Tuesday, May 31, 2005

Clause 30 and the process of EU treaty ratification

How about Clause 30 of the Constitutional Treaty signed by all 25 EU member states.

Clause 30: If, two years after the signature of the treaty amending this Treaty, four fifths of the Member States have ratified it and one or more Member States have encountered difficulties in proceeding with ratification, the matter shall be referred to the European Council.
The process of ratification must therefore proceed???

I believe this fits well with the discussions over at A Fistful of Euros where the whole question of "shelving" the Constitutional Treaty is being debated. More @ If the Netherlands votes No

See also the FT editorial
Blair’s moment of destiny on Europe

Britain cannot afford to be the first country unilaterally to say the new treaty is dead without weakening its influence among European governments that often see it as semi-detached. Recent British governments have striven to push the EU towards the flexible and lean organisation necessary in an era of globalisation. If the new treaty is shelved in an acrimonious atmosphere of protectionism, that influence could wane - damaging Britain's interests, as well as Europe's.
Also the FT has another report that states -
The European Union is poised to shelve its proposed constitution for several years after French voters rejected the treaty in a referendum on Sunday. From - EU to put new treaty on ice after French No.
Ratify or put on ice? Is it possible to suspend the ratification process for "several years" and then restart it? Clause 30 is pretty clear on this - all member states must have ratified within 2 years of signing the Treaty.

What a mess! Will De Villepin and Chirac be able to control their dreams of Napoleonic grandeur and help the rest of Europe find a way out of this? Without EU unanimity on the matter it will be more EU gridlock with a good measure of bitter acrimony. If past performance is anything to go by it wouldn't do to be too optimistic.

More on the trouble with Jacques Chirac

For the purposes of educational discussion here are some soundbites from a “comment” article, now behind subscription, that appeared in the Financial Times today. I fully concur with their views on Chirac - see my early April post - The trouble with Jacques

Never before has the French electorate rejected both its leadership and Europe to this extent: 56 per cent voted No on a 70 per cent turnout. The striking feature, however, is not the No vote itself but the fact that France is still so collectivist. This offers an opportunity to paraphrase Mr Chirac's famous remonstration to new members of the European Union; this time, it was he who missed "an opportunity to shut up".

French voters resented being told that they had a say, provided they consented. This is sadly revealing of both the nature of technocratic power and the government's subsequent refusal to engage in genuine debate once it outlined its grand designs. Mr Chirac has lost the authority of his leadership. He has squandered his presidency and gained a mandate for "losership".

The strong rejection of the treaty highlights the final throes of a regime reaching the end of its socialist tether, largely thanks to Mr Chirac. Elected in 1995 and again in 2002, the French president is emblematic of all things wrong in France. He has done everything to bolster interventionism and support for public sector lobbies, scorning anything smacking of free markets. He even recently managed to denounce liberalism as being "worse than communism" without raising eyebrows inordinately. French EU policy is predominantly concerned with its own influence and the common agricultural policy; the rest is silence. Internationally, Mr Chirac has abundantly proven the one constant in his career: a sustained critique of western democracy and capitalism, coupled with excuses and support for dictatorships in the name of cultural relativism.

Whenever the Franco-German tandem reached an obstacle, deal-making in Brussels provided a solution (as in the services directive). This model is now obsolete, as is the French dirigiste agenda. Recent and future enlargements of the Union are likely to tip the balance towards countries that reject constructivist designs and social engineering. The countries of central and eastern Europe endorse free-market policies (such as low and flat taxes). They also recognise, unlike Mr Chirac, that it was Ronald Reagan (not Mikhail Gorbachev) who deserves credit for the demise of the Soviet Union which enabled their liberation.

The vainglorious ambition to impose French rationalism on Europe is doomed. The former masterminds of EU integration are currently busy with damage control in their own countries. France and Germany, with slight differences, are slowly approaching moral, political and economic bankruptcy.

An enlarged Europe means that France and Germany will progressively lose their influence, because they have failed to provide a model, and thus effective leadership.

Quotes taken from A new mandate for losership

Monday, May 30, 2005

France - Europe's spoilt child

Did Chirac really miscalculate? Surely he knew the strategy was risky and that there was a very good chance that the people would vote “Non”. It seems to me the result in France suits Chirac perfectly – not only has he extracted a number of concessions in the run up to the referendum he is now in a position to push for a more French vision of Europe.

Whilst the reasons for the "Non" in France are undeniably varied, Europe needs to be very wary indeed of French motives, especially the French dislike of enlargement and economic liberalism. The former is, in my opinion, rooted in a peculiarly French form of inverted cultural racism and elitism. The latter appears to be a reflection of the immaturity of the French left which behaves more like a petulant adolescent in the face of economic reality, than a pragmatic adult. Sadly the spoilt child that is France has been over-indulged recently and the likelihood is that this will now continue.

As the FT puts it in one of many articles today on the referendum -

The problem for Europe's leaders is that French voters have not just rejected a treaty but the very basis of what the EU has become: a machine for opening markets and extending Europe's borders to the east.
From - Barosso warns of “contagion”
Now it appears that The French want Sarkozy as PM but my guess is that might de Villepin who in his book on Napoleon talked of the honour in defeat - such an attitude ought to serve him well in the coming few months!

Néanmoins, je ne portes pas la haine pour la France - au contraire je l'adore!

How some Hungarian politicians view the "Non"

Here are some views from Hungarian politicians:

Brussels, May 30 (MTI) - French voters' decisive rejection of the European constitution represents a serious crisis for Europe and its new member states, said Hungarian politicians after Sunday's referendum.

Hungary's European Parliament members said it would be almost impossible for the constitution to be adopted, after almost 55 percent voted against the constitution that included clause on minority protection crafted by Hungary.

Jozsef Szajer, of the right-wing opposition party Fidesz, attributed France's popular rebuff in part to Europe's eastward expansion, noting that fears of cheap manpower from new member states still ran deep. But Szajer argued the EU would still be able to function on the basis of the Nice Treaty despite its various deficiencies. The protection of minorities was at stake if the constitution were to be dumped outright, he added.

