in my judgement that would be extraordinarily harmful and highly risky.”
Convergence and solidarity over several decades has been “sufficient for the political acceptance of sharing a single currency and to ensure that it works economically”.
It might be harmful, and highly risky in economic terms but it doesn’t mean that it couldn’t happen. Joachim Fels of Morgan Stanley put it well in his comment of last Friday.
Recent events suggest that a break-up of the euro, long derided as the euroskeptics’ pipe dream, has become a distinct possibility.

First, the French and Dutch voters’ rejection of the EU constitution should have made it abundantly clear that hopes for a European political union remain elusive -- and illusory. Second, rising anti-market sentiment in the euro area threatens to block the move toward greater wage and price flexibility, which is a necessary condition for a well-functioning monetary union without a fiscal transfer mechanism. And third, there are worrying signs that the “stability consensus” regarding fiscal and monetary policy within the euro area is crumbling, thus undermining the very basis of the euro.

Full text @ The Disunited States of Europe -
Behind this issue lies that of the prospects for an improvement in the Eurozone economy. Broadly speaking the general view is that some recovery in growth will take place in the latter part of this year however it won’t take much to throw it off course – further terrorist attacks in EU member states, a spike in oil prices, a rise in tensions over Iran’s nuclear programme etc. etc. Naturally the European Commission, not wishing to feel left out, has developed its own plans see – 3 year blueprint for growth and jobs.

It all looks very impressive on paper / screen but the reality is that without the ability to enforce adherence to such guidelines the European Commission can do little other than talk about it ad infinitum!

The European Commission has no mandate over the labour / employment / social protection policies pursued by EU member state governments. Given this fact it begs the question why, after the failure of the Lisbon Agenda, the European Commission is once again making "plans"? Perhaps the Commissioners in Brussels are suffering delusions of grandeur and think they are omnipotent central planners - the centrally planned economies of the Soviet Union and its satellites suffered enormously from exactly such delusions! Is there any other explanation for such behaviour??

Tuesday, July 05, 2005

Reforming the ECB

The Financial Times leads today that:

The ECB is not the main cause of Europe's economic malaise. Its effectiveness is constrained by inflexible labour markets, weak public finances and underdeveloped retail financial markets. But it is part of the problem.
By responding too slowly to shocks the ECB has allowed output to drift away from potential. By taking an extreme position on central bank independence it has prevented effective co-ordination of monetary and fiscal policy, and structural reform. We have seen this before - in Japan - and it resulted in a decade of stagnation.
To carry on regardless, relying on its formidable legal independence, would be unwise. Sooner or later change - probably of the wrong sort - would be imposed from outside. What Europe needs is leadership from within the ECB to make it part of the solution to the continent's economic woes.

Making the bank part of the solution
So far so good, and one can even agree with the FT when it states that “Consensus-based decision-making by national central bank governors at a time of persistent economic divergences is a formula for inaction.”

However they then go on to suggest that the ECB should engage in closer dialogue with Eurozone governments and move towards majority decisions. This sounds good in theory but closer dialogue with governments could lead onto sticky ground – governments are not allowed to attempt to influence the ECB and such dialogue could give rise to charges of influence or favouritism. As for majority decisions - the divergences between member states as to what is a suitable interest rate for the Eurozone are now so wide that I imagine this approach might do more harm than good. And, those who lose out might be bitter enough about it to indulge in more of the kind of posturing that Italy and Germany have recently engaged in – with conferences on the risks of break-up and noises about having a referendum on withdrawal etc. etc.

Then there is the small matter of enlargement of the €uro area and the implications this has for monetary policy ....... Currently there is no political authority to back up the single currency and with gradual enlargement of the Eurozone that lack of political authority will become more and more apparent. The longer there is no political authority behind the €uro, and the ECB, then the greater the risks of instability and possibly eurozone break-up.

Extremists honour Kadar

Political extremists are still alive and well in Hungary.

