Friday, April 29, 2005

Head eastwards and beware the attention of politicians

Lure of eastern Europe difficult to resist reports the Financial Times

“New” Europe is indeed on a roll and deservedly so. Business is voting with its feet. However, there is another viewpoint that I have heard expressed that runs something like this - From the sell out at Yalta, the turning of a blind eye by the Allied Committee of Control to the disgusting tactics of the Communists in the post war elections, through to the 1956 Uprising, and the Prague Spring of 1968, western Europe and the US stood by and watched while whole nations had their freedom walked all over, and taken away from them. The renaissance of old capitals like Prague, Budapest, Warsaw, and indeed those of the Baltic States is long overdue. If German, French, or even British politicians want to gripe about it they should spare a thought for those who they watched get thoroughly shafted in the immediate post-war period, and who had to endure dictatorial Communism for nearly half a century.

The FT also reports that - Les bloggeurs want a Non in EU referendum

Clearly some politicians are concerned about the impact of the blogosphere on the outcome. It is worth noting that in the past opinions such as those expressed in blogs would have been disseminated in the Coffee Shops of Europe – the influence of the latter was such that Metternich employed spies to listen in to conversations in the C19th, and, in the C20th, the Communists did much the same in what are now the new EU member states; in fact the ruling Communists closed down quite a few Coffee shops in order to prevent people gathering and discussing matters of politics. Sometimes the attention of politicians is not always a good thing ....regulation of the internet is something many politicians and lawyers would like to get their teeth into.

Thursday, April 28, 2005

A Japanese solution for the EU?

Taking a look at Morgan Stanley's analysis of the new economic strategy paper of the Japanese government – the Takenaka Report - it is evident that there are some lessons here for the EU. Europe is also facing the same problems of the challenge of globalisation, a rising pensions burden on government, and an aging population.

The report takes a very pro-immigration stance

The report advocates that Japan greatly expand the skill sectors where immigrants are permitted, and guarantee against discrimination in the workplace. The report also says that Japan should recognize certifications from foreign countries, if they meet Japanese standards. Schooling and healthcare for foreign families are also advocated. Most surprising, the report says that Japan should actively establish schools in Japanese language and culture abroad, as a way of attracting talent.
Some, though by no means all, EU states are probably more advanced than Japan in this area. However, selling the need for expanded immigration, even if it is that of skilled immigrants, is proving very difficult in a Europe where popular opinion is becoming increasingly anti-immigrant with the result that more barriers to immigration are being put up than taken down. It is, I accept, a highly emotive issue, and one that is open to political exploitation .......

In the area of agriculture the proposal is for ...
... the removal of trade barriers on agricultural products, and a shift of policy to direct support of “producers with the desire and ability.” The report states bluntly that Japan should raise agricultural productivity and competitiveness, increase quality and specialization of products, and become an exporter of high-quality produce and foods.
Ending the Common Agricultural Policy (CAP) in Europe is long overdue but the French will lead the opposition to it as they receive the bulk of the subsidies under the system. It is high time Europe’s agricultural industry competed on a level playing field instead of relying on protectionism, and subsidies, to keep cheaper competition out, and guarantee itself a captive market. This is a major structural reform that has frequently been dodged, and, as RJW commented in response to my post of yesterday, the subject of stitch-ups and backrooms deals by Europe's political leaders. The CAP is a source of considerable tension with the developing world. The European Commission has in simple terms frequently said “Yes, but look at the USA” - whatever happened to leading by example??

On the issue of encouraging the population to have more children ….
The children of the baby boomers are now in their late 20s and early 30s, and still have a window to produce a larger cohort of children, if the economic burden of child-raising can be eased. To this end, the report advocates greatly expanded support for families with young children, and further expansion of daycare centers. To pay for such support, the report bluntly states that a shift of emphasis in social spending is needed, away from spending on the old and toward spending on the young. This could be accomplished by increased emphasis on preventive medicine, by expansion of the idea of “living wills,” and by a (gingerly worded) “rethinking of end-of-life care.”
Again this is a route Europe could do well to follow. However, given the demographics of the voting public, less state money for the old is going to be a difficult one to sell not to mention the rather cryptically phrased “rethinking of end-of-life care.”

The Morgan Stanley analysis concludes by observing of Japan that ...
... it will age, regardless of who may be in power. Globalization will proceed, regardless of who may be in power. Unaddressed fiscal deficits will strangle the economy, regardless of who may be in power. Hence, any government will have to adopt an economic strategy similar to that suggested in the new Takenaka report, or face extinction. Just as economics trumped politics in pushing the Japan-China relationship back on track despite recent bumps, so economics will trump politics in pushing economic policy in the direction of the Takenaka report, despite likely bumps.
Broadly speaking the same is true for Europe, unless of course populist politicians irreversibly poison the process; in which case Europe risks revisiting a past that the EU was set up to prevent happening again.

All quotes taken from Japan - Economic Future: Outline of opportunity

European Commissioner Siim Kallas on lobbying in the EU

Lobbying on local agenda as EU urges transparency

The above article, from the Budapest Business Journal, contains some interesting quotes from Siim Kallas, the European Commissioner for Administrative Affairs, Audit, and Anti-Fraud

“Lobbies do participate in the decision-making process in democratic societies, and it is vital that other points of view are able to be expressed and taken into account,” Siim Kallas, the European commissioner responsible for administration, audit and anti-fraud, stated in an e-mail sent to the BBJ. “But the situation is pretty confused, as about 15,000 lobbies gravitating around EU institutions offer a very diversified picture, from law firms acting for their clients, PR companies, industrial federations, and private companies, to NGOs – and no general rules apply to them. Their transparency is insufficient in comparison to the growing impact of their activities, and we would like to prevent this from becoming a problem.”

“I don’t favor the approach of the U.S. on lobbying, which contains strict legislation under which all lobbyists have to declare their finances, what they spend, for what and on whom,” he stated. “We will soon have a round-table discussion with representatives of those involved in this field, after which the commission will present concrete proposals.”
Lobbying is a fact of political life. However, unlike Commissioner Kallas, I believe lobbying should be very transparent where finances are concerned; not to require it to be so is a recipe for corruption in Brussels. I’m sure that the strict regulation of lobbyists in the USA was put in place for very good reasons. At least the Hungarian authorities appear a little more aware of this, and will they will seek to apply stricter legislation than that favoured by Commissioner Kallas. Unless lobbyists get at the Hungarian government, and members of parliament, and persuade them to water down the proposed regulations to the extent that they are useless.

Hungary to get "100 Steps Programme"

The governing Socialist coalition in Hungary likes doing things by the hundred. We have had the 100 Days programmes, and now it is the turn of the 100 Steps programme. MTI, the Hungarian press agency, reports it thus:

The Prime Minister is expected to outline details of its recently launched Hundred Steps programme on Sunday, an MP from the governing Socialist party, who wished to be unnamed, said on Wednesday.

On May 1 when Hungary celebrates the first year of its European Union membership, Ferenc Gyurcsany is expected to come forward with tangible proposals to run under the programme in job creation, new family support legislation, and changes to health care, education and training, the politician said.

Most of the changes are tabled for debate in Parliament before the summer recess, but a few may be put off until the autumn, MTI learnt.

Gyurcsany announced the launch of his government's new programme at the Socialist Party Congress on April 15, which aims to make small and targeted adjustments to public administration and services rather than sweeping reforms.

Since then, the prime minister has replaced his finance and the agriculture ministers.

From PM to unveil hundred steps programme on Sunday
With elections due to take place next spring it seems likely that the 100 Steps may be some forms of electoral programme rather than anything to be embarked upon now. On the financial front it looks as if some creative accounting is about all that can be expected from János Veres, Hungary's new Finance Minister, in attempts to bring down the ballooning deficit – there is some further useful analysis on this at the Budapest Business Journal See - New Finance Minister seen as political pick

It looks very much as if the new Finance Minister is unlikley to embark on anything that has a hint of austerity to it given that such measures could damage the chances of the Socialists getting back into power in next Spring's general election. As an aside it worth noting that the Hungarian people have changed their government at every election since the change of political system, probably so as to be sure that they still can, so the odds on the Socialists getting a second term next year are slim - but there is a first time for everything.

Wednesday, April 27, 2005

From the Euro Ghetto - Chirac's Protectionist Rap

Over at A Fistful of Euros there has been some discussion on the scare mongering being used to encourage a “Yes” vote to the EU Constitution in France. See – We don’t have a Plan B

What is clear to EuroPolyphony is that all the scare mongering does is serve to enable Chirac to extract ever more concessions from the EU, and move it further down the road to economic wreckage. No doubt the road is paved with good intentions, but the reality is that politicians in some of the leading Euro Ghetto states are blind to anything but their own self-interest. Viewed from the perimeter it is clear that protecting walls are being built around the “€uro Ghetto”; they will attempt to keep out the legendary Chinese horde, and keep the inhabitants locked in to high prices and high taxes.

