Thursday, June 30, 2005

Euro accession and Hungary

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

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

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

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

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

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

Tuesday, June 28, 2005

Tax plans for Hungary

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

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

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

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

It's autumn for Schröder and Germany

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

As the above linked report notes -

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

Deficits and politics

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

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

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

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

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

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

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

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

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

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

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

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

Monday, June 20, 2005

EU's old & in the way hold back progress

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

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

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

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

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

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

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

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

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

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

More on the Hungarian economy

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

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

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

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

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

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

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

Friday, June 17, 2005

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

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

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

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

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

Thursday, June 16, 2005

Eurozone expansion

The Financial Times today reports that the French premier calls for freeze on enlargement Regardless of whether you agree with de Villepin or not it is certainly a bit too late to be making such a call.

But what about enlargement of the Eurozone? Perhaps it is the case that enlargement of the Eurozone is one part of the so called “European project” that will continue unabated, or will it? Certainly the 10 new EU member states have no opt out on the single currency, as per the accession Treaty signed by these states governments and ratified in referendums, but the accession treaty laid down no timetable for Eurozone accession.

A report today at the Hungarian financial news portal, Portfolio Online, whilst outlining some of the benefits of eurozone enlargement, also suggests some reasons that may bring about a halt to expansion of the €uro area.

Central Europe's manufacturing industries would strongly benefit from a quick adoption of the euro but this might further increase the fears of workers in current euro zone, Michal Dybula, Warsaw-based analyst of BNP Paribas, said in a research note.

While ‘No' votes at the French and Dutch referenda on the European Union's Constitution might slow the convergence process of Central Europe, policymakers in Western Europe might also be concerned with regards to the poor fiscal track record in Central Europe, fearing renewed deficit overshoots once countries enter the euro zone.

"New risks would emerge if the political commitment of various European institutions to accept new members declines, reducing the incentive for accession countries to implement the measures required in order for the nominal convergence criteria to be met," Dybula said.

Central Europe's manufacturing industries can rely on a cheap but skilled labour force, lower taxes and, thanks, to strong FDI, good access to global markets via parent companies' sales channels. "Yet, for workers in many of the EU-15 countries, the success of newcomers poses a risk to their jobs." In several major EU-15 countries, including Germany and France, the relocation of production and/or inflow of cheaper labour from Central and Eastern Europe to the West start "to shape the language of the political debate", the analyst said.

While big companies, owned by western firms can manage the FX risks efficiently and rely on cheap loans from the parent firm, for smaller manufacturing businesses in Central Europe the adoption of the single currency would remove many obstacles to enter foreign markets in the Union.

“Also, smaller companies from EU-15 countries...could benefit from an expansion of the euro zone as the relocation of production to cheaper locations would become easier," Dybula said. “That, however, might mean a further reduction of manufacturing jobs in western Europe and the lack of sufficient labour market reform in the West would indicate that those lost jobs might not be swiftly replaced."

Dybula said that talking down a swift adoption of the euro by Central Europe should not be particularly difficult on the basis of, for example, the recent fiscal performance of most countries of the region.

"With deficits well above 3% of GDP in Poland, Hungary and the Czech Republic and little commitment to remove structural obstacles to sound public finances, policymakers in the current euro zone could insist that accession countries should deliver more than the current criteria, arguing for the need of assurance that their deficits will not slip out of control again after the adoption of the euro," the analyst said.

Dybula noted that Central Europe's policy makers “whose policy horizons often last for only four years", are unlikely to accept any demands to tighten entry criteria.

From - Central Europe and the Euro
As I noted the other day the austerity measures required to meet Eurozone membership criteria are not going to be politically popular – local politicians might, in private, be glad of a delay but of course they couldn’t admit to it in public.

Tuesday, June 14, 2005

The falling Euro, and the EU budget

Only those with their heads in the sand would deny that Economic gloom in Europe boosts the dollar against the Euro However, it is worth bearing in mind, as the above story at the Financial Times also points out, that there other factors behind the rise of the dollar.

Big banks are also increasingly reporting large repatriation flows by US multinationals under the auspices of the Homeland Investment Act, a year-long tax break designed to encourage US companies to bring home earnings held abroad. Repatriation had been held up by uncertainty over the accounting treatment of the money, but with these issues now overcome, JP Morgan believes US companies will repatriate $100bn (£55bn, €83bn) before the end of the year, most of which would be converted from euros.
Meanwhile the push for a radical overhaul of the EU budget is on. EU Trade Commissioner, Peter Mandelson, is reported by the FT to be in favour of such reform.
In a speech in London on Monday night, Mr Mandelson floated the idea that Britain could give up part of its rebate paid for by accession states, estimated at €440m out of a total discount from the EU budget of €4.6bn.

“Ministers must be consistent and courageous in their reformism, and be prepared, in the context of a deeper re-think about the EU's budget, to look at reforming Britain's rebate. For a start it is surely wrong to ask the poorer new accession states to pay for any part of the rebate,” he said at a Fabian Society lecture. His comments, in the midst of a dispute between the UK and other member states over future financing, appeared to be an attempt at breaking the stalemate in the budget row. Mr Mandelson warned London against making an overtly aggressive defence of the rebate that could alienate possible allies. He suggested examining the rebate as part of wider reform.

“Refusal to talk about much needed budget reform is part of the old conservatism in Europe, which the Barroso Commission is determined to change. But Britain should be careful not to play into the hands of this conservatism,” he said.