Csaba Tabajdi, of the senior governing Socialists, attributed the result to the unpopularity of the French government and President Jacques Chirac and the alienation of European policy-makers from the public, an anomaly which he said should soon to be remedied.

Istvan Szent-Ivanyi, of the junior governing Free Democrats, said the French voters' decision would halt progress towards European unity. A similar vote by the Dutch on Wednesday would mark the stamp of failure for the EU constitution in its present form, he added.

None of the MEPs polled by MTI saw any chance of French voters changing their minds in a second referendum -- as happened in Ireland with the Nice Treaty -- saying the almost 10 percent gap between the "no" and "yes" votes on a turnout of close to 70 percent was too wide for that.
The above is also @ Hungarian Politicians views on the EU Crisis ........ minority rights are very important in this part of the world as there are numerous Hungarian minorities in nearly every country bordering Hungary.

Thursday, May 26, 2005

EU tax plans

Buried by all the news on the referendums on the Constitutional Treaty I noticed this headline at the Financial Times EU tax harmonisation plan “ready in three years”

Yet curiously, almost in spite of the headline, the report states quite clearly that “the European Commission remains adamantly opposed to any harmonisation of company tax rates - a policy advocated by France and Germany as a means for ending "tax dumping" by countries with very low company taxes.”

Why the headline then? Just trying to sell newspapers? Or, is it the case that this is a case of harmonisation by another name. Here is what the FT report writes:

A Franco-German sponsored plan for more harmonisation of company taxation could be ready in three years, the European Union's tax commissioner claimed yesterday. Laszlo Kovacs is working on details to create a uniform system across Europe for calculating a company's tax base, ending wide national variations. The move is aimed at cutting red tape for business and to make it easier for companies to operate across borders. However, the European Commission remains adamantly opposed to any harmonisation of company tax rates - a policy advocated by France and Germany as a means for ending "tax dumping" by countries with very low company taxes.

Mr Kovacs, addressing a conference in Sweden, said he believed there would be wide support in Europe for a common corporate tax base. When asked when it would be ready, he said: "My assessment is three years if everything goes well." The task of distilling a common method for calculating corporation tax across Europe is large, but Mr Kovacs says it will bring significant benefits. "At the moment there are 25 different ways to calculate the corporate tax base," he said. "If we manage to have only one EU-wide set of rules that will increase competitiveness."

However, the idea has not met universal approval, with Britain among the countries refusing to accept the idea of an EU-wide corporate tax base. Gordon Brown, Britain's chancellor of the exchequer, believes the move would interfere with national sovereignty and restrict flexibility in the tax field. Although tax matters in the EU have to be decided unanimously, a group of countries could press ahead regardless under a mechanism called "reinforced co-operation", allowing Britain and other opponents to join later if they wished.

Mr Kovacs said that 20 member states out of 25 supported the idea, adding that he thought others would come around once the advantages to business became clear.
"They are afraid that it is a Trojan horse to implement the harmonisation of tax rates at a later stage," he said. "We have no ambition and I have no personal ambition [to do that]."
Harmonisation it isn't and the headline is sloppy and irresponsible journalism.

The speech Lászlo Kovács gave in Sweden is not yet up on his EU website but it sounds very much like the same speech he gave on 12th May. In which he said the following -
... this Commission has established as one of its priorities in the tax field the creation of a common consolidated corporate taxation base in the EU. The Commission considers that if companies were allowed to apply a single EU-wide set of rules for company tax purposes, this would eliminate most of the current problems such as double taxation that they currently face when they do business across borders in the EU. It would also lead to a substantial reduction in compliance costs. This idea has received considerable support from the business sector, as well as from many Member States. My services in the European Commission are currently discussing the elements of a common tax base with EU Member States in a technical working group.

....... I would like to stress that a common company tax base in the EU would not mean a common corporate tax rate. I believe that tax competition is not bad by definition and I support a degree of tax competition between Member States to the extent that it forces governments to produce value for money. I therefore see no need for Community action on corporate tax rates at present.
The above clearly states that harmonization is not on the agenda ... at present.

Here are some other proposals put forward in the speech of 12th May
The Commission has set as a particular priority that of simplifying VAT compliance obligations in the case of intra-Community activities.

The Commission intends to present before the summer break another important proposal within the current VAT strategy, namely a proposal on the place of supply of services to final consumers (B2C).

The objective of this proposal is to review the current rules, in order to ensure that tax revenues deriving from services than can be supplied from a remote location accrue to the Member State of consumption. For services which can be provided remotely (such as telecom services and e-commerce), the current rules increasingly result in distortions of competition and delocalisation of businesses.

...... Turning to the area of excise duties, here too the Commission attaches the greatest importance to preserving the integrity of the Internal Market. The Commission has no wish to intrude in areas which remain the responsibility of Member States. However, we continue to believe that a certain degree of approximation of rates of excise duties is essential in order to reduce distortions of competition and fraud within the Internal Market. In this connection, a discussion took place in the ECOFIN Council in April on the question of alcohol taxation. As a result, Member States gave us the green light to present proposals to adjust the Community minimum rates of excise duties so as to re-establish the real value of those minimum rates in the light of inflation since 1992 when they were set.

....... Another important indirect tax proposal which the Commission hopes to present in the near future, following extensive consultation with all stakeholders, concerns passenger car taxation. The purpose of this proposal will again be to improve the functioning of the Internal Market as well as to provide the Community with the means of achieving our aims under the Kyoto Protocol of reducing CO2 emissions from passenger cars.
Tax harmonisation it isn't but nonetheless it looks as if there are indeed some taxing times ahead – some of these proposals may prove more than a little controversial. Here is a link where one can open or download the full text of European Taxation and Customs Commissioner Lászlo Kovács Speech of 12th May from which I have quoted above.

Taxing times for Hungary

The Hungarian forint has weakened in the past week or so over concerns about Hungary’s ballooning budget deficit, and the casual manner in which new Finance Minister, Janos Veres, has been treating the matter.