Protectionism is just a directive away and with it the continued hollowing out and decline of states like Germany and France which will attempt to drag the rest of the EU down to the same miserable level. Chirac and Schroeder are each truly deserving of the title "Arch Eurowrecker” – DJ’s Jacques and Gerd are spinning the protectionist rap in a disgusting attempt to capture votes.

Let’s look at what the Financial Times has to say on the matter this morning:

A group of Germany's top economists on Tuesday rounded on the government for setting aside its reform agenda in favour of protectionist policies aimed at insulating Germany from low-wage foreign competition.

Speaking at a press conference in Berlin, where the think-tanks presented their six-monthly assessment of Germany's economic prospects, Joachim Scheide of the IfW world economic institute in Kiel said that "introducing minimum wages, and trying to close the borders [to foreign workers] is not the answer" to Germany's economic problems.

The institutes expressed concern that Chancellor Gerhard Schröder's recent policy drive against an alleged rise in illegal eastern European workers in Germany, and his Social Democratic party's attacks on the German business community, signalled that the government had departed from its Agenda 2010 reform programme.

From - Economists accuse Schröder of protectionism
Fear of foreigners and foreign competition is as misplaced as it is reminiscent of a Germany that existed in the 1930’s.

On the matter of China the FT notes that:
Europe could broaden its investigation into Chinese textile exports, Peter Mandelson, its trade commissioner, indicated on Tuesday as pressure mounted on Brussels to prevent Chinese clothing from flooding the EU market

Mr Mandelson's comments coincided with the toughest call yet for action against China from Jacques Chirac, France's president. “We cannot accept that these textiles, the prices of which have recently dropped significantly, can invade our markets without regulation,” he said. Mr Chirac, at a joint press conference with Gerhard Schröder, the German chancellor, said the issue provided additional evidence of the need for Europe to adopt a united front in the face of globalisation.

China's textiles exports have emerged as a key issue in the run-up to next month's French referendum on the EU constitution. It is being presented by Mr Chirac, who is trying to persuade voters to support the constitution, as a test case of whether Brussels will stand up for French interests or has been captured by free-trade “neo-liberalists”.

See - EU warns on China textiles market
So Chirac and Schröder are against globalisation and in favour of protecting the higher prices in the EU against the lower prices offered by a developing economy. But, they are not alone even that confused cowboy who inhabits the White House is in favour of trade tariffs. It is hard to put it more succinctly than the editorial from today’s FT:
The clamour on both sides of the Atlantic for safeguards against rising imports of textiles from China should be exposed for what it is: self-interested pleading on the part of producer interests and shameful opportunism by politicians willing to play up to them. It should be resisted firmly.

Quotas are in effect taxes paid for by consumers through higher prices. Free trade brings lower prices. Reintroducing quotas in the guise of safeguards means imposing a tax, especially on poor families, who spend a large share of their income on products such as T-shirts and jeans.

Cheap clothes should be particularly welcome in continental Europe, which has largely missed out on them so far. Since January 1 2000 clothes prices have fallen 24 per cent in the UK, 7.5 per cent in the US and 6 per cent in Japan. But they have gone up by 7 per cent in the eurozone.

From - Protectionist piffle
Finally the FT reports on some recent OECD recommendations – the OECD is in Paris but fortunately seems to be isolated from the rabid ravings of Jacques Chirac
The Organisation for Economic Co-operation and Development on Tuesday urged governments to open up their countries' markets for services, arguing that the overall economic benefits of such a move would far outweigh job losses in some sectors.

The call, by the Paris-based think-tank for the world's richest countries, comes as several European Union countries are turning their backs on an ambitious plan to liberalise the bloc's services market.

The OECD said such reluctance was misguided, since liberalising the services economy benefited both high-income and low-income countries in the long run.
The offshoring of services allowed companies in rich countries to “focus on what they do best, freeing up capital for research and development and investment in more productive activities”. It also allowed cost savings.

Poorer countries, on the other hand, would benefit from technology transfers that helped bridge the “digital divide” the gulf between rich and poor countries in the field of information technology.

Full text @ OECD stresses benefits of freeing up services market
Free trade means just that. Freeing up trade and knocking down the barriers that make it difficult for poorer nations to sell their products. It isn’t about exploiting the poor to keep the rich fat, and it isn’t about making the poor poorer - if you want that then support paranoid protectionist reactionaries like Chirac and Schröder.

If Europe is to move into the future it must ditch the protectionist nonsense and get itself some new leaders who are forward thinking, ambitious, energetic, and willing to embrace the challenge and opportunity of the C21st. If Europe wishes to revisit the past, and descend into misery, then it should stick with people like Chirac, whose personal ambition, and selfish nostalgia for the world as it existed before the rise of the Asian tigers and the fall of the Iron Curtain inform his judgement, policy decisions, and vision of Europe.

Tuesday, April 26, 2005

More ministerial change in Hungary

Having changed the Finance Minister last week, Hungarian PM Ferenc Gyurcsany has started this week by changing the Minister of Agriculture. Someone had to take the rap for the gross delay in paying out the EU grant subsidies to Hungarian Farmers that caused tractor driving farmers to descend on Budapest, make the capital's arterial roads even more log jammed than usual, gain Europewide media coverage that embarrassed the government, and force the government to actually agree a timetable for paying out the money.

Jozsef Graf the new Minister for Agriculture is, like the PM, the Finance Minister, and a number of others in the government a long time Communist who is now a member of the Socialist party. Like the PM and Finance Minister etc. etc. he is extremely wealthy and acquired this wealth as a result of being in the right place at the right time – inside knowledge might be another way of putting it. Many ordinary people are not surprisingly disgusted by the political class. Read some Facts about Jozsef Graf

There is a perception in this part of the world, that is not without some foundation, that cheerleading for socialists is cheerleading for people who, with one hand, simply changed the sign on the door during the change of political system, and, with the other hand, helped themselves to state assets.

Meanwhile from the Financial Times it seems that in Germany Schroeder's call to invest at home falls on deaf ears

At least German businesses don’t have to lie about the economic realities, which is more than can be said for the political leaders who, despite being aware of the realities, are trying to play them down and fool people that there is another way all in the interests of getting themselves re-elected.

As for the European Constitution ... Schroeder is due to lend his support to it in a speech in Paris. It looks as if the full might of the European Commission and the federalists is being brought to bear on France - the battle for France has begun and I suspect the result will be a capitulation i.e. YES, the battle for the Netherlands will follow soon after. I believe that the battle of Britain, if and when it comes, will be one that sees the federalists suffer defeat.

Monday, April 25, 2005

The Economics of Political Correctionism in Europe

Browsing through a cookery book over the weekend I came across some comment on Marinetti, the founder of the Italian Futurists, and author of La Cucina Futurista. Aside from his diatribe against the consumption of pasta - which he regarded as a food that induced scepticism, sloth and pessimism - Marinetti was also in the vanguard of a form of political correctionism that sought to counter the influence of foreign expressions that he regarded as anti-Italian. A bar should be called a quisibreve (here one drinks), a sandwich a traidue (between-two), a cocktail a polibibita (multi-drink), a maitre d’hotel was to be addressed as a guidopalato (palate guide), an aphrodisiac drink a guerra in letto (war in the bed) and, a sleeping draught as a pace in letto (peace in the bed).

Marinetti may have been joking, but as a browse through the blog Political Correctness Watch can attest there are those that take it all far too seriously. Just the other day at Rouge Classicism an article from the Hindustan Times was posted which looks questioningly at the changing of B.C. and A.D. to BCE and CE (see
That BC / AD thing). Finally, at Café Hayek there is a post that looks at the more insidious nature of some forms of political correctionsim. (see Captain Planet).

That brings me to a similar form of equally insidious “correctionism” that is highlighted today in the Financial Times; it appears that “anti-capitalist” political correctionism is starting to worry business in Germany -

Growing criticism of German business leaders by senior figures in Chancellor Gerhard Schröder's Social Democratic party yesterday triggered a threat to resign by one of the heads of the Invest in Germany organisation. Jürgen Weber, supervisory board chairman of Lufthansa, the national airline, said the anti-capitalist debate gripping the ruling SPD was already forcing a rethink by foreign investors. "If it turns out that this criticism of capitalism has a fundamental nature, then we don't need an Invest in Germany organisation any more," he warned Mr Schröder in an interview in the Welt am Sonntag newspaper.

Franz Müntefering, SPD chairman and Schröder loyalist, warned in a speech this month that "profit-maximising strategies inspired by international competition" posed "a danger to our democracy" .....

In parliament late last week, Mr Müntefering stepped up his attack against "anti-social" business leaders who cut jobs while increasing profits.....