From FT @ Mandelson calls for “courageous” EU reform
It seems that Commissioner Mandelson is echoing the stance of Tony Blair – not surprising given their past political relationship. Here is what the UK proposes
Mr Blair insisted that any change to the rebate had to be linked to radical reform of the budget as a whole, and the common agricultural policy in particular. “We are happy to have this discussion [about the rebate] but it’s got to be on a realistic basic,” he said. He argued that this realistic basis needed to recognise both the “unfairness” that led to the rebate being agreed in 1984, as well as the need to change the system that allocated 40 per cent of its payments to a sector -- agriculture -- that accounts for only five per cent of the EU’s employees. He added the discussions should be on the basis that “there must be fundamental changes, in particular to the CAP and the amount of the budget that it takes up each year.”

“You have to ask the question, in the early 21st century, is a budget formulated in this way the answer to the problem of Europe’s today. I don’t think it is,” he said.

More @
Blair remains defiant over British budget rebate
Blair has a point here, but whether Chirac is prepared to look at fundmental reform of the EU budget is quite another matter.

Unfortunately there is also a strong possibility that there will be no progress on the EU budget. In this case it may well be the new EU member states in Central Europe that will suffer. Funds that are much needed in the CEE region could be cut drastically in an attempt to prune the EU budget. If the benefits that accrued to Spain and Ireland are not going to be repeated then the CEE states will remain the EU’s poor relations, but then it is clear that are many in the old EU 15 who regard the people in the CEE region as somehow inferior and less deserving.

Monday, June 13, 2005

Hungary and the Euro

Further to my post of Friday on Hungary. Today the Financial Times runs a report entitled Hungary “committed” to join euro by end of the decade Finance Minister János Veres is quoted as saying

Hungary had no option but to continue aiming to join the eurozone in 2010.

"I do not think Hungary has any other playing field," said Mr Veres. "The Hungarian forint is not the Swiss franc. It cannot be maintained independently for decades."
The report then continues to explain that
Among the eight central European countries which joined the EU last year, Hungary is considered one of the farthest from the eurozone's rules on deficits, inflation, interest rates and debt which must be met two years before a state can join the single currency.

But Mr Veres, whose left-liberal government faces elections next spring, rejected calls for deep spending cuts that many economists view as necessary to keep Hungary on track for joining the single currency.

Mr Veres insisted the government would meet this year's budget deficit target of 3.6 per cent of gross domestic product - though analysts predict the figure will be over 5 per cent. In the five months to the end of May, the government had already accumulated a deficit equalling 82 per cent of the year-end target. Some analysts said only accounting manoeuvres would make the official target attainable. Such tactics, they warned, would not reduce real spending and would only weaken the government's battered credibility among investors.

Mr Veres said Hungary would not adopt a flat tax system similar to other central and eastern European countries, but he would seek changes aimed at boosting revenues by broadening the tax base. He said ministries and offices would be given less money for salaries in 2006 than in 2005.
Given that Mr. Veres and the Hungarian Socialist Party (MSZP) are unlikely to be in office this time next year his remarks on eurozone membership are largely academic, not to mention predictable. Predictable because the EU accession treaty signed by the 10 new member states requires them to join the Euro when the conditions are right - there is no opt out - so in that respect Mr. Veres is theoretically correct that there is no option.

Personally I think the FT would have been better to get the view of the opposition FIDESZ Party. Hungarians have changed their government in every general election since the change of political system.

A FIDESZ led government in power next May, taking a similar view on Eurozone membership, is going to find the challenge of joining the single currency by 2010 is immense; they will of course blame the present Socialist incumbents for grossly mismanging the economy should they have to postpone.

Yesterday evening the leaders of the Socialist Party and the Liberal Party, the junior coalition partner, were interviewed live on television – at times their facial expressions and body language, let alone their responses to questions, told viewers more about the state of the relationship between the two Parties than they themselves would openly admit – there is a distinct air of disharmony to put it mildly. I believe that the coalition might just about be able muddle through to the election next May, but the prospect of early elections should not be discounted.

The EU's lack of definition

The issue of Britain’s budget rebate has been so hyped by the media, and EU politicians keen to deflect attention away from the humiliating rejection of the EU Constitution by France and the Netherlands, that one might well think this was the only important issue to be debated by EU poltical leaders at the summit this week. It is clearly back to business as usual for the EU political elite!

What seems clear is that a more fundamental debate needs to be held as to what the purpose of the EU is in the C21st – the argument of peace in Europe is increasingly one that is no longer relevant 60 years after WW2, especially for younger generations.

Terms like “Europe” and “EU project” need to be defined. The words of Mr. Alumnia, Commissioner for Monetary Affairs, about “putting in place a system of economic governance that is efficient, well-balanced and credible”* need more explanation. If the Constitution, that has just been rejected by France and the Netherlands, represents the official definition of purpose for the future of the EU then clearly there is a problem; few people have either the time or the inclination to read hundreds of pages of legalese.

It is also clear that the EU can no longer function with contradictory mantras, such as that recently used by the Commissioner for Institutional Communications, that EU member states “while remaining sovereign, should pool their sovereignty”.** Frankly the latter is absurd and suggests a belief in the impossible – but then the EU has often seemed alarmingly like the Red Queen in Lewis Carroll’s Alice through the looking glass

‘But you can’t believe things which are impossible’, said Alice. ‘Nonsense’, said the Queen of Hearts. ‘You just haven’t had enough practice. I often believe six different impossible things before breakfast.’

* Joaquín Almunia Speech 10 June 2005

** Margot Wallström Speech 10 June 2005

Friday, June 10, 2005

Spanish EU funding levels needed in Central Europe

Here is an interesting fact buried in an article at the Financial Times on the matter of the EU budget.