Anyone looking for more on Janos Veres might enjoy the article / comment at Portfolio.hu Hungarian analysts grade FinMin “C”

The weakening Forint is bad news for all those people persuaded by banks to take out mortgages and debt in €uros; the repayments are rapidly becoming more expensive. I doubt that the risks of taking on debt in a foreign currency have really been properly explained to customers – banks in this part of the world engage in practices that they wouldn’t dare try out in say Germany or the UK. The banks need far more supervision to prevent them miss-selling financial products, and overcharging customers; bank charges in Hungary have risen dramatically in the past five years and are nothing less than daylight robbery – customer focussed banking it isn’t! I would add that €uro denominated mortgages are also widely sold in many of the Central European EU member states.

Personally I don't share the view that the Forint will bounce back - I think the Forint could easily break the band within which it trades against the €uro and go as low as HUF280 to the €uro – it is currently trading at around HUF255.

Following on from my last post about budget deficits I think that investors, foreign and local, are likely to be less than enamoured of the latest proposals on tax to come from the cash strapped Hungarian government.

The Hungarian government will levy a 4% tax on capital gains, dividends, exchange rate gains and income stemming from the sale of tangible assets and from the letting out of properties, government spokeswoman Boglár László announced on Wednesday. Interest revenue will remain untaxed, Lászlo added.

All proceeds from the tax, officially a health contribution payment requirement, will go to the National Health Fund. The upper annual limit of the tax, to be introduced on 1 January 2006, would be set to HUF 400,000.

Opposition party Fidesz commented the government's planned move as an introduction of a new tax. László said the government expected an extra revenue in the order of HUF 10 billion.

From Portfolio Hungary @ Hungary plans tax on capital gains

€uro deficit limits - one size should not fit all

Portugal on Wednesday introduced sweeping tax increases and big cuts in benefits for state employees as part of an emergency plan to tackle the country's ballooning budget deficit. The package of tough measures, aimed at averting European Commission sanctions and a debt downgrade, includes a controversial plan to raise the retirement age for Portugal's 730,000 public sector workers from next year.

The move comes just two days after a national audit commission said Portugal's budget deficit could soar to 6.8 per cent of gross domestic product this year, more than double the 3 per cent limit set by the European Union's stability and growth pact. Measures to increase value-added tax from 19 to 21 per cent and increases in sales taxes on tobacco and fuel will have an immediate impact.

The moves also include a new maximum personal income tax rate of 42 per cent on annual earnings above €60,000. The prime minister said the minimum retirement age for state employees - who account for one in six workers in Portugal - would be raised in stages from 60 to 65, starting in 2006. In a further attack on the "unfair privileges" enjoyed by state employees, sickness pay would be cut from 100 per cent to 65 per cent, bringing public sector workers into line with the private sector.
A "vast list" of tax benefits and exemptions would be abolished and a maximum limit set on corporate tax benefits, Mr Sócrates said.

The FT @ Portugal introduces emergency plan to cut deficit
Given that there has just been an election in Portugal the government will probably get away with this. Had it been the case that an election was due within a year to eighteen months I would suggest that Mr. Socrates would not be implementing such vigorous measures.

This is one of the fundamental problems the €uro, the EU, and the rules that underpin them, face - the conflict between domestic national interest and the wider European interest. As I have alluded before similar 'defict busting' measures are likely to have to be put in place by those new EU member states that plan to adopt the single currency in the period 2008 to 2010; it is going to be difficult and deeply unpopular. When such steps are taken in Germany or France – public sector workers, unions etc. come out on the streets, and the political left adopts anti-capitalist rhetoric.

In many respects states like France, Germany and Italy deserve less sympathy if they break deficit limits. There is however a very good case for arguing that less developed EU member states should be permitted to run a higher deficit whilst they are bringing their economies and social models up to parity with the rest of the EU. Clearly there would need to be a fair degree of supervision / accountability in such circumstances, but in the absence of a more understanding attitude towards deficits I can see a situation arising where some EU member states are going to remain the poor relations for many, many years to come.

The EU elite can't take NO for an answer .....

EU call to re-run treaty referendums

This is the message of Jean-Claude Juncker - I think this is absurd. So much for the maturity of the EU elite and their ability to deal with democracy!

Meanwhile Claude Bébéar, supervisory board chairman of French insurer Axa and head of the powerful Institut Montaigne business think-tank is reported by the Financial Times in “Competitiveness at risk” from No vote as saying that:

"Calling a referendum on the constitution was a mistake. It is too complex and technical, so people don't focus on it; instead they focus on other issues." He called it "bad democracy" to put such an important issue to a public vote, claiming it should have been voted on by parliament instead.
I think not holding a referendum would have been bad democracy.

I do agree with Claude Bébéar that the Constitution is complex and technical, but I would also add that it is so ambiguous in its wording to be open to a myriad of interpretations which leave it open to abuse. The Constitution should be short, clear and accessible, it isn't, so sooner or later rejection is inevitable, as is the fact the vast majority of EU citizens haven't, and may never, read the document.

Wednesday, May 25, 2005

EU leadership and the "NON" test

Lame duck, weak, and unpopular leaders who are “more interested in "bashing Brussels" to win over angry voters than building the European project” are blamed for the Political malaise in Europe according to the FT.

This is not new. The EU “project” has always been at risk from politicians using the EU as a scapegoat for their own policy failures. However, failure on the part of the EU institutions to defend themselves against such attacks hasn’t helped matters.

I would add that leaders do not have to “bash Brussels” to be a weak and lame duck leaders – Raffarin springs to mind here. In the BBC's Hardtalk news programme, that is being broadcast today on BBC World, he comes across as lacking the necessary charisma to persuade people to follow his lead on any policy initiative, let alone his pleas for ratification of the Constitutional Treaty. The FT reporting on this interview writes that:

Mr Raffarin warned it would take “a very, very long time” to recover from a No vote “during which we will have a political crisis and when we have a political crisis there are always serious economic consequences. Europe will grind to a halt . . . [but] the Indian, Chinese, US economies will grow. We cannot afford to wait.”