Hans Eichel, finance minister, appeared to join the debate last week when he intervened in the row between Deutsche Börse, the Frankfurt-based stock exchange, and the Children's Investment Trust, the London-based hedge fund that is the Börse's biggest shareholder. "There are reasons to think about regulations that do not favour people making quick money and moving on," Mr Eichel said. From ‘Anti-capitalist’ political debate alarms German businesses
Small wonder the German economy is all doom and gloom these days! Is Hans Eichel an adherent of Marxist economics as as well as being a former Classics scholar!??

As I have frequently noted on this weblog economies such as France and Germany must reform, or they will simply find business will vote with its feet and move out. This is a view also put forward in an editorial at the Financial Times today that notes:
Saddled with bigger social costs than their Asian competitors and a higher exchange rate than their US rivals, it has never been harder for European companies to be world-beaters. Yet they need to strive for this if Europe is ever to achieve its twin goals of economic growth and social justice.

But an unfortunate paradox is emerging. Not so long after European Union leaders agreed last year to put a broadly pro-market set of commissioners in charge of the EU executive, some of these national leaders are now turning hostile to business and to Brussels in order to curry favour with their electorates. This is all too easy a temptation on a continent where the culture of enterprise has never been as popular as in the US or even Asia.

…………. Behind much of this popular and political railing against business lies widespread ignorance of the fact that no European country has captive companies. The latter can - and will - walk, if they feel badly treated at home. To avoid this, the politicians must do three things. First, be aware many European companies need to complete rebuilding their balance sheets before they can be expected to step up investing or hiring. Second, refrain from wrapping companies in more red tape and regulation. And third, governments should get on with the structural reform agenda that they long ago set themselves. The intimidation of European Business
"Intimdation" that is a very good word for it - those like Chirac, Schroeder and Zapatero, who appear to be obstructing and diluting structural reform, are effectively bullying the fragile buds of growth that exist in Europe. Furthermore, as we learn today where China is concerned, protectionism is making a comeback - how long before economic and political instability also makes their comeback - Europe's polticians are indeed failing in their duty.

Friday, April 22, 2005

Europe's changing social order

In 1848 Europe was gripped by revolutions and the world that Metternich had restored after the Napoleonic wars was turned upside down. There was a new social order emerging in Europe that even Metternich, and those of a like mind were powerless to prevent. In 1848 one of the biggest underlying drivers of change was industrialisation.

Today the existing social order in Europe, and indeed the old socio-economic model, is under threat. The communications and technology revolution that has been taking place in the past 20 years has revolutionised almost every sector of the economy. The change of political and economic system in Central Europe after the collapse of the Iron Curtain, followed by EU Enlargement, has given many businesses the opportunity to capitalise on cheaper labour and preferential tax regimes. The rise of the Asian tiger economies, along with the development of the economy in India and the opening up of China in recent years, have brought unprecedented competition as well as the relocation of manufacturing and service centres. Labour in Europe is finding itself unemployed as it is being undercut by cheaper, and more flexible labour elsewhere. Either it must reform or it will make itself unemployable.

On top of this the demographics in Europe are changing fast; the population is aging and government is increasingly challenged as to how it will meet the cost. Allowing immigration is mooted as one answer. This too means fundamental changes to the nature of the existing social order, and is meeting stiff resistance from those who are finding their economic well being more insecure - immigrants tend to work longer for less. To make matters worse the safety net traditionally provided to labour by munificent governments is now under threat as budget deficits rise and public spending cuts become de rigour.

And, as if the forces of economic change were not enough, there is the revolutionary change that has been brought about by the institutions of the European Union at breakneck speed. In 2002 much of Europe found itself with a new currency and monetary system in the form of the €uro. Only last May the EU enlarged from 15 to 25 member states. On top of this the people of Europe are now being asked to approve a Constitution. In the face of so much change coming so fast within the space of three years, at a time of profound economic change, it is no wonder that people are starting to resist. The European Institutions would have been better to consolidate after enlargement rather than propose more of the same, and a Constitution.

The existing social, economic and political order in Europe is under intense stress today and yet politicians, and heads of state, appear to be hoping the problem will go away.

To pander to populism, as Jacques Chirac has done, and claim that challenges to the old existing socio-economic order are some sort of "new communism" is as misguided as it is dangerous. Preserving the old social order will mean higher taxation, increased state intervention, inflexible labour, and trade protectionism – business will resist this and vote with its feet thus ensuring the continuing hollowing out of such economies and very possibly pushing them into terminal decline. One might well wonder why people like Mr. Chirac are not marching and protesting against globalisation because effectively that is what is being implied.

The future for the EU and Europe is that of the emergence of a new social order and it is up to the political leaders to ensure this inevitable transition is peaceful; they ignore and resist the challenge at their peril.

Metternich's "Political Confession of Faith"

Somehow this seems apt even if it was written in 1820. The French problem is still haunting Europe.

The Source of the Evil
Man's nature is immutable. The first needs of society are and remain the same, and the differences which they seem to offer find their explanation in the diversity of influences, acting on the different races by natural causes, such as the diversity of climate, barrenness or richness of soil, insular or continental position, &c. &c. These local differences no doubt produce effects which extend far beyond purely physical necessities; they create and determine particular needs in a more elevated sphere; finally, they determine the laws, and exercise an influence even on religions.

It is, on the other hand, with institutions as with everything else. Vague in their origin, they pass through periods of development and perfection, to arrive in time at their decadence; and, conforming to the laws of man's nature, they have, like him, their infancy, their youth, their age of strength and reason, and their age of decay.
Two elements alone remain in all their strength, and never cease to exercise their indestructible influence with equal power. These are the precepts of morality, religious as well as social, and the necessities created by locality. From the time that men attempt to swerve from these bases, to become rebels against these sovereign arbiters of their destinies, society suffers from a malaise which sooner or later will lead to a state of convulsion. The history of every country, in relating the consequences of such errors, contains many pages stained with blood, but we dare to say, without fear of contradiction, one seeks in vain for an epoch when an evil of this nature has extended its ravages over such a vast area as it has done at the present time.

The progress of the human mind has been extremely rapid in the course of the last three centuries. This progress having been accelerated more rapidly than the growth of wisdom (the only counterpoise to passions and to error); a revolution prepared by the false systems, the fatal errors into which many of the most illustrious sovereigns of the last half of the eighteenth century fell, has at last broken out in a country advanced in knowledge, and enervated by pleasure, in a country inhabited by a people whom one can only regard as frivolous, from the facility with which they comprehend and the difficulty they experience in judging calmly.

Having now thrown a rapid glance over the first causes of the present state of society, it is necessary to point out in a more particular manner the evil which threatens to deprive it, at one blow, of the real blessings, the fruits of genuine civilisation, and to disturb it in the midst of its enjoyments. This evil may be described in one word - presumption; the natural effect of the rapid progression of the human mind towards the perfecting of so many things. This it is which at the present day leads so many individuals astray, for it has become an almost universal sentiment....

The causes of the deplorable intensity with which this evil weighs on society appear to us to be of two kinds....

. . . We will place among the first the feebleness and the inertia of Governments. It is sufficient to cast a glance on the course which the Governments followed during the eighteenth century, to be convinced that not one among them was ignorant of the evil or of the crisis towards which the social body was tending….

France had the misfortune to produce the greatest number of these men. It is in her midst that religion and all that she holds sacred, that morality and authority, and all connected with them, have been attacked with a steady and systematic animosity, and it is there that the weapon of ridicule has been used with the most ease and success. Drag through the mud the name of God and the powers instituted by His divine decrees, and the revolution will be prepared! Speak of a social contract, and the revolution is accomplished! The revolution was already completed in the palaces of Kings, in the drawing-rooms and boudoirs of certain cities, while among the great mass of the people it was still only in a state of preparation. The scenes of horror which accompanied the first phases of the French Revolution prevented the rapid propagation of its subversive principles beyond the frontiers of France, and the wars of conquest which succeeded them gave to the public mind a direction little favourable to revolutionary principles. Thus the Jacobin propaganda failed entirely to realise criminal hopes.

Nevertheless the revolutionary seed had penetrated into every country and spread more or less. It was greatly developed under the régime of the military despotism of Bonaparte. His conquests displaced a number of laws, institutions, and customs; broke through bonds sacred among all nations, strong enough to resist time itself; which is more than can be said of certain benefits conferred by these innovators. From these perturbations it followed that the revolutionary spirit could in Germany, Italy, and later on in Spain, easily hide itself under the veil of patriotism…

We are convinced that society can no longer be saved without strong and vigorous resolutions on the part of the Governments still free in their opinions and actions. We are also convinced that this may yet be, if the Governments face the truth, if they free themselves from all illusion, if they join their ranks and take their stand on a line of correct, unambiguous, and frankly announced principles.