Madrid has received a net €93bn ($109bn) in EU funds since joining the union in 1986, a cash injection that surpassed US aid to Europe under the Marshall Plan after the second world war. EU funds have helped transform a once backward country into one of the eurozone's fastest growing economies, with modern highways and high-speed rail networks.

From Spain and the UK's EU budget rebate
The new member states of Central Europe certainly need a similar injection of funds. There was no Marshall Plan money in this region – the Stalinist communists who grabbed power under the watchful eye of the Red Army after WW2 refused the aid.

However Alberto Navarro, Spain's secretary of state for the European Union, goes on to say that -
“Spain should not pay for the full cost of enlargement while other countries get enlargement for free,” Mr Navarro said. “Financing enlargement should not be a question of taking money from Spain and giving it to the new member states.”

Quote from the above link
Where does he think all the money the EU poured into Spain came from? It came from the EU budget, and is money that was contributed / transferred by the other EU member states. The Spanish government's attitude does not surprise me as I am sure the Spanish government is nervous about the competition from Central Europe’s ambitious and growing economies.

It’s high time the nations of Central Europe put their heads together and took a united stand on this issue, rather than being sidetracked and split by the petty machinations of people like Chirac and Schroeder who are desperately trying to stem their own fall from grace. Central Europe's EU member states can expect no favours from these latter two, and if they do grant them any favours they should extremely wary of the subtext.

Sometimes I get the feeling that some in the EU would feel happier if the new EU member states stayed poor and put a sign on their respective doors that reads “Poor relations - open for exploitation” Still it could be worse the sign could read “Arbeit macht frei” but then let’s not forget there’s one of those already in Poland.

Hungary's new President, and debt concerns

My sincere thanks to Edward and the rest of the people at A Fistful of Euros for giving me the opportunity to have the text below put up as a guest post on their weblog @ Hungary: New President and debt downgrade Comments should be made there rather than here, hence the comment / trackback facility for this post being switched off.

This week Hungary has a new President. The election of Laszlo Solyom as Hungary’s new President was a major setback for the governing Socialist Party (MSZP), at the same time as it was widely lauded as a victory by the right wing opposition Fidesz party. The outcome was largely the result of the behaviour of the MSZP’s junior coalition partner, the liberal leaning Free Democrats, who abstained. Katalin Szili, the MSZP choice, was regarded by Free Democrats as being far too involved with the MSZP. Only 3 votes separated the two candidates, and this reflects the current balance within the Hungarian parliament between Fidesz and MSZP – a handful of independents and the Free Democrats in fact have the deciding votes.

This result will only serve to increase tensions within a coalition that has always looked slightly ill at ease. If it doesn’t create enough friction between the two partners to lead to early elections, it will certainly result in the kind of stand-off which means that little of importance is likely to be achieved between now and the general election next spring - apart, that is, from snide remarks and recrimination. There is an MSZP convention scheduled for this Saturday and it is always possible that the future of the coalition will be up for debate.

Sadly the normal state of affairs is for the politicians in Hungary to spend more time trying to smear each other than they do working on really important matters such as the economy.

In fact Hungary seems to be heading for deep trouble, economically speaking, due to its ballooning twin deficits. In addition to the repeated criticism from the European Commission over the state of Hungarian finances, Standard & Poor’s recently gave Hungary a sovereign debt downgrade due to the poor fiscal outlook: they forecast a budget deficit of 5.2% of GDP, and a current account deficit of over 8% of GDP.

At the end of last month the government had already consumed 82% of its budgeted public deficit target so overshoot is more than likely. Despite this situation it looks very much as if the current incumbent at the Finance Ministry is not going to embark on anything that has even a hint of austerity to it, since such measures could damage the chances of the MSZP getting back into power in next Spring’s general election. If anything there is a risk that they will spend more in an attempt to garner political support in the run-up to the election. This risk seems not to be unfounded if history can serve as a guide: the MSZP, in a fit of idealistic largesse, offered many public sector employees a 50% pay rise in the latter stages of the 2002 election campaign. They actually delivered on the promise and the costs remain an immense fiscal burden.

Bringing the deficits down, a task facing whichever party wins power next May, is going to require the government to cut public spending and raise more from taxation. Public spending appears to be already way down – I have lost count of the number of times Ministers and officials have, when asked why there is no money available to make much need improvements in key areas such as healthcare, transport infrastructure etc, bluntly replied there is no money. The tax system needs restructuring to make it both flatter, and one that makes evasion by businesses and individuals less profitable.

A primary driver, aside from fiscal responsibility, behind the need to bring down the deficit is the path to Eurozone membership – 2010 is the target date. However, with all the criticism being heaped upon the €uro at present it may be that some in Hungary’s political class, both on the left and the right, are now considering whether membership of the European single currency is really such a good idea. The drive to meeting ERM2 criteria might force desperately needed reform – official red tape here is a nightmare, and huge savings could certainly be made by streamlining the bloated, and inefficient, bureaucracy that is a legacy of the Communist era. That said, it is also the case that public spending cuts are going to be deeply unpopular; some 20% of the working population are employed in the public sector and any reform of this soviet-legacy bureaucracy is going to cost votes.