He also ruled out the prospect of running another referendum if the No vote wins on Sunday. “There will be no second round, no second chance. France will speak once and once it has spoken its message is clear.”

More @ FT Giscard fires first salvo as recriminations begin
Raffarin certainly seemed a bit dramatically animated, and over-excited, about the implications of a NO but then the French tend to be more emotional about politics ..... However I would point out, which the FT does not, that having just watched/listened to the interview he also said that if there is a new Treaty then a referendum on that could not be ruled out.

As I noted the other day a NO is not something to fear. How the EU deals with a NO will demontrate just how grown up the "Union" really is, and how strong and resilient it is. In my view this is a test that is overdue - if the "Union" and its institutions can weather the storm of a rejection in a positive, and mature manner then the EU will be stronger for it rather than weaker. Rejection of the Constitutional Treaty, contrary to what some politicians have said, does not mean rejecting the EU.

More on €uro rates & the €uro being at risk.

Further to the comments of the OECD and the ECB being diametrically opposed as per the previous post. The FT notes today that

..... Mr Liikanen indicated that the ECB still expected its next interest rate move to be upwards. “We have a very accommodative policy stance at the moment,” he said. “There is a monetary stimulus in the market place. At some point in the future, policy should move towards a more neutral position.” Quote from Eurozone weakness “baffling”
Also well worth reading is today’s editorial False Stability It concludes by posing some questions on the ECB -
has it over-interpreted its price stability target? Is it chasing an arbitrary goal? Why is it so obsessed with government deficits? Why does it place so little emphasis on its other treaty obligation of supporting the European Union's economic policy? These are questions Europeans have not been, but should be, asking.
Perhaps Europeans might decide to go one stage and question the stability of the foundations of European Monetary Union(EMU) - Professor Martin Wolf writing in the FT certainly does:
Let us think the unthinkable: could the eurozone disintegrate? The answer is yes. Disappearance of the zone as a whole seems hugely unlikely, so long as the commitment to the European project survives. But the exit of one (or more) members, a sovereign default or both is not at all inconceivable.

See -
Italy’s predicament exposes Eurozone
There are some serious risks inherent in EMU as it currently exists in the Eurozone......

Tuesday, May 24, 2005

€uro rates and protectionist tariffs

The OECD is calling for a 0.5% cut in rates from the ECB. While this goes against the view of Jean-Claude Trichet at the ECB it would be welcomed by Germany, even if it might not suit all EUrozone member states. The imbalances within the Eurozone itself are the real crux of the problem for the ECB. The economists at the OECD need to take into account the fact that the EUrozone is not a politically integrated state or federation, but is rather a collection of such states which often have conflicting interests in terms of their approach to economic, and monetary policy that are dictated by domestic politics and electoral cycles. I think their call may fall on deaf ears. The Financial Times carries a story on this @ OECD calls for rates cut in Eurozone

Meanwhile the European Commission is set to continue to ensure that consumers in much of Europe overpay for fruit and vegetables.

The European Union will probably seek exemptions for fruit and vegetables from cuts in farm tariffs under the current Doha round of trade talks, Peter Mandelson, trade commissioner, said on Tuesday. Mr Mandelson's comment, made to the European parliament, was one of the opening bids in what trade negotiators say is likely to be a long and fraught process of designating products to receive special treatment under an eventual global trade agreement. Such items, known as "sensitive products", will face less stringent requirements for tariff cuts.

"It's more likely than not that fruit and vegetables will be among the sensitive products that we include," Mr Mandelson said. Such exemptions could be used by rich countries wishing to protect their domestic farmers, particularly in uncompetitive sectors where the local price is artificially maintained above the world price.

The EU runs a large trade deficit, particularly in bananas, oranges and orange juice, which account for about a quarter of the world's fruit and vegetable imports. It runs a special regime in which imports that undercut prices charged by domestic fruit and vegetable growers are charged a high tariff.
More @ FT EU mulls fruit tariff exemptions
Protectionism would be a better word for this policy.

Every picture tells a story

F. Sorrieu

Notions of a politically united Europe are nothing new. With the referendum in France on the European Constitutional Treaty only a few days away now the painting above seems to hit the right spot. It speaks for itself.

The title of the painting is Le Pacte by Frédéric Sorrieu. It is from a series of four that appeared when Europe was gripped by revolutions in 1848, and explored the theme of "La République universelle démocratique et sociale."

This painting, and the others in the series, along with some interpretation and background can be found by visiting L'utopisme républicain de 1848

Monday, May 23, 2005


Schroder and the SPD’s defeat yesterday is evidently no victory for the capitalist “locusts”, rather it is widely suggested in the media that it was because the SPD weren’t doing more to legislate against these pestilent creatures! Clearly the SPD, if it wants to get back into power following early elections, will have to offer some sort of "anti-locust" manifesto. Should they win there will be trouble ahead for business investment in Germany. The Eurozone economy is already in poor shape – and a "fashionably" anti-capitalist government in Germany could yet drag the still salvageable Eurowreck down into the depths of recession.

For more on the dire state of German politics the following article, which appeared in the Financial Times last week, is pretty good Germany loses in populist politics

So much for political turmoil, and the onset of stasis in Germany.

However, it seems that the European Union as a whole is heading down the same path!

The Financial Times led with an editorial on the European Constitution over the weekend - Time for the people to speak

Here are some issues I have with it. (The FT text is blockquoted.)

The threat that France and the Netherlands will reject the European Union's draft constitution in their referendums at the end of this month is now very real. Of those telling pollsters they definitely intend to vote, the Nos outnumber the Yeses in both countries.
I think the vote is far too close to call – predictions of victory for either side are wildly over-exaggerated.
The stakes are high. French and Dutch approval of the treaty would merely extend this marathon of participatory democracy on to an even more fraught UK referendum next year. If the French and Dutch give the treaty the thumbs down, the likely consequences will go far beyond a probable change of government in France and political ructions in the Netherlands. There may be fall-out in the financial markets, and serious setbacks to Europe's ability to pursue economic reform and remain open to enlargement and immigration.
Well possibly there might be a short-term hit to the €uro. But I tend to the view that it will be business as usual - Crisis is business as usual for the EU!
The souring of these two founder-members of the Union towards their common creation is striking. For in both countries, the constitution has been less the subject of detailed debate than the occasion for a far wider re-appraisal of attitudes towards Europe.