By this course the monarchs will fulfil the duties imposed upon them by Him who, by entrusting them with power, has charged them to watch over the maintenance of justice, and the rights of all, to avoid the paths of error, and tread firmly in the way of truth. Placed beyond the passions which agitate society, it is in days of trial chiefly that they are called upon to despoil realities of their false appearances, and to show themselves as they are, fathers invested with the authority belonging by right to the heads of families, to prove that, in days of mourning, they know how to be just, wise, and therefore strong, and that they will not abandon the people whom they ought to govern to be the sport of factions, to error and its consequences, which must involve the loss of society. The moment in which we are putting our thoughts on paper is one of these critical moments. The crisis is great; it will be decisive according to the part we take or do not take....

Union between the monarchs is the basis of the policy which must now be followed to save society from total ruin....

The first principle to be followed by the monarchs, united as they are by the coincidence of their desires and opinions, should be that of maintaining the stability of political institutions against the disorganised excitement which has taken possession of men's minds- the immutability of principles against the madness of their interpretation; and respect for laws actually in force against a desire for their destruction....

Let [the Governments] in these troublous times be more than usually cautious in attempting real ameliorations, not imperatively claimed by the needs of the moment, to the end that good itself may not turn against them - which is the case whenever a Government measure seems to be inspired by fear.

Let them not confound concessions made to parties with the good they ought to do for their people, in modifying, according to their recognised needs, such branches of the administration as require it.

Let them give minute attention to the financial state of their kingdoms, so that their people may enjoy, by the reduction of public burdens, the real, not imaginary, benefits of a state of peace.

Let them be just, but strong; beneficent, but strict.

Let them maintain religious principles in all their purity, and not allow the faith to be attacked and morality interpreted according to the social contract or the visions of foolish sectarians.

Let them suppress Secret Societies, that gangrene of society.

In short, let the great monarchs strengthen their union, and prove to the world that if it exists, it is beneficent, and ensures the political peace of Europe: that it is powerful only for the maintenance of tranquillity at a time when so many attacks are directed against it; that the principles which they profess are paternal and protective, menacing only the disturbers of public tranquillity....

To every great State determined to survive the storm there still remain many chances of salvation, and a strong union between the States on the principles we have announced will overcome the storm itself.

Thursday, April 21, 2005

More on the budget deficit in Hungary

The print edition of this weeks Budapest Times carries a couple of short notes that are relevant.

The first alludes to the comment from Deutsche Bank's Chief Economist, Norbert Walter, that a French NO in the coming referendum on the EU Constitution might bring about speculative attacks on currencies in the new EU member states - linked to in Currency crisis if France rejects European constitution The paper goes on to note that many analysts believe the Hungarian Forint is overvalued and is due for a correction by as much as 5%.

The likelihood of a correction is, I understand, also increased because the deficit is unlikely to be reduced any time soon. A second note at The Budapest Times reports that according to the State tax authority (APEH) there are increasing payment delays with VAT refunds - some €97.5 million is still being held from the third quarter of last year, and that is on top of a staggering €325 million, also from last year, that is to be paid out in the coming weeks.

I would further add to the above that tax rebates for employees, which in previous years have always been paid in January, are being held over until June – I don’t know how much this figure is but would imagine it too runs in € millions.

Speaking of tax, and further to my post of 11 April The online edition of The Budapest Times carries the following story on the EU Tax Commissioner - Kovács touts various EU tax increases

In an interview with the daily Népszabadság, Kovács said EU finance ministers had approved his plan to increase the excise tax on spirits by 24% in order to bring them to the 1993 value in real terms, an amendment which will not bring changes in Hungary since excise tax is higher here. Kovács has also recommended increasing VAT by 0.5%, raising petrol taxes by EUR 0.03, and levying EUR 10 per ticket on flights within the EU and EUR 30 on tickets flying outside the EU. The money will be earmarked to fund EUR 30 billion in EU development requirements at the United Nations.
24% on spirits!! - that's quite a hike in the minimum rate and will certainly mean higher prices for many.

The Euro is at risk ? contd.

I see the people at Adam Smith have picked up on the Joachim Fels comment I mentioned yesterday via The Telegraph I am surprised they haven’t posted a link to the actual comment at Morgan Stanley – here it is again just in case they change their mind Euroland: The Euro at Risk

I think it is well worth noting, which The Telegraph and the Adam Smith blog don't, that Joachim Fels also wrote – “Don’t get me wrong: I’m neither advocating a break-up of EMU, nor am I saying that this is the most likely outcome.”

Wednesday, April 20, 2005

The Euro is at risk ?

Joachim Fels at Morgan Stanley is going to be courting as much controversy with his latest comment Euroland - Euro at Risk as he did with his Eurowreckage analysis early last year.

I believe he makes some valid points.

Here is part of his comment which relates to Germany withdrawing from EMU. I would however recommend a reading of all of it at the above link to put in context.

How could EMU break apart? As I see it, the most likely break-up scenario entails a weakening of the ‘stability consensus’ within the union, with sharply rising fiscal deficits in some countries and increasing political pressures on the ECB to create higher inflation in order to erode the real value of government debt. Naturally, the ECB would likely put up a tough fight initially, but eventually it is difficult to see how it could stem against a loss in the stability consensus that we assume in this scenario. High fiscal deficits and rising inflation could then lead to a wave of protests in countries which have historically had a high preference for price stability, such a Germany. One or several political parties could then jump on the issue, promising to lead the country out of the ‘instability union’ by introducing a New Deutschmark, which would be internally and externally more stable than the euro. Of course, a credible threat of a large country to withdraw from the euro might already bring about a change in policies in the union at large. However, depending on the political constellations elsewhere at that time, some other governments or parties could well choose to embark on a ‘national-interests-first-campaign’ as well, spelling the end for the single currency. As I spelled out in more detail in the Euro Wreckage? piece last year, the technical and legal hurdles to re-introducing national currency are fairly low, in any case.

Latin in the Vatican - the Papacy and the European Union

Over at A Fistful of €uros there has been considerable discussion on the issue of whether Latin is a solution to the EU’s language problems

Dave Schuler from The Glittering Eye offered the following:

Let me repeat the suggestion made by Jacob Grimm more than 150 years ago: Hungarian. It's a living language and standardized but not spoken natively by enough people that it's not likely we'd see Hungarian hegemony. It's very regular, doesn't have any difficult sounds, and, unlike Latin or English, has a perfect orthography.
In many respects I would agree but my own experience is that Hungarian is not an easy language to learn, and, unlike English, is not very forgiving where matters of pronunciation are concerned. As an aside I would add that the origins of the Hungarians, and their language, are questions that even Hungarians do not always agree upon - as good a starting point on this as any might be Chapter One of The Timeless Nation.

To return to the matter of Latin. Latin was the language used to announce the new Pope yesterday. Latin also forms the title of a post at The Glittering Eye entitled, Habemus papam, which links to the Benedict XV’s encyclical on matters philosophical which contains gems such as; "It is not our intention here to repeat the arguments which clearly expose the errors of Socialism and of similar doctrines". Habemus papam is also, co-incidentally, the title of a post over at Rogue Classicism which also discusses the Latin language.

What one might ask does the Pope have to do with the European Union? Joseph Ratzinger will take the title Benedict XVI - St. Benedict is the patron saint of Europe – the European tradition appears to have triumphed at the Vatican, and the Papacy does indeed have a bearing on the EU.

If the new Pope, who has expressed reservations about Turkish membership of the EU, also holds similar views on economics to those attributed to his predecessor, by a Polish intellectual in an article entitled John Paul the Moderniser, then maybe we will soon see France ditch the secular state!

I commend the above article even though there appears to be an implied justification of the European Social Model. Whilst I respect the views expressed I remain to be convinced that the European Social Model is anything much more than an unrealistic objective that is holding back the process of economic growth in much of "Old Europe".

Here is some what is written on the late John Paul’s views on economics:
.... the words of the Pope are clear and leave no doubt. “It would appear that, on the level of individual nations and of international relations, the free market is the most efficient instrument for utilizing resources and effectively responding to needs. But this is true only for those needs which are ‘solvent,’ insofar as they are endowed with purchasing power, and for those resources which are ‘marketable,’ insofar as they are capable of obtaining a satisfactory price.” But the Pope added: “[T]here are many human needs which find no place on the market.”

That encyclical also contained a second fundamental statement concerning the idea of profit. “The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied.”

Once again, the Pope added a caveat: “But profitability is not the only indicator of a firm's condition. It is possible for the financial accounts to be in order, and yet for the people — who make up the firm’s most valuable asset – to be humiliated and their dignity offended. Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency.”

John Paul II was no follower of neo-liberalism. For him, markets and profits were not a solution to human problems, but a mechanism to be used for moral purposes. Indeed, we often forget that both Adam Smith and Herbert Spencer’s reasoning are very similar. Both of them – the two greatest thinkers that promoted the idea of the free market – were also moral philosophers.

For them, as for John Paul II, the free market and profits were ways to improve humanity. They were sometimes naive, as when Spencer hoped that rich citizens would nearly automatically be good citizens and thus find it natural to help those who were not so successful. John Paul II might have been naive, too, but only up to a point.