In the short term, at the rate things are going, Hungary’s twin deficits will soon cause major problems ( possibly before the year is out) and put the currency, the Forint, under intense stress. A weakening Forint is especially bad news for all those people persuaded by banks to take out mortgages and debt in foreign currency; the repayments have already become more expensive in the past month of so. I would add that these types of mortgages and loans are also widely sold in many of the Central European EU member states; I doubt if the risks are properly explained to customers but that is another matter. The government has also been financing its debt in foreign currency – see Magyar Allampapir

In many respects I think Hungary, and some other “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. To allow such a situation means that they will have to postpone their ambitions for Eurozone membership, and it also means that financial markets will have to permit such an adjustment. This type of scheme would mean less demand on an increasingly thin EU budget, and avoid the inevitable scowls that Eurozone accession will generate in other parts of the EU already sceptical about the costs and benefits of EU enlargement. Clearly there would need to be some strict parameters and supervision of this to ensure it isn’t a licence for profligacy. The damage done by nearly half a century of central planning and communist dictatorship are immense, and it is fair to say that weekend break tourists, visiting dignitaries and business people, and a fair number of “expats”, only see the glossy veneer of prosperity and carefully restored cultural attractions. Not to adopt some sort of plan such as this is to risk what has been already gained and / or mean these states spend much of the next half century running at double speed to achieve economic parity with their counterparts in the rest of Europe. Ask a Hungarian what have been the tangible benefits of EU membership and the response is more often than not – ’none’.

Once again many thanks to Fistful of Euros for putting up the above text as a guest post on Hungary. For further interest on the differences between the main parties in Hungary visit the Reuters poll on what to expect after elections in Hungary

Wednesday, June 08, 2005

Euro dreams, and the nightmare to come

Bemoaning the lack of political union in the EU, and the watering down of the Stability Pact, the Financial Times concludes in an editorial today that -

In short, the euro needs precisely the kind of neo-liberal reforms French voters rejected on May 29. Break-up is a nightmarish option: the exit costs for countries such as Italy would be huge. A soft euro would lack credibility in the market. Eurozone politicians should stop playing to the gallery and tell their people that flexible markets offer the only way to generate jobs and keep the euro dream alive.

Full text @ The euro needs actions not words
The reality is that what makes sense in theory doesn’t always work when implemented. The kind of reforms that are championed by the FT are going to be deeply unpopular, and politicians are nothing if not people who desperately want to be loved by their electorates. I think the writer of the above FT editorial will find this appeal falls on the ears of the severely deaf!

Of course it could be the case that such reforms are pushed through by the European Commission via the backdoor as another FT editorial notes –
State aid is often a substitute for structural reform at the national level, a lazy way for a government to help a company or sector instead of privatising or deregulating it. If, therefore, Brussels can use its powers to reduce state aid, it may be able indirectly to spur national economic reforms over which formally it has no direct influence. In other ways, with her parallel plans to launch investigations of the energy and financial services sectors, Ms Kroes also seems to realise that the commission can use its autonomous competition powers to achieve some of the liberalisation that member governments, after the referendum No votes, seem increasingly incapable of.

State stinginess plea
Devious indeed!

However I think the Commission does this at its peril. The recent rejections of the Constitution demonstrate a growing unease among EU citizens about the direction the EU is taking. Politicians in Germany, Italy and France are increasingly sensitive about “interference” in the way they manage they their economies, and therefore by default election manifestos. The recent wave of criticism of the €uro from Germany, and others, is tinged with fond memories of the way things were, but it also sends a very strong subliminal message that “we want our own money back” could all too easily become a popular mantra. Italy could yet prove the test case - Silvio Berlusconi’s government is looking increasingly as though it is going to ignore calls for it to address its budget deficit, and members of the coalition are set to try to prompt a referendum on the re-introduction of the lira.

Then there is the small matter of the EU member states attempting to agree on what to do about the Constitutional Treaty – States split over stance on EU Treaty approval

Let’s not forget too that the EU budget has also got to be agreed, and there seems to be more than a little disagreement on that issue between EU leaders.

Frankly the future is not looking bright for either the €uro, or the EU, at present – regardless of whether you are for or against economic liberalism it is clear that there is a nightmare looming on the horizon.

Tuesday, June 07, 2005

László Sólyom elected Hungary's new President

In the final third round vote the governing Socialist Party's candidate Katalin Szili, Speaker of the Parliament, polled 182 votes, and László Sólyom, former President of the Constitutional Court polled 185. The junior coalition partner of the Socialist Party, the Free Democrats, abstained because they felt that Szili was too involved in party politics. Not only does this represent a defeat for the Socialists it will generate bad feeling withing the governing coalition.

Blair speaks with a forked tongue

Brit Prime Minister Tony Blair on recent events in the EU

"I think the constitution is a perfectly sensible way forward and at some point Europe is going to have to adopt rules for the future of Europe and if it doesn't it is not going to function properly".

"I don't believe that Europe should relinquish the social model, we should have a strong social model, but it has got to be one for today's world."

See FT @
Blair seeks to heal rifts over EU constitution

Blair is still backing the idea of a Constitution and sounds conciliatory on the issue of the “European Social Model”. If he thinks a Constitution is such a good idea he should put the matter to a referendum and campaign for a “Yes”. As for a social model model "for today's world" it sounds very catchy but hides his real agenda - I don't think many people in France and Germany will buy into his vision.

Monday, June 06, 2005

Without political union the Euro will always be at risk

Here is an overview of Why history shows that EMU's success may depend on poltical union.

The above is well worth a read, and given that driver for political union is the Constitutional Treaty it is not unreasonable to conclude that the €uro is at great risk of failure.

Hungary's President, and its budget deficit

In Hungary it isn’t the EU that is top of the agenda today it is the election by MPs of a new President – the process starts later today. The Politics section of Hungary Around the Clock gives a good overview on this as well as other matters of concern here in the heart of the Carpathian Basin.