Many in France have grown disillusioned with, or downright hostile to, deregulatory, free-market policies from Brussels and see EU enlargement as diluting their influence. Inevitably, the constitutional debate is viewed through the distorting optic of France's miserably high unemployment rate, and focuses on whether the new treaty would create or destroy jobs.

The campaign in the Netherlands has also been warped. The Dutch used to be the EU's most reliable federalists; indeed only the Dutch had the gumption in 1965 to insist that Community business should continue despite General de Gaulle's boycott of the council of ministers. Now, however, this federalist faith is dimmed by fears that the EU has opened the dykes to Muslim immigration that could become a flood if and when Turkey joins.

This is groundless alarmism, and the Dutch should have been told so more resolutely by their politicians. Equally, Jacques Chirac, the French president, has been less than honest in presenting Brussels and its policies as more the problem than the solution to French unemployment. His government has warned that a No verdict would worsen the economic climate, but it is hard to see the wisdom or impact of such a warning when that climate is already bad, with gross domestic product growing by only 0.2 per cent in the first quarter of this year.
I think the FT is being overly dramatic here. Disenchantment with the EU has far more to do with it being out of touch with the ordinary people of Europe than anything else. If one reads/listens/watches the news every day, as no doubt the FT’s editors and journalists do, one is far more likely to overrate the issues recently highlighted by the media – hence statements such as it is to do with “deregulatory, free-market policies from Brussels” and “fears that the EU has opened the dykes to Muslim immigration”. If writers and broadcasters were less prone to panic and over-dramatisation, and were able to exercise more self control we might actually get a more realistic and balanced view of both the consequences of a “NO”, and also the underlying reasons.
Perhaps the best thing that French and Dutch supporters of the treaty can do at this stage is to refrain from overselling the benefit of a Yes vote as well as the cost of a No vote. They should instead stress that the constitution is a compromise between big and small states, and between Anglo-Saxon free marketism and continental industrial and social policy. This is why its provisions can be interpreted various ways, but also why it is probably the best bargain that 25 member states are likely to strike.
The FT stops short of recommending a “Yes” but only just. What they ought to have highlighted is that it is the inherently ambiguous wording of the Constitution, and therefore the fact that “its provisions can be interpreted (in) various ways”, that make it such a poor document. Member states will, if it is ratified, likely spend so much time squabbling over the “legal” interpretation of the document’s provisions that stasis will rapidly set in. The Eurozone is already in economic stasis – the Constitution will ensure that there is also political stasis.

In the space of the last 30 months there has been the physical introduction of the €uro, enlargement of the EU from 15 to 25 members states, and now the Constitutional Treaty – this is simply too much change too fast, and it is change that I am sure for many people appears to have been decreed rather than democratically agreed. The EU's political elite are like the 600 of the Charge of the Light Brigade - on and on they ride, but as the onlooking French General so wryly observed "c’est magnifique mais ce n’est pas la guerre!". It is indeed time for the people to speak and we need have no fear of a "NO" - it could well prove to be the best thing to happen to the EU.

Buyer Beware

The following is from Hungary Around the Clock.

The Free Democrats will honour those who speak out against discrimination with the Bearded Man prize, named after a hostile remark by Fidesz MP Zsolt Semjen. The party has invited the public to submit misogynous, homophobic, racist and insensitive quotes by public figures for posting on its website szdsz.hu.

Semjen told a Christian Democrat convention in February that anyone who wants his teenage son to obtain his first sexual experience from a bearded man should vote for the Free Democrats.

The Free Democrat website also recalls a remark attributed to Prime Minister Ferenc Gyurcsany, who once spoke of the need to trade in “aging wives”.

Film director Miklos Jancso will head a five-member panel to select prize-winners. The other panel members will be MPs Matyas Eorsi, Gabor Horn, Peter Gusztos and Laszlo Csozik.

Bearded man prize
Such is the level of political debate in Hungary at this time of year! The Hungarian Prime Minister’s comments earlier this year about the Saudi football team being a bunch of terrorists ought to qualify for first prize but I’m sure it won’t. Apparently Gyucsany and his Ministers are going to spend part of the summer touring the countryside town and villages to explain the 100 Steps plan. I seem to recall the previous government did something similar ..... long lunches with wine and palinka should produce some choice quotes for the Free Democrat website.

Whilst on the subject of poisonous remarks, there have been a few stories recently in Hungary of salmonella poisoning. This is no surprise. It is common here for major supermarket chains to pre-cut more expensive cheeses and wrap them in cling film – they then re-wrap the same pieces of cheese of until they have been sold; sometimes this can take a few weeks; this is a deliberate policy followed by some supermarkets although they will deny it. The other week I saw a display of Parmesan cheese in a big supermarket in the Westend shopping centre that appeared more like a display on how to cultivate penicillin than a showcase of Italian food – cut ham and salami were right next to it. ....... It is not unknown for meat and poultry products to be treated in the casual manner. Dairy products are sometimes left long periods, perhaps even longer, in warm areas prior to being put out in the refrigerated display cabinets – this is less of a concern when winter temperatures are below zero but when the summer comes and temperatures often stay between 25 – 35 centigrade for weeks it is a concern. There are inspectors here but no doubt like most forms of officialdom in Hungary they are underpaid and can be "persuaded" to look the other way.

Just as with Hungarian debt, so it is with food in some of Hungary's supermarkets - buyer beware.