Everything depends on our idea of human nature. If we believe, as the Catholic Church believes, that human beings bear the burden of original sin, but are perfectible; that human beings can understand what is good and bad and can choose between them because we have free will, then approval of the free market is understandable and not naive. By this one encyclical, John Paul II moved Church teaching from the Middle Ages to modernity.

The debate the Pope began on the relationship between the free market and moral problems remains unfinished. Eliminating the abuses that accompany capitalism and harnessing it for the benefit of society and human morals still needs to be tackled. John Paul II had the courage to raise the fundamental questions that needed asking. We will continue to ask them without his leadership and prompting?

Tuesday, April 19, 2005

Hungary gets new Finance Minister

Over at Serious Topics the other day we were discussing the Hungarian budget deficit, the fact that the deficit is financed mainly in foreign currency, and the general economic situation. Also see Hungary calm before the storm at Morgan Stanley for some more background on this.

Hungary has been singled out by the European Commission for failing to bring its deficit under control, as can be seen from the mention in the previous post’s quote.

The situation is as follows:

Budget deficit = 4.4% of GDP
Current account deficit = 8.9% of GDP
Government debt = 60.7% of GDP

Yesterday the Finance Minister was changed however I remain unconvinced that this change is anything more than cosmetic – the fundamental problem is one of a need to curb spending and / or increase government revenue. The governing Socialist led coalition is unlikely to propose tax increases in any shape or form with only a year to go before the next parliamentary elections. Spending cuts are going to be difficult – the bureaucracy here is bloated to say the least, a hangover from the Communist system. Putting scores of civil servants and other public sector employees out of work isn’t going to generate much in the way of votes.

Furthermore there is already a cry of “nincs penz” (no money) for even the most necessary of public expenditure so the room for cuts is limited to say the least. Austerity may be required but at the same time there remains a requirement for essential public spending to bring some areas, hospitals and doctors salaries for example, up to something more or less resembling European standards. I personally see no change to the situation in the near future, and as the new incoming Finance Minster, Janos Veres, was quoted as saying yesterday “There is no need for austerity measures, and the fulfilment of the convergence programme should be continued”.

Below is an overview from Hungary Around the Clock – but personally I would be surprised if the much talked about reform programme materialises this close to an election.

Gyurcsany sacks Draskovics
Prime Minister Ferenc Gyurcsany yesterday fired Finance Minister Tibor Draskovics and announced that Socialist MP Janos Veres will replace him from April 25. In explaining the move, Gyurcsany said Draskovics is not being sacked because of the budget deficit, but because he wants stronger support from the Finance Ministry. “We will break through limits, which were taboo before, for which the political and professional support of the governing parties’ MPs is necessary,” said Gyurcsany.

Veres was hitherto Gyurcsany’s chief of staff. He will be succeeded in that role by Interior Ministry administrative state secretary Gyorgy Szilvasy, a long-time confidant of Gyurcsany, Napi Gazdasag writes.

“There is no need for austerity measures, and the fulfilment of the convergence programme should be continued,” Veres said.

Draskovics himself observed that Gyurcsany has realised that the reform of state administration can no longer be postponed, because without it no permanent economic stability is possible. Draskovics blamed his fall on the central bank’s failure to adequately support the government’s economic policy and on the lack of political support to push through substantive reforms.

Speaking later in the Netherlands, Gyurcsany said it was necessary to fire Draskovics as the government wants to pursue a new and more courageous policy and enhance professional and political confidence.

Veres is the ideal man to carry out the 100 steps programme announced by the Prime Minister at Friday’s Socialist Party conference, deputy caucus leader Istvan Gondor observed. He explained that Veres has considerable support within the party, is a seasoned budget expert, and is well versed in the entrepreneurial sphere.

Other observers also suggested that Veres’s good standing within the Socialist Party makes him better suited than Draskovics to push through reforms, as Draskovics is not a member of the party. Draskovics, as a former administrative state secretary, remained an “office clerk” in the eyes of the Socialists, who did not regard him as capable of carrying out reform, Magyar Hirlap writes.

Citing other possible reasons for Draskovics’s departure, Magyar Hirlap notes that the tax reform commission supervised by him was unable to produce any substantive proposals for changes in its report earlier this month. Moreover, he did not get along with Gyurcsany and it was only international pressure that kept him in place when Gyurcsany became Prime Minister last year, the newspaper adds.

The change was driven by political forces, as Veres better fits Gyurcsany’s plans, according to analysts from Budapest Economics. Barclays Capital strategist Jeff Gable said the market expects a detailed plan from Veres.

Fidesz chairman Viktor Orban called the dismissal of Draskovics an admission of the fiasco of recent times, an admission that things cannot go on like this. In Parliament, Fidesz caucus leader Janos Ader said that during Draskovics’s 14-month tenure state debts rose by Ft 1,200 billion, while the budget deficit reached more than 47% of the target for the whole year by March.

Free Democrat leader Gabor Kuncze said confidence no longer existed between Draskovics and Gyurcsany, nor between the Finance Minister and the Socialist Party, and in such a situation a change is necessary. “We expect Veres to spearhead reforms,” he added.
Here is a link to a brief overview of the new Finance Minster, Janos Veres A former Communist like the Prime Minster he is also pretty wealthy by local standards. It is always interesting to see how rich many ex-communist party members have become since the change of political system ...... I suppose it’s something to do with being in the right place at the right time ....

Lacklustre Euroland

In a speech in Washington yesterday Joaquín Almunia, European Commissioner for Economic & Monetary Affairs, outlined what is required to return EUrope, and more specifically Euroland, to growth.

We have become somewhat more downbeat about the EU’s growth outlook for 2005 since our previous, autumn forecast. This follows, in part, from the recent oil price hike and the strengthening of the euro. However, growth is projected to return to potential in the course of this year against the background of:

(i) accommodative macroeconomic policies;
(ii) continued wage moderation and low inflation;
(iii) supportive financial conditions;
(iv) widening profit margins; and
(iv) progress in structural reforms.
Given recent events I really cannot see this background materialising. Oil prices are set remain high. Inflation is set to remain above the ECB 2% target. Profit margins are being put under pressure by the strength of the €uro and Asian competition, and, progress towards structural reform is being slowed down by the constant dilution of necessary reform proposals in an effort to save the European Constitution from rejection by France.

Commissioner Almunia continued in his speech to say that:
Domestic demand is expected to take over as the main driving force in the euro area and the EU. In particular, investment is forecast to gather momentum, whereas private consumption is anticipated to increase more gradually. Employment growth is also set to accelerate gradually in both the euro area and the EU. This is expected to create 3 million new jobs in the EU during 2005-2006, while leading only to a modest decline in unemployment in view of the usual influx of persons actively seeking employment as the labour market situation improves.

Public finances remain broadly unchanged over the forecast horizon. The average deficit is expected to amount to 2.6% of GDP in both the euro area and the EU in 2005. Differences remain sizeable, with nine countries above the 3% reference value in 2004. Of these, five Member States (namely Greece, France, Cyprus, Hungary and Malta) are expected to narrow their deficits significantly in 2005, i.e. by more than ½ percentage point of GDP. Still, the number of Member States with deficits at or above 3% increases to 11 this year.
This is hardly upbeat stuff. The prospects of the Eurozone becoming an engine of global growth are remote, especially with so many key Eurozone economies in breach of the deficit rules. Negative growth, and possibly even recession, may be a far more likely scenario.

All quotes taken from Joaquín Almunia speech @ the Commission Press Room

Haloscan commenting and trackback have been added to this blog.

Monday, April 18, 2005

The EU - business as usual

The end of the EU, and the break-up of the €uro are just two of the fantasies attributed to rejection of the EU Constitution by France being touted by some in the blogosphere. Such notions are just wishful thinking. Some of the most rational comment on the French referendum and the likely implications/results of a NO can be found at the following:

Friday’s Global Economic Forum digest at Morgan Stanley

The Economist - Can the Constitution be saved?

Financial Times - Europe rallies to save French referendum

Le Figaro - Le “plan B” de Bruxelles si le non gagnait

Le Figaro concludes with the possibility of “…l'Europe à plusieurs vitesses, dans laquelle la France et l'Allemagne ne joueraient plus de rôle moteur.” This view is also hinted at in the Economist article. It's hardly a break-up; simply a multi-speed Europe in which France and Germany are no longer the motor for integration. As I wrote on Thursday the EU is no longer a cosy club run for the benefit of France, Germany and the Benelux countries; times are changing and the EU must change with them.