On matters economic. Finance Minister János Veres is due to reveal the extent of Hungary’s budget deficit as at the end of May later today. reports it this way

For May the ministry had expected HUF 130 billion from VAT revenues, HUF 51 billion from excise tax, HUF 35.6 billion from corporate tax and nearly HUF 68 billion from personal income tax.

On the expenditure side, interest payments may have declined to HUF 46.6 billion from HUF 123.5 billion in April, while expenditures of central budgetary organs might have been HUF 153.5 billion. This latter one could be the lowest value this year. Housing subsidies may be somewhat above HUF 10 billion.

Looking a bit further ahead, the ministry still considers the full-year budget deficit target achievable. At the same time the ministry has been heralding further measures aimed at preventing a budget deficit overshoot.

The National Bank of Hungary, market analysts and international organisations all say that deficit targets for the year are not achievable.
I am inclined to agree that the likelihood of the deficit targets being met is remote .... unless of course the Italian Ministry of Finance has been giving lessons in accountancy! As I have mentioned before the chances of any targets being met this side of next spring's general election are highly unlikely. However, with all the flak being heaped upon the €uro at present it may be that these targets are less important than they were; some in Hungary's Finance Ministry might well now be considering whether membership of the European single currency is really such a good idea ....

Choices facing the EU

William Rees Mogg writing in The Times of London has an excellent opinion piece today that puts forward some possible future directions for the European Union.

There are three destinations that Europe can choose. The first is simply a return to the normal sovereignty of the nation states. That is the default setting for Europe, as one can see from the condition of the single currency. If the euro fails, most of the eurozone nations will withdraw; they will return to their original independence and their original currencies, though failure will have damaged those currencies. They will not be back at square one, but at square minus one. In each field of European authority, the most likely trigger for the default mechanism is an overambitious objective, which is either rejected or perceived to be a failure.

The second possible destination is the United States of Europe. This has been the real objective of the European project from the beginning, admitted by some leading figures, concealed by others. Many of the participants have been ambivalent, swinging between the single state and the multiple state solutions.

The problems of the United States of Europe solution include the differences of national cultures and loyalties, and the obstacle of democratic consent. Most supporters of the European project have hoped to lure the people to accept the United States of Europe by gradual stages. This involves methods of deceit: frankness, even on the scale of the constitutional treaty, gets a negative answer.

The third possible destination is a common market. That goes somewhat farther than a pure free trade area, but is confined to the creation of a single, free trade market. It leaves everything else to the democratic choices of the independent European nations. Naturally, a common market creates certain sympathies and loyalties that make co-operation on other international subjects easier. So long as this remains independent co-operation, it can work to everyone’s benefit. The principle is not that of the universal veto, but that of the universal opt-out. If some nations, perhaps France and Germany, want a closer federal system, that is their affair. As well as a universal opt-out, there should be a universal opt-in to measures of integration, subject to democratic consent.

Full text @ Break out from Brussels

Friday, June 03, 2005

Politics and the English language.

First a hat tip to Crooked Timber for drawing attention to the excellent article in French from Etienne Chouard on why the EU Constitution is bad for democracy - See Une mauvaise constitution qui révèle un secret cancer de notre démocratie.

For the weekend, and a welcome break from matters EUropean, I commend to all a reading of George Orwell's essay of 1946 Politics and the English Language

Here is a short extract to give a taster - George Bush should also take note!!

In our time it is broadly true that political writing is bad writing. Where it is not true, it will generally be found that the writer is some kind of rebel, expressing his private opinions, and not a 'party line'. Orthodoxy, of whatever colour, seems to demand a lifeless, imitative style. The political dialects to be found in pamphlets, leading articles, manifestos, White Papers and the speeches of Under-Secretaries do, of course, vary from party to party, but they are all alike in that one almost never finds in them a fresh, vivid, home-made turn of speech. When one watches some tired hack on the platform mechanically repeating the familiar phrases — bestial atrocities, iron heel, blood-stained tyranny, free peoples of the world, stand shoulder to shoulder — one often has a curious feeling that one is not watching a live human being but some kind of dummy: a feeling which suddenly becomes stronger at moments when the light catches the speaker's spectacles and turns them into blank discs which seem to have no eyes behind them. And this is not altogether fanciful. A speaker who uses that kind of phraseology has gone some distance towards turning himself into a machine. The appropriate noises are coming out of his larynx, but his brain is not involved as it would be if he were choosing his words for himself. If the speech he is making is one that he is accustomed to make over and over again, he may be almost unconscious of what he is saying, as one is when one utters the responses in church. And this reduced state of consciousness, if not indispensable, is at any rate favourable to political conformity.


More on Germany's re-aligning role in the EU

An article in the FT entitled Merkel calls for re-think on Turkey’s EU membership might also have been called “the shape of things to come” – it reinforces my view (see - Germany, coquettes and EU relationships) that Germany is likely to re-align itself with Central Europe in the coming years, especially if, as seems likely at present, a CDU led coalition takes power in Germany after the coming elections.

The above linked FT articles reports that:

An FDP politician, possibly parliamentary leader Wolfgang Gerhardt, would be expected to become foreign minister under a CDU-led coalition government.

Friedbert Pflüger, CDU parliamentary foreign affairs spokesman, ...... said EU integration “would remain a core pillar” of German foreign policy, but said that Berlin's ties with Paris should be refocused away from being a “dominant force” within the bloc, towards a “leadership role based of full consultation with other EU members”.

