Wednesday, June 01, 2005

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.