The above link to Morgan Stanley contains the following in part answer to the question Would a French no lead to a break-up of EMU?:-

In my view, the purpose of the EU is not to have a common currency or to share sound economic rules. It is above all to guarantee peace in this part of the world where wars and bloodsheds, which took a global dimension in the last century, were the rule and peace the exception. That Europe has been in peace for 60 years is a great achievement, but by no means is it a guarantee that it will last forever. In 1870, or in 1938, after long periods of peace (respectively 55 and 20 years), only a handful of visionary thinkers understood that war was coming. The new members of the Union have suffered at least as much as the older ones from this past and their historical vision is the same. The very long-term historical dimension of the EU makes it radically different from previous attempts to build large political entities: the Union is the result of negotiations, not of the use of force. To some extent, a French no would not be so different from “business as usual”, in the EU context.
“A French no would not be so different from “business as usual”, in the EU context.” – that made laugh and I couldn’t agree more.

The issue of structural reform in the leading Eurozone economies is, in my opinion, far more crucial to the success of the EU, and EMU, than any Constitution. The Financial Times gives France some home truths on this issue today in its editorial France’s Fears:
In truth, France must tackle the creeping crisis in its public finances, whether or not the European Commission tells it to. France must deregulate some of its products and labour markets if it ever wants to tackle its high unemployment, no matter how much it wails about the EU's services directive.
The French government should start telling the whole truth to its voters and sell the necessity of reform. Further attempts to dissimulate will only be counter-productive. Mr Chirac's attempts last week to convince a sceptical television audience that all was right with France already appear to have backfired in the polls.
The main argument against reform is that it will undermine the European Social Model and lead to a "downsizing" of the welfare state. The Scandinavian countries are often held up as shining examples of how the “social model” might work. There is some interesting comment on this over at Café Hayek entitled “Do Scandinavians live better than Americans?” which quotes a report from a Swedish free market think tank called Timbro. The conclusion is that they don’t! The Eurozone's leading economies need to wake up and embrace the C21st, and the new reunited Europe that was officially born on Ist May 2004; unless of course the "old EU" stalwarts like France and Germany want to live worse than Americans!

Friday, April 15, 2005

French Focus with a bit of German thrown in.

I was interested to note in article at FT.COM entitled Chirac will not resign if vote lost that:

Nicolas Sarkozy, the populist president of the ruling UMP party, on Thursday contradicted the president's upbeat views by saying that the “French social model” was failing the people.

In a speech in southern France, Mr Sarkozy said that with a 10 per cent unemployment rate France should stop saying its system worked better than that of others. “In 20 years both the left and the right have doubled the credits to combat unemployment but we have not produced one fewer unemployed person,” he said.
Let's hope Sarkozy wins the Presidency because otherwise France will just continue to follow Germany down the road to economic basket case status.

The situation in Germany shows little signs of improvement. Over at Morgan Stanley's Global Economic Forum they are commenting on minimum wage legislation and how it will contribute to the ongoing hollowing out of the German economy.
The purpose of the minimum-wage manoeuvre is to appease trade unions and left-wingers ahead of the important state elections in North Rhine-Westphalia on May 22. North Rhine-Westphalia is not only the most populous German state, home to 35% of the population. It is also the Social Democrat’s longstanding home-base. If the present Red-Green coalition government were ousted, which is what polls showing the Red-Green votes at a combined 44% and thus behind the CDU 46% suggest, this would be a serious setback for the Schroeder government. As in the transition agreement on migration and the rejection of EU Services Directive, the government’s desire to fend off the competitive pressures from the new Member States will likely accelerate the hollowing-out the German economy. In today’s globalised markets, the competition is just too powerful. Erecting new hurdles just as the labour market reforms start to bite and the incentives to work increase, seems a high price to pay for a pre-election gimmick.
The prospects for the Eurozone are looking more than a little dismal these days and getting worse as each new one passes!

Finally in another article at over at the FT on the EU Referendum a respected French political analyst, Dominique Moïsi, puts his finger on the nature of the problem France is facing. "
The young, who are pro-European, are not mobilising because the cause of Europe is being represented by people they don't like," said Mr Moïsi. "It is a leadership problem from Barroso to Chirac."
Chiracs’s record on Europe hampers Yes campaign
This is true right across Europe; political leaders are neither respected or believed – Blair, Schroeder, Berlusconi are a few names that spring to mind.

Thursday, April 14, 2005

European Union literary standards - the lighter side of culture

Taking a lighter look at European Culture here are some extracts from an article on the Commission for European Standards: Literary which appeared in the Spring 2004 issue of The Hungarian Quarterly.

Novelists based in the Europe Union please take special note of the following extracts:

The Hungarian Writers' Union has been informed by a source in Brussels that, after a series of confidential conferences, an agreement is imminent on obligatory literary standards for all EU member states. Nations due to join the EU in the 2004 round of accession were also present at the conferences in an observer status, without the right to vote (Slovak, Slovenian and Hungarian writers' organisations are said to have protested because they were not invited). Our correspondent has been able to obtain this draft copy of the chapter relating to the novel only.

The Novel must be arranged through an Action, namely into a beginning, middle and an end, and this arrangement is obligatory. This trinity is defined as Action-Bow. In the absence of an Action-Bow, a Novel is not allowed to be published, distributed or written in the territory of any Member State of the European Union.

.....A Novel may be Historical, Social or Extreme.

10) A Historical Novel is one that deals with the past-time circumstances of individuals (as defined under common European Law), and its morals are Humanist in the sense that this term is determined by the relevant Standards of the European Union (see Paragraph 7, Chapter CVL). In an Historical Novel, a so-called "post-modern" or "interventional" procedure is inapplicable.

11) A Social Novel is one the Author of which describes contemporary society (societies). Positively presenting the work of the official bodies of the Union is preferred.

12) An Extreme Novel is one that falls outside the fields defined under Sub-Sections 10 and 11, but meets all other criteria. The support provided to an Extreme Novel must not be higher than 20 per cent of the support provided for Historical and Social Novels.

........ The following are accepted as Negative Characters: Islamic Fundamentalists, Suicide Bombers, Extraterrestrials, Nazis, Fascists, Bolsheviks, Murderous Armed Robbers, Mass Murderers, Desecrators of Dead Bodies, Paedophiles and Anti-EU Demonstrators. Characters not included in the above list are Positive Characters.

D) Positive Main Characters recommended exceptionally strongly:

a) A grandmother who underwent many terrible tribulations before the advent of the EU with her spiritual and moral integrity remaining intact, and who now educates her grandchildren single-handedly in such a manner that they become upright, law-abiding citizens of the European Union who meet the challenges of business life.

b) A scholar of Jewish origin who suffered Nazi and/or Bolshevik imprisonment, but was redeemed by the ideas of Free Market and Christianity, who adopts at least two African or Asian orphans and educates them to become law-abiding citizens of the EU successful in business.

c) A young man or woman originating from an ethnic minority of an EU Member State who succeeds in having his/her minority accepted by the dominant ethnic group of the given Member State, thus contributing to the relief of latent ethnic conflicts. Especially recommended to the states joining the European Union after 2004 is the portrayal of young, upwardly-mobile, optimistic members of the Roma minority. In this type of novel the rappers and folk singers of Roma descent 2004 accession countries should have dazzling careers and should be subjects of admiration, especially on the part of the youth of the majority group in the countries concerned.

d) Erotic or Sexual Novels must have as their Positive Main Character prostitutes who as children were forced by violence, beatings and torture to provide sexual services, their passport was taken from them, but who succeed in escaping their tormentors and in helping the police imprison them, while liberating their fellow-sufferers from captivity. An additional 20 per cent support is due to the Sexual Novel whose Main Character is an Asian, African, Latin-American, Russian, Ukrainian, Kazakh or Turkmenian immigrant. It is mandatory that such Novels have detailed instructions on protection against AIDS. A failure to meet this condition means that the Novel must not be supported.
In Novels with an Erotic or Sexual content, the description of any sexual position other than those described in the Kama Sutra is strictly prohibited.
Disclaimer: Europolyphony accepts no responsibility for bloggers and novelists who take the above seriously.

Brighten up at the FT, please!

The Financial Times is full of doom and gloom today. Here is a quick look at some of their stories.

Eurozone finance ministers raised the stark contrast between countries such as fast-growing France and Spain and laggards such as Germany and Italy, complicating the task of setting a single interest rate for the entire region.
Their discussion at a meeting in Luxembourg this week highlighted official concern that, despite the introduction of the euro in 1999, the 12 economies of the eurozone are drifting apart, according to a senior German official.

More @ Divergencies in the Eurozone economy
The one size fits all interest rate has always been problematic, though not as problematic as creating a currency union without first putting in place the political structure to underpin it. Doing it the other way around, as the EU is attempting, is fraught with difficulty as they are discovering.

In another leading article the FT remarks that:
In an extraordinary speech yesterday, resonant with the language of class warfare, Franz Müntefering, chairman of Mr Schröder's SPD, condemned the profit-maximising strategies of global financial institutions as a danger to democracy. The debate about the country's economic future has become increasingly poisonous - one reason why companies have been reluctant to invest more in Germany.
Just as the country's political establishment miscalculated the economic effects of German unification, it has been miscalculating the economic effects of EU enlargement. The appropriate response would have been to improve economic flexibility to allow resources to shift into new sectors. Instead, there is a rise in protectionism that does not bode well for Germany's economic future.