A CDU-led government would also focus on improving ties with Washington, following strained relations over the Iraq war. “The current government has let the transatlantic relationship deteriorate badly,” Mr Gerhardt told the FT Deutschland

In contrast, relations with Russia, defined by Mr Schröder's close friendship with Russian president Vladimir Putin, would be expected to cool, due to concerns over alleged authoritarian tendencies in the Russian government. “We cannot simply keep quiet about [such] problems” in Russia, said Wolfgang Schäuble, the CDU's foreign policy chief. Mrs Merkel is in private highly critical of developments in Moscow, aides added.
Germany leading the EU with smaller states of Poland, Hungary, Slovenia, Czech Republic, the Baltic states, Slovakia, and of course Austria makes far more sense than the current Franco-German EU core. France and Germany have always looked the "odd couple" and were thrown together largely because of the cold war division in Europe that kept much of "old" Europe locked behind the Iron Curtain. The attitude on Russia dovetails well with that of those new EU member states that once found themselves on the eastern side of the Iron Curtain too.

Thursday, June 02, 2005

A Kommissar's perspective

Here is a report on the EU Tax Commissioner's reaction

Brussels, June 2 (MTI) - Reaching consensus on the European Union's 2007-2013 budget at the EU's summit in June would help to lessen the damage done by the French and Dutch rejection of the constitution, Laszlo Kovacs, the EU's customs and tax commissioner, told MTI late on Wednesday night. But Kovacs warned that the rejection was likely to influence upcoming referendums in other countries, resulting in growing national inwardness, self-protection and a lack of solidarity, which could cause difficulties in adopting the next EU budget.

Kovacs said a negative outcome in Holland on Wednesday had been expected, but the massive scale of the rejection had taken all by surprise. Euro-scepticism in the Netherlands may have its roots in the country's disproportionate input into EU coffers compared to the subsidies it receives, Kovacs said, but it could also be motivated by ungrounded fears concerning plans for further enlargement of the organisation.

From MTI -
Fast budget decision needed to counterbalance constitution fiasco, says EU commissioner
So all these "NO" voters are Eurosceptics? Really? Seems to me that members of the European Commission need to read more, and get out a bit more to meet real people instead of hiding away in the hallowed halls of the Brussels based EU institutions - they might actually learn something!

The EU soap opera continues

According to the Financial Times Europe (is) in turmoil after Dutch “No”

“The constitution is in a deep coma and it may not come out,” said one EU official.

And then there is the falling €uro which the FT reports upon as follows:

Underlying nervousness about the euro, financial markets reacted negatively to German media reports that Germany's central bank and finance ministry had discussed the danger of the eurozone breaking up. The Bundesbank dismissed such speculation as “absurd”. But researchers at the Bundestag the lower house of parliament have compiled a report stating European economic and monetary union is not irreversible.

The unpublished report, requested by Peter Gauweiler, an opposition MP, and obtained by the Financial Times, says that member states are entitled to leave the eurozone in case of serious breaches of the Maastricht Treaty by other members, but only after all conflict-resolution procedures available under EU law have been exhausted.
For more on the above see also -

Euro sinks further after break-up talks

The Guardian

... and some excellent discussion over at A Fistful of Euros

The FT’s Editorial Vive la différence suggests that it may be the bond markets that are the only way to bring back some much needed discipline to the Eurozone.

Meanwhile it looks as if the ratification agony may continue -
Jean-Claude Juncker - “We want the other member states to have the opportunity to tackle the same debate,”

The official line was trotted out across Europe's capitals. Gerhard Schröder, German chancellor, said: “I am convinced the ratification must continue.” Meanwhile Jacques Chirac, French president, seemed keen for other leaders to share his pain, pointing out that 14 countries had still not given their verdict on the constitution.

“While 11 countries have already come to a decision, it is the responsibility of all the other member states of the Union to have their say,” Mr Chirac's office said. Mr Juncker is desperately trying to hold that line until the EU summit of June 16-17, when leaders can express their true feelings behind closed doors.

More @ Leaders say the show must go on
The same report suggests there is ecstasy across the Atlantic at what is happening in the EU
In Washington, behind the Bush administration's public declarations that it favours “a strong Europe”, there is widespread relief and considerable satisfaction that the French and Dutch people voted No and, in particular, that Mr Chirac has been humbled.

US officials deny that President George W. Bush and his cabinet were opposed to the proposed treaty. But neither do they say that they supported it, arguing that this was an internal European issue that the US should not meddle in.

There was also a keen delight in seeing Mr Chirac taken down a notch, a split developing between France and Germany, and a favour done to Tony Blair, the UK prime minister and closest US ally.
The European Council meeting on 16-17 June will probably be a very blunt discussion; more like a meeting of squabbling fish wives than a meeting of heads of governments.

The official response from Brussels to the Dutch "No"

Here is the official response to the Dutch referendum from the EU Institutions

Joint Statement of President of the European Parliament Josep Borrell Fontelles, President of the European Council Jean-Claude Juncker and President of the European Commission José Manuel Barroso on the results of the referendum in the Netherlands on the Treaty establishing a Constitution for Europe.

The people of the Netherlands, like the voters of France, have chosen to say no to the ratification of the Constitutional Treaty.

This is a choice that we respect. The result of the democratic ballot taken in the Netherlands comes at the end of a rich and intense debate and deserves a profound analysis, to which we must now dedicate the necessary time.
We remain convinced that the Constitution makes the European Union more democratic, more effective and stronger, and that all Member States must be able to express themselves on the project of the Constitutional Treaty.