Workers Party chairman Gyula Thurmer praised Janos Kadar at a commemoration on Saturday marking the 16th anniversary of the Communist leader's death. Speaking at Kadar's grave in the Fiumei ut cemetery, Thurmer said Imre Nagy, leader of the 1956 Uprising, had taken the path of reformists and traitors, while Kadar had taken the way of the revolutionaries. "Our choice was Janos Kadar," he declared.

.... Thurmer criticised Prime Minister Ferenc Gyurcsany for refusing to return the Red Star to the working class, then described the Socialist Party as a right-wing party in the service of foreign and Hungarian big capital. "Just because we do not like Fidesz, it does not mean that we shall support the Socialists," he said.

....... Attila Vajnai, head of the internal opposition in the Workers' Party, was taken away in handcuffs by police for wearing the Red Star at a Saturday ceremony marking the 16th anniversary of the death of Communist leader Janos Kadar. The emblem has been banned in Hungary as a symbol of tyranny. Vajnai said in a statement issued on Sunday that he will continue to use the "international emblems of the working class movement" despite the "police brutality".

Quotes from Political News @ Hungary Around the Clock -
As well as the Red Star, the Hammer and Sickle, and various Nazi symbols such as the Swastika are also banned in Hungary. Extremist socialists are challenging the ban of their symbols at EU level.

Friday, July 01, 2005

The quest for the legendary White Hind

For the weekend why not go in search of the White Hind.

According to legend, Eneth, the first wife of the great oriental king Nimrod the Hunter – great grandson of Noah and builder of the Tower of Babel - bore him two twin sons, Hunor and Magor. The sons of Hunor became the Huns, and the sons of Magor became the Magyars, the Hungarians.

The lark's aloft from bough to bough,
the song is passed from lip to lip.
Green grass grows o'er old heroes now,
but song revives their fellowship

Forth to the hunt they ride again
two brave sons that fair Enéh bore,
Hunor and Magyar, champions twain,
Ménrót's twin sons in days of yore

Wild beasts in pools of blood they drag;
they slaughter all the elk they find;
they have already killed the stag,
and now they all pursue the hind.

Continues @ The Legend of the miraculous hind by János Arany

From - In Quest Of The Miracle Stag: The Poetry Of Hungary

Even the Council of Europe appear to be involved in the quest ........ perhaps at some future date the EU will produce an "authorised" version .... anything is possible.

There is something rotten in the European Union

Insider brands Brussels a “bureaucratic nightmare”

Jim Dougal, who quit a year ago as head of the Commission's UK representation in London, launches a vitriolic attack on what he calls the “Brussels machine” on the eve of Britain's assumption on Friday of the European Union presidency.

“It is not just that the Commission fails to explain what the EU is for . . . Its modus operandi displays an outrageous lack of common sense . . . It became intolerable to work within what had come to seem like a bureaucratic nightmare that makes Whitehall look a model of simple efficiency.”

Accusations of overbearing bureaucracy are the hallmark of eurosceptic attacks on the EU but it is rare for a Brussels aficionado to echo those concerns.

In his article, Mr Dougal says: “The Brussels machine has no idea of how it should even begin to sell itself to the British public”. Mr Dougal was hired to brief the Commission on UK affairs and to help improve the British public's understanding of its workings but he describes how he quickly realised his job was impossible.

He gives a damning insight into the red tape that critics say hampers the Commission's operation. Mr Dougal also describes José Manuel Barroso, Commission president, as “hardly the first choice” and “the lowest common denominator” on which member states could agree.

And, as if we really needed any further evidence of sheer the asininity of many EU politicians, a Financial Times editorial also concludes that:
The strategic reasons for enlargement have not changed. What has been exposed is a crisis of leadership: EU politicians prefer to blame "Brussels" rather than confront potentially unpopular Europe-wide issues. This craven capitulation is enlarging the constituency for populist and nationalist demagogues - not least in Turkey

See - Nervousness about EU enlargement

Thursday, June 30, 2005

Euro accession and Hungary

Hungary's annual average inflation is expected to fall below 2% in 2006 largely due to a cut in the top VAT rate to 20% from 25%, Finance Minister Janos Veres said on Wednesday, Reuters, reported.