Wednesday, May 18, 2005

EUrope heading for a split

Reading through the Financial Times earlier today I noticed the following paragraph in an article entitled No campaign regains lead, French poll shows

France and Germany have talked about a "relaunch" of a stalled EU along their preferred lines, with more social and economic harmonisation. But since at least half of EU members would not be attracted to what British diplomats caricature as a "core Europe of high unemployment and low growth", such a move could split the EU into two camps
This “split” within the EU is something I have alluded to before, and with every day that passes it seems more likely that a split may occur. The FT also carries another article that echoes the above qoted paragraph See - Schroeder reaches out to critics of capitalism
German chancellor Gerhard Schröder will next month call for a European initiative to promote public spending on research, set minimum social standards in companies and tighten controls on international financial flows, senior members of his Social Democratic party said on Tuesday.

The chancellery refused to comment on the initiative, which would add to signs of an emerging rift within Europe between advocates of protectionism and governments that back a more liberal economic policy agenda.

But Mr Schröder's plan suggests that the anti-capitalist tone could not only endure after Sunday's vote but also inform policy over the next 16 months, shaping the SPD's campaign ahead of the next general election in September 2006.
Schroeder and Chirac will both probably hype up the rhetoric in the next year or two. Coming on top of the split with the Atlanticists in the EU25 over foreign policy it simply makes the likelihood of a two tier Europe more probable. It seems ironic that the EU, which was originally set up to bring the people of Europe closer together, to prevent conflicts, and to end power blocks, is now host to what is becoming two very large power blocks with very different visions – the rhetoric is also contributing to a polarisation. A split Europe is looking increasingly realistic and papering over the crack is getting harder to do.

Tuesday, May 10, 2005

Social Democracy in Central Europe

Today at the Financial Times there is some very revealing comment in the article -

Turbulent times for Social Democrats in Central Europe

The FT writes that:

Entry to the European Union should have stabilised the political scene in central Europe and bolstered the region's ruling Social Democrats, but instead prime ministers are resigning across the new member states, with opinion polls predicting defeat for their governments.

The disintegration of the centre-left is blocking crucial decisions about economic reform and ratification of the European constitution, and risks bringing to power populist rightwing governments that could take a much more confrontational stance towards Brussels. So far, however, financial markets have shrugged off the political turbulence because they see greater chance of fundamental economic reform once the Social Democrats are ousted.
I suspect the markets are correct.

“Populist rightwing government” The horror! The horror! Social Democrats, as anyone with even a rudimentary knowledge of contemporary German politics will know, are no strangers to populism and the breed of “social democrat” in Central Europe is no different. Let’s not forget that it was the Socialist party in Hungary that offered many public sector employees a 50% pay rise in the run up to the elections in 2002 – populism or bribery, take your pick. A point the FT also conveniently omits is that many of the so-called “social democrats” in central Europe are former members of the Communist Party and their credentials as "Social Democrats" are at best suspect. There is also the fact that people in Central Europe are sufficiently suspicious of all politicians, who all seem to be unusually wealthy, to want to change their governments at every opportunity just to make sure they still can; given past history, not to mention endemic corruption which more often than not goes to the highest political office, that suspicion is not without some justification.

The FT continues that:
The political turbulence in eastern Europe is partly a reflection of the fact that democracy was only established 15 years ago. With the exception of Hungary the new European members use proportional representation electoral systems that encourage power sharing and a multitude of parliamentary parties.
Power sharing and a plethora of parties is surely a healthy sign – far better than the opposite. What is preferable, power sharing, or, that a party that polls only 36% of the vote gets over half the available seats? The latter may pass for “representative” democracy in the UK but it wouldn’t work in too many other places in EUrope! Also Hungary has a mix of “first past the post” and proportional representation – a candidate must gain over 50% of the vote to be directly elected to parliament, how many candidates in the recent UK elections would pass that test? Not many!

The FT whilst lamenting the fate of Social Democrats does at least admit the fact that they have broken their promises and are embarking on programmes of unpopular reform.
Yet the political problems mainly reflect a crisis within the region's dominant Social Democratic parties, which promised to ease the pain of the economic transition to membership of the eurozone when they came to power at the start of the decade.

This autumn Polish elections are forecast to mark the start of a regional swing back to the right, with Hungary and the Czech Republic set to follow in 2006. Social Democrats are being punished for breaking their promises to their voters and honouring those made to the EU. Economic reforms, budget cuts and modernisation of the welfare state - however tentative - have antagonised voters and important lobby groups.

Disillusioned Social Democrat voters have defected to extremist parties of the left, as in the Czech Republic, or the right, as in Poland. "Social Democrats lost a lot of their identity in the eyes of their potential voters by doing things Social Democrats were not meant to do," says Jiri Pehe, a Czech political analyst. "People were prepared to put up with tough reforms as long as they were on the road to joining the EU. People now think: 'We're in, don't we have the right to take a break?'
Why are they embarking on programmes of unpopular reform and cutting back on public spending at a time when it is urgently needed? The reason is simple - qualifying for the Eurozone membership. Most of Central Europe’s economies are running budget deficits that are way in excess of the ERM2 limits - either they reform or they miss the target dates and find themselves punished by the financial markets. Only the other day the Governor of the National Bank of Hungary was quoted as saying:
“Hungary needs fundamental economic reforms in order to be ready for euro zone entry by 2010 as planned, MTI quoted central bank (NBH) Governor Zsigmond Járai as saying.

Járai said on Wednesday he expected the current account deficit to reach 8-9% of GDP in 2005, attributing this performance to the high budget deficit.

“Reducing the size of the public sector and of public spending is of special importance for meeting the Maastricht criteria, he said, adding that the central bank doubted the government statistics showing that the budget deficit as a percentage of GDP was in line with the criteria.

He also said the high public sector deficit and the ongoing reluctance of the government to tame spending would constrain the NBH's room to ease monetary policy in the short term

FromJárai urges sweeping reforms @ Portfolio.hu
Public spending cuts are going to be unpopular in Hungary for example, because some 20% of the working population are employed in the public sector so any reform of this bloated soviet legacy bureaucracy is going to cost votes. Then there is the poor state of public hospitals some of which cannot even supply their patients with cutlery, let alone the fact that standards of treatment are falling as many of the best Doctors have been quite deliberately recruited by “western” EU states where the pay and benefits are literally 10 times better. The roads are a hazard for anything but a tractor they are in such a poor state of repair. 30% of the buildings in downtown Budapest were recently described by the city council as dangerous. Approximately 50% of Budapest’s sewage goes into the Danube untreated. The railway network, like the road network needs considerable money spent on it to even make it saleable ...... there is a veneer of prosperity, but it is just that, a veneer.