The fourteen Member States that have not yet had the chance to bring to a conclusion the process of ratification are today faced with a situation in which, although nine member states have ratified the constitutional treaty, two Member States have rejected it. For this reason, the Presidency has decided that the Council of 16 and 17 June could usefully carry out a serious collective analysis of the situation.

Furthermore, we hear the messages sent by the citizens of France and the Netherlands on the European project and we note them well. The European Institutions will listen to the concerns of European citizens and they will come together to offer a response.
We are confident that together and in partnership – national governments, European institutions, political parties, civil society – we will know how to find the means to move the European Union towards an enduring consensus as to its identity, its objectives and its means. Because Europe goes on, and its institutions will continue to function fully.

Wednesday, June 01, 2005

Germany, coquettes, and relationships at the EU Core

Over at Marginal Revolution they are asking Does the EU still have a core?

They link to a report in the FT – German role in Europe unclear after French No

Over the past fifteen years or so there have been a number of issues that have produced tensions in the so called Franco-German alliance at the heart of the EU – for example: German re-unification, France’s attitude towards the Common Agricultural Policy, and the dispute over the Presidency of the ECB. Over the past several years a new and bigger element has been emerging to change the relationship - EU Enlargement. Many of the new EU member states in Central Europe that joined the EU last May are historically, culturally, economically, and politically closer to Germany than France. The volume of trade between these states and Germany is far greater than that with France; German investment in the region accounts for circa one third of the total whereas France’s investment in the region is, by comparison, minimal. I would suggest that Germany has been reconsidering its role in Europe and its relationship with France for some time - the French “Non” may simply speed up, I believe, the inevitable realignment.

A further point here is that Germany, up until the point that Schroeder used opposition to the Iraq war as a populist re-election tactic, has always been more Atlanticist than France. The nations of Central Europe are more Atlantic in their outlook too. If Angela Merkel gets into office later this year, as at present seems likely, that Atlanticism will likely be revived – the Iraq war was probably an aberration rather than an major shift in German foreign relations.

Deutsche Bank Research yesterday also commented on the Franco-German duo.

French-German relations will become less close and more complicated. A continuation of the French-German integration axis is far from being certain irrespective of the outcome of the prospective German general election in autumn. If a conservative coalition government takes over power there, a significant change in German enlargement policy is likely. The CDU/CSU strongly opposes Turkey's EU membership and is only willing to offer a "privileged partnership" implying full economic integration but no participation in institutions. Moreover, the CDU/CSU is expected to rely not solely on the French-German axis but also emphasises a stronger involvement of small and medium-sized member states in formulating European policy.

From - Talking Point – France says “non”
France and Germany might well find “popular” common ground over Turkey’s EU accession bid but then there is also a sizeable Turkish community in Germany and Germans are likley to wary of taking too strong a public stance against on this for fear of the inevitable accusations. However from living in Central Europe for over five years it is clear to me that there is also a very strong resistance in this region to Turkey – the strength of feeling may even me be much stronger than in France or Germany – it just isn’t discussed very much. Germans might be happy with their near neighbours taking the flak and doing their dirty laundry on Turkey??

Unlike the FT I don’t see Germany getting closer with the UK except perhaps on a few issues. Nor do I see the relationship with France as inviolable as the writer of an article Le Monde Diplomatique did earlier this year. (See the google cache of A marriage of convenience to avoid the subscriber barrier.)

Central Europe has a far stronger allure for me as Germany’s new partner. La belle France may well continue as Germany’s occasional mistress, but her inconstancy makes her an unreliable partner - Central Europe is less likely to play the coquette and will prove a far more constant and long-term partner. Of course, as Ms Guérot is quoted as saying in the FT, “Germany must help France perform a reality check” it is after all the only humane way to treat a coquette!

NB. Updated 3 June to add please also see my post of 4 June for more on Germany's re-aligning role in the EU.

More still on the €uro at risk

According to a report in today’s Financial Times -

The European Union's revised stability pact and growth pact will be “more challenging to implement” than the version it replaced earlier this year, according to Caio Koch-Weser, Germany's influential deputy finance minister. Mr Koch-Weser's comments reflect fears that Europe's politicians are planning to use the relaxation of the pact to run looser fiscal policies.

Italy, which is in recession, has already said it plans to run deficits above the pact's 3 per cent ceiling, while a leading ally of Jacques Chirac, French president, suggested on Tuesday the pact had lost its teeth. Jean-Louis Debre, speaker of the French National Assembly, said the government needed to boost employment and build social cohesion, even if that meant breaking the pact. “Today that's no longer the problem,” he told RTL Radio.

On international pressure to increase development aid, a key issue ahead of the Group of Eight leading industrialised nations summit in Scotland in July, Mr Koch-Weser said that, given budgetary concerns in many EU countries, it would not be easy to meet the EU plan, agreed this month, for each country to increase aid to 0.51 per cent of GDP by 2010. He admitted that it would be a “challenge for Germany, due to financial constraints” to meet this goal. Germany currently spends less than 0.3 per cent of GDP on aid. He said the EU proposal tabled this month to impose a tax on airline tickets to raise funds for development assistance would “make some progress” at the Ecofin meeting of finance ministers next week. Officials familiar with the proposal said Ireland, Spain and Greece were the leading opponents of the proposal.

Full report @ Concerns of looser fiscal policies under revised pact
It very much sounds from the comments of Mr. Koch-Weser that Tony Blair's attempt to put more development aid at the heart of both his EU, and G8, presidencies is going to fall on some pretty deaf ears.