Veres told a press conference that the VAT cut would reduce the CPI by 1.7 percentage points in 2006. He also said Hungary was in continuous talks with the European Union Commission about Hungary's budget deficit cut plans and the planned tax cuts, after Monetary Affairs Commissioner Joaquin Almunia said he had been surprised by Monday's tax cuts.

From - No need for corrective action
VAT may come down but I very much doubt if prices will, whereas when VAT rises prices tend to rise.

As for the deficit it is a problem and combined with the proposed tax cuts, as discussed in the previous post, it could indeed cause a setback to Hungary's Eurozone accession - JP Morgan appear to agree.
“While the tax cuts are highly likely to be introduced, the implementation of the spending cuts is much less credible and we expect the net impact of the measures to be a widening of the 2006 budget deficit to around 5.8% of GDP (4.8% of GDP including private pension funds) from our previous forecast of 5.4% of GDP and an estimated 5.5% of GDP this year," JP Morgan analyst Nóra Szentiványi said in an emerging markets research note.

“In fact, the higher deficit profile until 2008, in our view, cuts the chances of euro adoption by the 2010 target date close to zero. We, nonetheless, think that EMU entry 2012 is still feasible, if the next government cuts spending after the elections or increases other taxes," she added.

From Portfolio Online - JP Morgan on Hungary's Euro adpotion
One would hope that a Fidesz led government would make serious cuts to the bloated bureacracy that plagues this country .... but then they did fail to do this last time they were in office so they may well fail again!

Tuesday, June 28, 2005

Tax plans for Hungary

Meanwhile on the periphery of the Eurozone Ferenc Gyurcsány, Hungary’s Prime Minister, yesterday announced a sweeping programme of tax changes that, if implemented, would significantly reduce government revenues and put back the 2010 target date for Eurozone accession! For details see – Hungary’s tax cuts and also Table on impact of tax proposals

I agree with the statement that “more substantial spending cuts are needed to be implemented in order to fulfil the requirement of the public sector deficit not exceeding 3% of GDP by 2008. According to original plans, Hungary's public sector deficit would be cut to 2.4% of GDP, which has been criticised by analysts as a “close call". Now, with the impacts of the tax cuts, the number goes up to 2.8%, which is expected to further increase scepticism whether Hungary can meet its euro zone accession target by 2008.” See Hungary teeters on narrowing Eurozone edge

Far, far deeper cuts need to be made into the massive Soviet era legacy bureaucracy that is draining the Hungarian treasury dry, but clearly Ferenc Gyurcsány and the governing Socialist Party are unlikely to carry out any such reform as it would put many of their supporters jobs at risk.

Much is being made for and against these tax changes but it should not be forgotten that they are proposals. There is an election next May, and based on current opinion polls the opposition FIDESZ party Chairman János Áder, who I might add also proposes tax cuts, as per this interview, is probably correct, as he said in the parliamentary debate yesterday, that Gyurcsány and the Hungarian Socialist Party will not be in power this time next year. It is the fiscal spending plans of a FIDESZ led government that analysts should be paying attention to, not the bonanza proposed by Ferenc Gyurcsány; the latter is more a smoke and mirrors plan than anything really concrete.

It's autumn for Schröder and Germany

Schröder's attempts to sway US in claim for UN seat reports the Financial Times. So much for EU solidarity. Surely Schröder should be pushing for a collective EU seat on the UN Security Council rather than one just for Germany!

As the above linked report notes -

The opposition Christian Democratic Union, meanwhile, is not expected to pursue the goal of a permanent seat with the same dedication. Wolfgang Gerhardt, a member of the small Free Democratic party who has been billed as a possible foreign minister in a new centre-right coalition, last week told the Financial Times Germany would revert to its earlier policy of advocating a pooled seat representing Europe.
Schröder's action is clearly that of a man desperate to try and regain popularity with an electorate that has lost faith in him. The long cold winter that comes with the end of a political career is clearly not far away where Gerhardt Schröder is concerned if opinion polls are any guide - it's just a pity that Jacques Chirac can't be sent out into the cold with him.