It was all supposed to better after joining the EU – at least that was the message given by the ruling Social Democrats. The problem for these people, many of whom are ex Communist party members, is that there is more transparency today and the truth tends to get out in a way it didn't prior to 1989 – people are not surprisingly becoming somewhat disillusioned with the EU; they were led to believe it was something which it isn’t!

Russia and the West

In recent days there has been much said, and written, about the “need” for Russia to embrace democracy, especially in the rhetoric coming out of Washington. It is also backed up in the media by papers like the Financial Times and The Economist. There is also frequent criticism of President Putin’s “authoritarian” stance. I wonder how much all these commentators really understand about Russia and what it might be like without Putin’s guiding hand ....

Here are two articles that criticise:

Russia and the West – The Economist

The long shadow of the second World War

Here are two that are constructively critical, and advise against trying to force the issue of democratic reform.

Freedom, not democracy, for Russia

The essential Vladimir Putin - A semi-authoritarian present is Russia’s best hope for a liberal future

I tend towards the latter two.

Whilst on the subject of Russia I see that Edward over at a Fistful of Euros has been addressing the subject of the need for Russia / Putin to “apologise”. See - When sorry is the hardest word

One might answer "let him without sin cast the first stone". I think today's younger generations of Germans must be heartily sick of always having to apologise, and feel guilty for the actions of past generations in respect of the two world wars, and the concentration camps. The time for apologies is long past, and those that perhaps ought to have made them are nearly all dead. The FT at least got something correct in its’ recent editorial when it wrote that;

History must not dominate contemporary relations. Politicians must know when to move on, like the men who brought post-war reconciliation between France and Germany. However, nations also need time to come to terms with their past. Western Europeans have had 60 years to contemplate the second world war. East Europeans have been allowed to consider it freely only since 1989.
It is time we all moved on in Europe. Trying to brow beat an apology out of Russia is not a good idea. An apology is about as worthless as Chamberlin’s piece of paper declaring “peace in our time” back in 1938. One can’t bring back the dead, the wrongs of war and misguided ideologies cannot be righted, time cannot be turned back. The best that can be done is to work together to make sure it doesn’t happen again. Yesterday the Russian President acknowledged that fact when he called for all nations to work together to ensure there are no more “hot” or “cold” wars - I think this is the best we can hope for, and it contains an implicit admisssion of responsibility that ought to be shared by all.

Thursday, May 05, 2005

The €uro – A currency union at risk? Revisited.

On Tuesday in my post The €uro – A currency union at risk? I discussed and linked to the Financial Times editorial - A currency Union needs markets - The editorial may go under subscription in which case I am happy to mail out a saved copy for educational purposes.

Briefly the FT argued, in respect of EMU, that the need for political union to back up currency union was without a definitive answer, but that a market economy was essential to making the currency union work. I argued that without the political structure and inclination in place such a transition was impossible to achieve. There is also a good post entitled ECB: Plus Ça Change? by Edward over at A Fistful of Euros that also explores the issues surrounding EMU.

Today in a letter to the Financial Times, responding to the FT editorial, Michael Woolfolk, of Bank of New York, argues that:

Until recently, it appeared that economic and monetary union was largely an economic project aimed at improving the competitiveness of Europe to counter-balance the ascendancy of the US and to thrive in the new global economy. It now appears that Emu is increasingly becoming a political project as the costs associated with the economic project are becoming higher than many are willing to pay.

........ What is needed at this important juncture is the political courage and leadership to see beyond the current transition costs. Without it, Emu will not succeed. It may end up that signing on to the euro currency will require the move to a market-based economy. This will certainly not be easy for welfare-based economies, and it may not ultimately be possible politically. The inability of founding eurozone members to adhere to the fiscal deficits of the Stability and Growth Pact suggests that the political will to implement the basic necessities of an optimal currency zone does not currently exist. If this remains the case, there appear to be only two choices looking forward: political union to maintain the euro, or disband the euro to maintain sovereignty.

In this light, it is not surprising that France is having strong reservations about passing the EU constitution referendum later this month. Perhaps the referendum is being viewed as a choice between sovereignty and the euro. Moreover, France may not be the only EU member with such concerns. If so, the sustainability of the euro needs to be reconsidered and financial markets need to take heed.

From - Choice between Euro and Sovereignty
One point that I take issue with is that it has always been made clear that EMU, and indeed the EU, is a political project and the last Commission President, Roman Prodi, stated as much on a number of occasions - is this fact really only just starting to dawn on Americans??? That aside, the costs associated with EU and Eurozone membership are indeed rising. The letter casts doubt as to whether there is the political will, especially in France and Germany, to implement the necessary structural reform to enable transition to a fully free market economy – what Chirac calls the “new communism”. I think this is a correct assessment.

Where I part company is where the letter states that:
In your editorial you argue that eurozone politicians must explain that a monetary union is not a way to escape the market, but rather that the market is a way to secure a more prosperous future. As you point out, Germany's unit labour costs have fallen dramatically against France's and Italy's since 1999, as the German private sector equips the country to cope with the challenges ahead. Such structural changes are occurring throughout the eurozone, and the costs borne by the average European are substantial. Therefore, it is not surprising that Mr Muntefering believes that the transition to a market-based economy endangers democracy and that two-thirds of Germans support him. The German economy has stagnated, unemployment is near a postwar high and the current welfare model is in jeopardy
I can see that during the transition period there might be the opportunity for politicians to engage in populist rhetoric, something to which people like Muntefering, Schroeder, Chirac etc. are no stranger. Indeed the populist "anti-capitalist" rhetoric of the vote seeking German SPD politicians is at present doing much to whip up divise sentiment, and discourage business from investing in Germany at a time when the country needs every job and scrap of business investment it can get.