Development aid aside this is also more confirmation, as if any were needed, that the €uro and the rules that underpin it are most certainly under some stress and Joachim Fels comments over at Morgan Stanley are well worth bearing in mind.
It is important to remember that, rightly or wrongly, the euro’s founding fathers envisaged it to be a stepping stone towards a European political union. The idea was that by creating a single currency, national governments would over time be forced to cooperate more closely on economic, fiscal, and other policies, culminating in a single political entity that would back the single currency. Yet, in the last several years, serious cracks have opened up in Europe’s political compound, suggesting that political union will remain a pipe dream.

....... a disunited Europe could also lead to plausible scenarios characterized by fiscal and monetary instability in which some member states would want to leave the single currency.

More @ Vote No to Eurozone bonds
It seems to me that the new EU member states waiting to join the €uro might be well advised to think carefully about the merits of postponing their accession to the single currency.

Similarly prospective EU members such as Romania, Bulgaria and Turkey might want to consider whether they are better off as full EU members, or as preferred trading partners who can manage their own economic affairs without snide remarks and arm twisting from EU politicians. As I noted in a post below a number of "old" EU citizens are less than welcoming of new members. Following the EU blueprint, as the EU's CEE countries have done, is undeniably beneficial but at the present moment it seems that these prospective members have little to gain from rushing into full EU membership – especially as events this week are set to usher in period of profound change and bitter debate about the future direction of the EU.

The EU's kinky political elite

It is always remarkable how little the EU political elite really understand about the nature of the EU they purport to govern. Here is some news of a plan to introduce elements of the Constitutional Treaty via the backdoor.

The European constitutional treaty may be impossible to rescue if member states press on with ratification after the French No vote, one of its principal drafters warned yesterday.

Giuliano Amato, the former Italian prime minister and vice-president of the convention that drew up the constitution, pleaded instead for the most useful parts of the treaty to be "transplanted" into the Treaty of Nice, which will continue to be the legal basis for EU decision-making. He singled out the creation of a European foreign minister and the introduction of a simplified double-majority voting system as two essential elements that might be saved.

Mr Amato, a constitutional lawyer, said that the 25 member states were currently bound by an agreement to continue the ratification process until November 2006, and then take stock of how many have formally ratified in parliament or in referendums. If four-fifths have ratified - 20 of the 25 members - the EU leaders will hold a summit to decide how to proceed.

"The fact that some countries might say No is implied in the declaration," he said. "We are supposed to continue." But there was a danger of a domino effect after the French No vote on Sunday. "If ratification continues I fear that at the end of 2006 nothing could be done to rescue the constitution."

Although it would require a unanimous decision at the forthcoming EU summit to change the ratification procedure, individual countries could simply decide not to proceed, Mr Amato said. At the end of the process they would simply be counted as having failed to ratify. It would be preferable to allow the ratification process to peter out after six months and choose which "organs" in the treaty could be transplanted, he said.

See FT @ Plea to save elements of the Constitution
So it seems that Clause 30, as per my post yesterday, is not worth the paper it was printed upon. No surprises here - most EU treaties are ignored to a greater or lesser degree; even the rules underpining the €uro have been ignored!

However it is worth remembering that some of the elements Mr. Amato wants to save will mean re-opening the debate on such highly controversial proposals as majority voting and the matter of an EU Foreign Minister. The former issue nearly destroyed the Constitutional Treaty last year as member states argued over the weight their respective votes carried. The latter one will mean revisiting the question of an EU-wide common foreign and security policy – as we all know from the Iraq War issue not all member states governments can agree on this, and I doubt whether anyone is going to surrender a seat at the UN Security Council to let the new EU foreign Minister in; nor is it likely that many will see why the EU needs a seat when existing EU member states already have one.

I have long maintained that EU political elite and the European Commission in particular are kinky in that they seem to enjoy a rather strange form of economic and political sado-masochism. Mr. Amato simply adds further confirmation of this kink.

The Central European scapegoats

In an increasingly globalised world structural economic change is inevitable whether people like it or not. The world has changed dramatically in the past ten to fifteen years – from the Indian sub-continent all the way to China economies are developing at a rapid rate and challenging the economic superiority of western industrialised nations. The alternative to reform in the Western economies is a return to protectionism, which will mean developed market states being seen as trying to keep less developed ones in a state of relative poverty; this latter scenario will of course increase geopolitical tensions in a world that is already tenser than it was five years ago. It is up to world leaders to find a balanced solution, but as the European Union has recently discovered such solutions are not always easy to find, and the compromises not always popular.

Related to the above. I have seen quite a bit of anti-central / eastern European diatribe in the past few days much of it blaming EU Enlargement, and more specifically the new EU member states, for undercutting "old" EU members states on corporate tax and the cost of labour. It is also the case that a number of “No” voters in both France and the Netherlands blame EU enlargement for the problems their economies now face.

This attack on the Central & Eastern European nations is curious because the level of increase in “old” EU members export trade into the region has increased whilst the number of corporate re-locations has actually slowed in the CEE region since EU accession. Furthermore, the cost of labour is rising fast and business are actually relocating out of the region eastward to China! The majority of the corporate relocations, and taking advantage of cheaper labour costs, took place in the decade before EU enlargement. This process would have happened anyway regardless of whether these countries applied to join the EU or not. What exactly is it that some of these French / German / Dutch etc. "social model" adherents want? A sign on the door in all the new EU member states that reads "Keep us poor & Open for exploitation”???! The irony of so-called socialists behaving so selfishly is palpable.