Deficits and politics

According to a report in the Financial Times today the Bank for International Settlements has warned that “Growing domestic and international debt has created the conditions for global economic and financial crises”.

However, the bank has acknowledged that, “monetary tightening would conflict with the desire to keep unemployment low and avoid deflation.” And, furthermore, doubts “politicians or central bankers had the will to implement the necessary policies.”

To quote from the Bank's report as per the FT article -

“If what needs to be done to resolve external imbalances is reasonably clear, it also seems clear that much of it is simply not going to happen in the near term,” the report said.
Quotes from FT @ BIS warns on domestic & international debt

This is more or less the situation in the Eurozone. Everyone knows what needs to be done in terms of economics to promote growth, and there is no shortage of armchair pundits giving their variation on the theme. Yet it remains the case that the political requirements of electoral cycles, and the need for politicians to be "popular" are the real stumbling blocks to solving the problem – one of the drawbacks of democracy perhaps, ..... that and the fact that power is still, thankfully, not sufficiently centralised in organisations such as the European Union.

Italy's period of grace & national sovereignty in the EU

The story of the European Commission and Italy’s budget deficit is reported in the Financial Times as follows:

According to officials, the Commission will on Wednesday officially declare Italy in breach of the pact's deficit provisions, and give the government two years to correct that situation. Brussels' recommendation is expected to be endorsed by EU finance ministers at a meeting on July 12.

Mr Berlusconi's government will then have to propose budget measures within the following four to six months, aimed at achieving the target set by the Commission.
The length of this procedure means it is unlikely that Italy will have to take measures to slash the deficit this year.

However, the government is already working on its long-term draft budget, which could be announced next week. The budget and the plan to be presented to the Commission later this year are likely to be similar, people close to the process said on Monday.

Full text @ Italy wins two years grace on budget
On the face of it a more stark exposure of just how much sovereignty has been ceded to the EU centre in Brussels would be hard to find - Italy must report to the European Commission and submit proposals for approval etc. etc.

Coming on the back of the rejection of the Constitutional Treaty in referendums, the failure to agree on an EU budget, and the recent grumbling by some in Italy and elsewhere about the €uro / ECB being to blame for economic woes it is not surprising that the European Commission has taken a less prescriptive and bellicose line over the Italian budget deficit. As the European Commission has recently discovered national sovereignty is still a significant power to be reckoned with in Europe, and we are many, many decades away from the kind of European Superstate that is being advocated in a book being advertised over at A Fistful of Euros

Monday, June 20, 2005

EU's old & in the way hold back progress

The Financial Times carries an excellent perspective from Poland on the EU budget failure. It isn’t just Poland that will suffer but all the new EU member states in Central Europe. A shortfall in EU payments will mean a slowing down of the speed of development in the region which could in turn lead to higher and more stagnant budget deficits, and high budget deficits in these states will impact their ability to meet Eurozone accession targets.

“We see it as a fault in national egoism in many countries,” Jaroslaw Pietras, Poland's European affairs minister, told the Financial Times, naming France, Britain and Germany as particularly guilty of being influenced by the short-term concerns of the voters at home instead of the long-term good of Europe.

Senior British figures acknowledge the collapse of the deal was bad news for the EU's 10 new accession states because the lack of a budget agreement threatens to delay projects and slash structural payments.

In Poland there is a sense of unfairness that old EU members, suddenly afraid of their eurosceptical voters, have taken to defending their national interests single-mindedly without thinking much about the EU as a whole. Warsaw is mindful of the enormous benefits gained by other poor countries included in earlier enlargements such as Greece, Ireland, Portugal and Spain and is worried that similar generosity may not be on offer to the former communist states who joined last year.

It is not just a question of money. Only Britain, Ireland and Sweden allowed workers from the new member states access to their labour markets. Old Europe has also been wary about reducing barriers for service providers, hugely important for poor, high-unemployment countries like Poland.

But wealthy European self-interest may exact a price. “Rich countries cannot say that we aren't going to give you a free market and aren't going to give you much money either,” said Mr Pietras. “If we get no compensation, then we want competition.”