Full text @ Protecting Germany
Oh dear! This doesn’t bode well for Germany’s ever burgeoning army of unemployed! Germany has gone downhill in recent years - couldn't be anything to do with the €uro could it? .... it's just that it's a bit odd that the costs of German re-unification have suddenly become an issue 16 years after the event.

Yet another editorial paints an equally gloomy picture as regards the US trade defict and the possible implications it might have on global growth, and the value of the US Dollar. See - Imbalances worsen

Further weakness in the US$ will be very bad news for the €uro and could send it to new heights with all that implies for the Eurozone economies etc. etc.

Looking at the above anyone would think we were on the brink of global recession and economic crash – no wonder economics is called the dismal science! Looks as if the sun will come out here in Budapest .... time to take a walk on the bright side of the road!

Referendum trouble in the EU

George Parker at the FT paints a fairly dismal picture for the future of European unity in the event of a NO from France, or the Netherlands, in their respective European Constitution referendums – this will no doubt generate prolific comment from the people over at EU Referendum

It seems some have forgotten the EU motto - "Unity through diversity"? In the George Parker article EU Referendums a threat to European Unity the Director of the Centre For European Policy Studies (CEPS) is quoted as saying, of a NO vote to the Constitution by France,

"If it means that France does not like liberalisation, that would mean the end of the single market as a liberalising machine,"

"If it means that France does not want to be pushed around as part of an expanding Europe, that would mean goodbye to enlargement."

He believes the immediate result of a No vote would be an attempt by some countries, including France and Germany, to form a "hard core" group, pushing ahead with closer co-operation to build the idea of a "social Europe" with harmonised taxes.
Does the EU really revolve around France, and do the French people really want harmonised taxes? These are arrogant assumptions on the part of the CEPS, and epitimoise the problem of an EU political elite out of touch with the people of EUrope. Daniel Gros has quite clearly forgotten about "Unity through diversity"!

This raises some fundamental issues about the triumph of NON over OUI. Aside from being symptomatic of an EU whose political leaders have lost touch with the citizens (democratic deficit), it also represents a monumental failure to communicate and explain on the part of the EU institutions, (over to you Margot Wallstrom). It seems evident that one of the core problems is that the EU vision, as cherished by founding states like Germany, France, and the Benelux countries, is under threat and they don't like the new more liberal and reformist direction it is taking. That "old" vision, and the people who expound it, have not moved with the times.

In the C21st an EU of 25 nation states is never going to be quite the cosy club it was back in the good old days when there were only six - it is the old and in the way vision of the EU that is creating much of the problem; times are changing and the EU must change with them.

In the meantime Jacques Chirac must be revelling at being the centre of attention, and at his ability to hold the EU to ransom. That said, for some reason he always has an expression on his face that makes him look as if he is suffering at the hands of a proctologist.

Wednesday, April 13, 2005

EU Lisbon Strategy & the Euro-Mediterranean partnership

The Lisbon Strategy of the EU always looked ambitious, and without fundamental reform in many of the major EU member states it will continue to remain over ambitious. The reasons why the EU is having to restart the Lisbon Strategy, as enumerated below, will continue to remain stumbling blocks.

Why do we need a new start for Lisbon?

- Insufficient progress has been made to reach the Lisbon objectives.

- Although EU productivity levels were growing faster than those in the US for five decades, since 1996 the EU has been lagging the US every single year. Labour productivity in the US is now growing twice as fast as in Europe. As a result our relative levels of wealth have also started slipping.

- Europe is not investing enough: investment has – on average – been growing by only 1.7% per year compared with 5.4% per year in the USA.

- We are not spending enough on Research & Development: the USA is spending about €100 billion more on R&D than Europe. The EU has only 25% of the number of patents per head of population found in the USA.

- Finally, while in the USA 32% of population has university or similar degree, this percentage stands at only 19% in Europe. In addition, the USA is also investing about twice the amount per student as most European countries.

- These trends, if not addressed, will drag down the potential growth rate to slightly over 1% - or a third of the Lisbon objective.

- In 2004, the average growth of the Euro area was a meagre 2.2%, while the US economy grew by 4.3%, Japan by 4.4%, India by 6.4% and China by 9%.

- We need to revamp the Lisbon Strategy because the delivery process which has become too complicated and is poorly understood. It generates much paper, but little action. Responsibilities between the national and the European level have become blurred. Limited ownership of member states is the result.
The above quoted text is from a rather cryptically titled Commission press release -
The new integrated employment and economic guidelines

That last line, "Limited ownership of member states is the result", is a rather curious statement.

The EU also has very ambitious plans for a number of non-EU countries which also appear to be over ambitious, if not unrealistic. See the Five year plan to reinforce Euro-Mediterranean partnership

The target dates for the above "plan" are likely to go the way of the Lisbon Strategy target dates. Looking at some of the proposals I wouldn't be surprised if, on some issues, the EU doesn't find itself coming into conflict with local cultural and religious values. The countries concerned are Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestinian Authority, Syria, Tunisia, and Turkey. Libya apparently has “observer status”.

Pensions, tax, deficits, demographics, the Euro, and Italy

The Financial Times leads today on mess that is the UK pensions strategy, or rather the lack of it. See - Kicking pensions into the long grass

The editorial notes that - "Providing a more generous state pension could reduce means-testing and make saving more attractive without compulsion."

The problem with this is that it means taxes will have to rise, and making tax increases seem politically appealing is a task that even the most cynical masters of political spin might well find daunting! This is true not just for the UK, but for many EU member states; all are facing the same so called demographic, and pensions “time bomb”.

Speaking of tax increases it looks as though they may be the only solution to what the Financial Times describes as Italy’s fiscal folly

What really caught my eye in the editorial was this little gem -

For the Commission, the looming dispute could determine whether the single currency area can continue as a rule-based system.
Indeed! If Italy treats the warnings from the Commission with the same disdain that Germany and France have then I would say that the rules that underpin the €uro will be well and truly redundant, with all that implies for the stability of the single currency.

Tuesday, April 12, 2005

Currency crisis if France rejects European Constitution

Currency crises for new EU states if France votes No

The chief economist at Deutsche Bank, Norbert Walter, told FT Deutschland that a French No might cause a currency crisis in the new member states. "There could be speculative attacks on currencies of the new EU member states", Mr Walter said. "These countries would then have to raise their interest rates. It could cause enormous exchange rate fluctuations", he warned. Mr Walter explained that a rejection of the Constitution would jeopardise new member states' euro hopes, sparking the currency attacks.
This article from EU Observer sounds very dramatic and will no doubt delight many of those campaigning against the Constitution. Before getting too exicited I think one needs to pay attention the use of the words “could” - at no point does Norbert Walter say it “will” happen.

One might very well take the view that this should be good news for the French and may even encourage them to vote “NON” – the French were never happy about EU Enlargement, and might well be delighted at the prospect of plunging the currencies and economies of the new EU member states into temporary turmoil. Are the French that vindictive and capricious? Some are, but not all.

It is early days yet to be predicting a crisis. The French, despite, or maybe in spite of, the opinion polls, may very well vote “OUI”, which is what I think most likely on the day; although it may, like the battle of Waterloo, be “a close run thing”. Having said that making predictions about the future is never wise not even if you happen to be the Chief Economist of Deutsche Bank.

(Norbert Walter and his Deutsche Bank Research team web page is linked to in the sidebar of this blog under "Current Affairs".)

European secession - Britain's dreamers

The FT also carries an editorial on the UK Conservative Party manifesto. They state that on Europe;

..... the Tory manifesto fails to recognise how the European Union is changing since the arrival of the former communist countries of eastern Europe. The EU is becoming the more flexible and liberal organisation the Conservatives want to see, but instead they are advocating a form of partial withdrawal. There is no explanation of how a Tory government could achieve this without leaving Britain on the margins of Europe - subject to EU legislation but less able to influence it.
I tend to agree. People who believe that a Conservative government would be able to successfully achieve a renegotiation of the terms of Britain’s EU membership are dreaming – this is one election promise that would certainly be broken.

As for the changing nature of the EU, that is certainly true; it's a pity that some of Europe's member state politicians such as Jacques Chirac can't, or don't want to accept it.

Incidentally the label "former communist country" beloved of journalists is increasingly a misnomer. People in countries like Hungary, Poland, Czech Republic aged under 30 have little or no knowledge of what life under communism was like other than what they are told by their parents, or get from books and the media.

EU wine tax faces veto

The FT has also picked on the matter of alcohol taxation today. Wine may well escape due to concerns about adverse reaction that might impact the Constitution YES campaign in countries such as France. That still leaves beer and spirits – Commissioners and Finance Ministers will certainly need a stiff drink or two if they intend to announce a hike in the minimum rate of up to 20%!