Nevertheless I am at a loss to understand why anyone thinks that the transition to a full free market economy endangers democracy. In the past 15 years eight of the ten member states that joined the EU last May have been making just a such a transition, and they have also moved from dictatorship to democracy. In these states free market economics and democracy go hand-in-hand - granted the tranistion has not always been easy, but at no point has democracy been under threat; if anything the free market has assisted the cementing and solidification of democracy.

Wednesday, May 04, 2005

Victory and remembrance in Russia

Monday next week will mark the 60th anniversary of the victory of the USSR in 1945 over the forces of Nazism. This has sparked a variety of emotions in some of the new EU member states especially some of the Baltic Republics and there are some excellent articles on this at the online journal Russia Profile.

The current list of heads of state attending is at the official Victory in the Great Patriotic War website. It is, and ought to be, a widely acknowledged fact that without the Red Army victory in Eastern Europe the forces of Nazism could not have been defeated, and the Allied invasion of 6 June 1944 would have ended in defeat.

The Fourth Generation is an fascinating article written by, Natalya Loseva, an editor of the website Our Victory Day by Day - (for the English version click on eng.9may.ru). The website was set up to inform, and engage in discussion, the under twenty generation of Russians about the war. One of the most telling findings was the following:

The second group of teenagers is made up of the “victims of Hollywood.” They are interested in the war, but only as action-packed material for a screenplay. They are, without doubt, victims of show business propaganda – the most effective and insidious kind. The Hollywood version of World War II has proved an immensely effective form of product placement for a completely new way of recounting history – the cinematographic format – complete with special effects, cliches, heroes and storylines that fit the blockbuster formula and a completely new kind of cinematographic truth shaped for the circumstances of the moment. Of course, no one would dream of saying that the majority of these films are politically motivated. Instead, the motivation is economic. This is the innocent nature of the entertainment industry. The real danger only becomes apparent through what these children, who are curious and interested, write in forums and letters, revealing a completely different picture of history. Indeed, these children, who have grown up on movies and comic books, seriously believe that the United States and Great Britain won the war, with only symbolic help from the Soviet Union.
The above is probably true of the vast majority of teenagers, and very possibly many adults, in western Europe and, almost certainly, the United States. The facts highlighted by the above quote can only help to justify the view that Europe needs to counter some of the excessive influences of American culture.

Tuesday, May 03, 2005

The €uro - A Currency union at risk?

Is it possible to have a monetary union without a political union? This remains a question without a definitive answer.
Asks and answers the FT in an editorial today. Currency unions not backed up by political union have a very, very poor record of success but I guess the FT doesn't want to discuss that, instead they concentrate on ....
.... another, more immediate concern. It is whether a currency union can work in countries without a flexible market economy. On this, current European rhetoric and performance begin to raise disturbing doubts.

The Financial Times goes on to castigate the populist stances being taken by politicians in France and Germany, and discuss the ills of the "Italian Patient". Finally they conclude that:
The only hope for future success is acceleration of market-oriented reforms. Rigid economies will put huge pressure on the monetary union itself. What is at stake in the eurozone's big countries is too important to permit such infantile populism.

All italicised quotes from - A currency union needs markets

Reading the above linked article one might well conclude that the €uro is at risk from the fact there is no central political power that can push through market orientated reforms. The opening question comes back to haunt us -
Is it possible to have a monetary union without a political union?

The answer is clearly NO. To suggest the question is "without a definitive answer", as the FT does, is to duck the question.

Monday, May 02, 2005

The EU - just another player in the orchestra

Yesterday was a triple celebration in Hungary – Mother’s Day, Workers/Labour Day, and the 1st Anniversary of EU Accession.

The Europa concert, with Sir Simon Rattle conducting the Berlin Philharmonic in the Budapest Opera House, was probably the highpoint of the day - pieces played were by Bartok, Berlioz and Stravinsky. Nonetheless I must admit to being a little disconcerted by the schoolchildren, out on Andrassy Ut, who sang the EU Hymn dressed with EU blue and yellow scarves tied around their necks; not so many years ago children here would have sung socialist “hymns” with red scarves around their necks .......

At the Financial Times is yet another editorial that underlines the need for leading Eurozone states like Germany and France to embrace structural reform, or stagnate and rot away. This has been a constant theme on this weblog.

.... the OECD argues in papers published ahead of today's ministerial meeting, more trade in services will stimulate innovation, raise incomes and create jobs - provided countries adopt the right domestic policies. The OECD does not mention the European Union services directive by name, but its analysis shows precisely why Europe needs such a measure, and what EU states should do to make a success of it .........

...... France and Germany fear service imports from low wage Eastern Europe will destroy domestic jobs and drive down wages. In fact more cross-border trade should create jobs and raise real incomes even in the richest states. But - and this is a serious proviso - it will only do so if domestic labour and product markets are flexible enough to allow workers to move from declining sectors to expanding ones.

One way to speed mobility is to cut unemployment benefits, as Germany did recently. But this is not the only answer. Tightening eligibility requirements and switching subsidies to in-work benefits can also play an important role. Excessive employment protection laws, which deter employees from switching jobs and discourage employers from creating new full time positions, can be eased. Wage bargaining systems can be overhauled to ensure they allow movements in relative wages. Governments can work with employers to finance skills and retraining, and address rigidities in the housing market that prevent workers from moving in search of work.

This may look like a daunting agenda. But it need not amount to adopting an Anglo-American economic model wholesale. Without such changes many EU states will continue to stagnate and may well emerge net losers from the services revolution. The choice is theirs.

Full text @ Jobs and Services
However, it seems that for some people the European Union’s dreams of becoming a leading global power do not even feature, even if by some miracle structural reform is embraced. Joseph S. Nye in an op-ed entitled An India-China Axis? recounts that:
As one Indian strategist put it to me during a recent visit, “By 2030, we envisage the US, China, and India as the three largest powers in world politics. We don’t want a China- or a US-dominated world, but if we had to choose, it would be easier for us to live with the latter.”