Tuesday, July 12, 2005

Living in Eurowonderland

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

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

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

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

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

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

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