The European Commission wants to increase harmonisation of alcohol excise duties in the EU, in an attempt to tackle fraud and smuggling inside the single market. It also believes the big variations in excise duties distort the market, although differentials in value added tax are often a more significant factor.

Finance ministers, meeting at Tuesday's Ecofin council in Luxembourg, are expected to instruct the Commission to update the 1992 deal which brought modest harmonisation of EU excise rates on alcohol. That set minimum rates for beer, fortified wine and spirits, but left wine and sparkling wine untouched. Sweden has led demands for the minimum rates of excise duty to be increased in line with inflation they have been unchanged since 1993 in effect increasing them by over 20 per cent.
More @ Plan for new wine tax faces veto

Monday, April 11, 2005

Minimum tax rate on alcohol in the EU set to rise

Buried in a press release on the agenda for this weeks Eurogroup & Finance Minsters Meeting was the following small paragraph under the heading - Alcohol taxation:

Commissioner Kovacs will state his hope that the Council can agree to allow the Commission to draw up proposals to adjust and modernise the existing system of minimum rates at least to re-establish the real value of the Community-wide minimum rates in the light of inflation since 1992 when the current minimum rates were set.
No doubt this will provide an excuse for tax increases on alcoholic beverages - it will take some time for this measure to get agreement but I'm sure it wil pass.

High EU labour costs a drag on growth, and well above those of US.

The Eurozone is going to have to accept that labour reform, and cutting back on welfare are essential to solving the problems of structural unemployment, stagnant growth, and the relocation of businesses to more competitive, and, often non-EU countries.

Despite this it appears that Germany is still attempting to protect its labour market with measures that are likely to have the opposite effect of much needed fundamental reform.
Schroeder & Germany ready to launch minimum wage reports the FT -

The German government will this week consider a series of measures to fight a downward spiral in wages, including setting a minimum wage for the most vulnerable sectors of the economy. The step is part of a crackdown on businesses that use cheap, often eastern European, labour to trim their costs. When they joined the European Union a year ago, the 10 new member states agreed to a moratorium preventing their citizens from seeking work in Germany for several years.

A joint task force of the finance and economics ministries on the "fight against abuses of the freedom of services" will report to the cabinet on Wednesday and outline a series of proposals.

Effectively barring selected businesses from hiring cheap foreign workers, meanwhile, would not necessarily lead them to hire Germans.

Despite record unemployment, the Federal Labour Agencies last year issued 870,000 authorisations for companies to seek foreign workers for jobs that could not be filled by Germans
One of the greatest abuses of the "freedom of services" is the restriction Germany, and others, have put on the new EU member states to supply services, not to mention that most fundamental of EU freedoms, the freedom to work anywhere in the EU .....

...... to return to the subject. The FT today also reports on a survey on the cost of labour in EU Europe. Not surprisingly it is countries like Germany that are hugely uncompetitive - See Labour costs in the EU
Employment costs in the EU as a whole were about 15 per cent less than in the US, but after taking eastern EU countries out of the equation western European countries were 23 per cent more expensive than in the US and among the highest in the world said Mercer.

The highest annual employment costs according to the European study were in Belgium, Sweden and Germany where the total financial burden of employing a worker, including benefit costs, was more than €50,000 ($58,500) a year. This compared with €4,752 in Latvia; €5,649 in Lithuania; €8,257 in Poland and $9,540 in the Czech Republic.
Annual labour costs of €45,879 in France and €46,541 in the UK were in line with Japanese costs of €45,839 but almost 40 per cent higher than US costs of €33,195. Chinese and Indian labour costs of €13,884 and €2,024, respectively, were even more competitive said the study.
Agreed the weak US$ / strong €uro makes a difference to any comparisons with the US, nevertheless, the failure to reform is going to hold back the EU and the Eurozone in particular. No doubt there are those in the European Commission who believe that such reform could put the whole project at risk so dare not push it too hard. Decisive and bold leadership are often unpopular but it is what the EU needs if it is to make its collective economy work.

It says much about the nature of the EU and just how insecure and fragile it really is that anything that might upset the Social Model, in one or more of the larger member states, tends to get watered down and/or shelved. It is time Europe's political leaders woke up to the fact that the era of "sozialmarktwirtschaftwander" is over instead of sticking their heads in the sand.

Sunday, April 10, 2005

Another EU reform dropped to succour the French

Another much needed reform to make the EU more competitive bites the dust in order to try and avert a French NON to the EU Constitution. Some in Brussels might very well be wondering if the EU might not be better off without the French.

Brussels delays overhaul of state aid

A crucial policy paper mapping out plans to overhaul the European Union's state aid regime was postponed this week, in part over concerns that it might affect the French referendum on the new European constitutional treaty.

The Commission and the French government have repeatedly clashed over state aid, especially state-backed bailouts for large French companies such as Alstom, Bull and France Telecom. Brussels has the power to block or limit such injections of state funding
The European Constitution has proved divisive and controversial - it has in many respects been a step too far. The wisdom of seeking its ratification so soon after EU enlargement, and the divisions caused by the Iraq war, is looking increasingly suspect - as a French General is said to have remarked after witnessing the Charge of the Light Brigade - "C'est magnifique, mais ce n'est pas de la guerre!"

A further thought on the previous posting. I would guess that Brussels may suggest a minimum rate of corporation tax - it is isn't quite harmonisation via a flat rate, it would guarantee much needed income for squandering governments, it would still allow a degree of tax competition, and, it would probably satisfy Chirac and Schroeder.

Friday, April 08, 2005

EU tax harmonisation & the M&S judgement

Leading on the M&S judgement on taxation in the EU the FT observes that:

Judgment in favour of M&S would thus place great strain on the public finances of the countries affected - most are struggling to reduce their fiscal deficits. In Britain, the margin Gordon Brown, the chancellor, has for meeting his fiscal rules in the current cycle has already shrunk to £6bn, and his predictions of a surplus through the next cycle depend on a sharp increase in corporate tax revenues. The budget deficits of Germany, Greece and Portugal are already over the 3 per cent EU limit.

A better solution is to recognise the growing mobility of international capital and design corporate taxation to cope with it. Much lower, preferably flat-rate, taxes provide less incentive to avoid tax. The cost can be offset by abolishing most of the exemptions that enrich the tax avoidance industry.

Countries in eastern Europe that have adopted this approach have shown the way. Those that cling to high tax rates will find their revenues ebbing, no matter how hard they struggle to protect their corporate tax bases.
Full Text @ Tax cuts exclusively for everyone

To expand a little on the comment on this at EU Referendum. All this is one consequence of the establishment of a single european market. The implications for Euro rule busting budget deficits are huge - governments could indeed lose billions. Further, there have already been noises about the harmonisation of corporate taxation from Germany and France because of what they regard as unfair competition from the new member states in Central Europe - this will simply give them more ammunition and might even force the British to support such a measure. The Brussels bureaucrats, not to mention some of the arch eurofantics many of whom favour tax harmonisation and rates being set by Brussels, must be rubbing their hand with glee. For the record I am against tax harmonisation in any shape or form, and firmly for tax competition.

High oil prices may perpetuate Eurozone gloom

Oil prices look to stay high according to the IMF. With scare stories like this emanating from the IMF they most certainly will! The knock on effect for the Eurozone will be even more doom and gloom - maybe the Kommissars will revise their growth forecast down again.

The FT reported today -

Predicting surging demand from emerging countries and limited new supplies from outside the Organisation of the Petroleum Exporting Countries after 2010, Raghuram Rajan, IMF chief economist, said: “We should expect to live with high oil prices.” “Oil prices will continue to present a serious risk to the global economy,” he added.
Read more @ IMF warns of permanent oil shock

Thursday, April 07, 2005

EUrozoners will have to do more for less

It looks as if Eurowreckers are going to have work more hours for less pay. Either that or they're going to end up joining the ranks of the unemployed. Stroppy French and German workers used to the comfortable life under the European "sozialmarktwirtchaft" model are going to have to face reality. Here's how a German Director of the IFO explains the matter.

Trade union opposition to extending working hours is based on the “lump-of-labor” theory. According to this view, there are no economic advantages of such a policy, because the total amount of labor in the economy is fixed. As a result, a 10% increase in working time will merely reduce employment by 10% percent. Despite its seeming plausibility, this view is wrong. Working longer for the same pay is a useful way of making Europe more competitive, and, when compared to reducing wages, it imposes a much lighter burden on workers and employees.

Working longer will boost economic growth, for if people work longer, then so does capital. Except for where all 24 hours of the day are filled with shift work, increasing the daily working time of people extends daily capital utilization. Thus, a 10% increase in working time is the same as if the economy’s stock of productive capital were increased by 10%. There is a jump in wealth and an immediate production boom.

Full text @ Europe is working Longer