For Poland, the failure to pass an EU budget for 2007-2013 could have enormous consequences. If the budget is adopted next year, under the Austrian presidency, funding for some Polish projects could be delayed. If there is no new budget, then a provisional budget would go into effect that would see annual structural fund transfers to Poland cut to €4.6bn ($5.7bn, £3.1bn) from the €8.7bn under the failed Luxembourg proposal.

Poles hit out at “national egoism”
As Mr Pietras says “If we get no compensation, then we want competition.” But, as we all know Germany and France, among others, aren’t happy about competition either – remember all those noises about unfair competition on corporate tax rates etc.- this despite the fact that even the ECB is calling for more competition! It seems to me that disillusion with the EU could rapidly set in Central Europe .....

Awareness of the potential for disillusion is apparently, according to the FT - why Mr Blair is to campaign to secure a European budget deal during his six-month EU presidency, recognising that Eastern European member states feel let down by the failure to strike an accord in Brussels last week.

Sadly the prospects of a deal are pretty remote and will remain so as long as Chirac, Schroeder, Blair and their ilk remain in power. It is high time these old and in the way politicians were replaced by more ambitious leaders with a vision for the EU that is more C21st than one rooted in the depths of C20th.

More on the Hungarian economy

Janos Veres, Hungary’s current Finance Minister, in an article on the EU budget is reported by MTI as saying

The Hungarian economy is performing well and those who say the opposite are either incompetent or distorting the facts wilfully, the minister said, arguing that Hungary's GDP growth exceeds the EU-15 average by about 2 percentage points.

From - MTI
Unreal - I wonder what planet Mr. Veres inhabits!

Meanwhile the Governor of the Hungarian National Bank is reported as saying:
The euro can be adopted in Hungary in 2010 only if economic policy reforms are made, budget spending is cut radically - on which politicians already agree - and if they are implemented after the 2006 elections at the latest, central bank governor Zsigmond Jarai told the "Vasarnapi Ujsag" radio show yesterday. Hungary is the least prepared for the adoption of the euro of all new EU members, and is in the middle in terms of competitiveness, Jarai said

See HATC - Economic News
And, it isn't only the Central Bank that can see the the problems
Sándor Csányi, chairman and CEO of OTP Bank Rt, Hungary's flagship retail bank, said he would consider becoming Hungary’s crisis manager in a purely technocratic government if he were to be asked. While denying to have either left or right political leanings, Csányi said he shared more in the economic policies of conservative side. Speaking of Hungary’s economic troubles, Csányi said the most important task that lies before the government is to improve the country's competitiveness, cut taxes, reduce the oversized public administration and introduce radical healthcare reforms.

OTP Chief ready to become Hungary’s crisis manager
It seems not everyone agrees with the Finance Minister including this weblog!

PS. At a guess I 'd say Sándor Csányi is clearly willing to serve in what the Hungarian opposition party, Fidesz, describes as a national unity government. The problem with this approach, that the former Prime Minister and Fidesz leader Victor Orban is championing, is that it may well lead to accusations of being more about nationalist unity than national unity.

Friday, June 17, 2005

EU summit, and euro-sense, or the lack of it

In an article that suggests this weeks summit of EU leaders is a “censorship summit” the Financial Times explains how Leaders turn blind eye at crisis summit. Sounds like business as usual to me! The report notes that -

.... before long the EU will have to deal with the real issue of what to do after the referendums. Popular demands for a debate on the EU's future will prove irresistible, not to say unmanageable.
I cannot agree more – the debate is long overdue as is the need for some definition of the “European Project”, and its objectives.

PS. The FT also has a report that claims the ECB fears the euro has hurt growth What is clear is that it isn't the euro itself, but the failure of eurozone member states to embrace, and carry out, structural reform that is holding back growth.

It is ironic that the very same countries that championed the €uro, and proposed the rules to underpin it, are now the ones complaining about "locust capitalism" and calling liberal economics the "new communism". Were they really so stupid that they didn't realise that membership of the eurozone, under the terms they all agreed to, must inevitably mean structural reform? Evidently the answer is yes! .... but then common sense amongst Europe's political elite is clearly not common enough these days.