EuroPolyphony

Living in Eurowonderland

2005-07-12T14:45:00.000+02:00

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??

Reforming the ECB

2005-07-05T14:08:00.000+02:00

The Financial Times leads today that:

The ECB is not the main cause of Europe's economic malaise. Its effectiveness is constrained by inflexible labour markets, weak public finances and underdeveloped retail financial markets. But it is part of the problem.
By responding too slowly to shocks the ECB has allowed output to drift away from potential. By taking an extreme position on central bank independence it has prevented effective co-ordination of monetary and fiscal policy, and structural reform. We have seen this before - in Japan - and it resulted in a decade of stagnation.
To carry on regardless, relying on its formidable legal independence, would be unwise. Sooner or later change - probably of the wrong sort - would be imposed from outside. What Europe needs is leadership from within the ECB to make it part of the solution to the continent's economic woes.

Making the bank part of the solution

So far so good, and one can even agree with the FT when it states that “Consensus-based decision-making by national central bank governors at a time of persistent economic divergences is a formula for inaction.”

However they then go on to suggest that the ECB should engage in closer dialogue with Eurozone governments and move towards majority decisions. This sounds good in theory but closer dialogue with governments could lead onto sticky ground – governments are not allowed to attempt to influence the ECB and such dialogue could give rise to charges of influence or favouritism. As for majority decisions - the divergences between member states as to what is a suitable interest rate for the Eurozone are now so wide that I imagine this approach might do more harm than good. And, those who lose out might be bitter enough about it to indulge in more of the kind of posturing that Italy and Germany have recently engaged in – with conferences on the risks of break-up and noises about having a referendum on withdrawal etc. etc.

Then there is the small matter of enlargement of the €uro area and the implications this has for monetary policy ....... Currently there is no political authority to back up the single currency and with gradual enlargement of the Eurozone that lack of political authority will become more and more apparent. The longer there is no political authority behind the €uro, and the ECB, then the greater the risks of instability and possibly eurozone break-up.

Extremists honour Kadar

2005-07-05T13:34:00.000+02:00

Political extremists are still alive and well in Hungary.

Workers Party chairman Gyula Thurmer praised Janos Kadar at a commemoration on Saturday marking the 16th anniversary of the Communist leader's death. Speaking at Kadar's grave in the Fiumei ut cemetery, Thurmer said Imre Nagy, leader of the 1956 Uprising, had taken the path of reformists and traitors, while Kadar had taken the way of the revolutionaries. "Our choice was Janos Kadar," he declared.

.... Thurmer criticised Prime Minister Ferenc Gyurcsany for refusing to return the Red Star to the working class, then described the Socialist Party as a right-wing party in the service of foreign and Hungarian big capital. "Just because we do not like Fidesz, it does not mean that we shall support the Socialists," he said.

....... Attila Vajnai, head of the internal opposition in the Workers' Party, was taken away in handcuffs by police for wearing the Red Star at a Saturday ceremony marking the 16th anniversary of the death of Communist leader Janos Kadar. The emblem has been banned in Hungary as a symbol of tyranny. Vajnai said in a statement issued on Sunday that he will continue to use the "international emblems of the working class movement" despite the "police brutality".

Quotes from Political News @ Hungary Around the Clock -

As well as the Red Star, the Hammer and Sickle, and various Nazi symbols such as the Swastika are also banned in Hungary. Extremist socialists are challenging the ban of their symbols at EU level.

The quest for the legendary White Hind

2005-07-01T14:13:00.000+02:00

For the weekend why not go in search of the White Hind.

According to legend, Eneth, the first wife of the great oriental king Nimrod the Hunter – great grandson of Noah and builder of the Tower of Babel - bore him two twin sons, Hunor and Magor. The sons of Hunor became the Huns, and the sons of Magor became the Magyars, the Hungarians.

The lark's aloft from bough to bough,
the song is passed from lip to lip.
Green grass grows o'er old heroes now,
but song revives their fellowship

Forth to the hunt they ride again
two brave sons that fair Enéh bore,
Hunor and Magyar, champions twain,
Ménrót's twin sons in days of yore

Wild beasts in pools of blood they drag;
they slaughter all the elk they find;
they have already killed the stag,
and now they all pursue the hind.

Continues @ The Legend of the miraculous hind by János Arany

From - In Quest Of The Miracle Stag: The Poetry Of Hungary

Even the Council of Europe appear to be involved in the quest ........ perhaps at some future date the EU will produce an "authorised" version .... anything is possible.

There is something rotten in the European Union

2005-07-01T09:20:00.000+02:00

Insider brands Brussels a “bureaucratic nightmare”

Jim Dougal, who quit a year ago as head of the Commission's UK representation in London, launches a vitriolic attack on what he calls the “Brussels machine” on the eve of Britain's assumption on Friday of the European Union presidency.

“It is not just that the Commission fails to explain what the EU is for . . . Its modus operandi displays an outrageous lack of common sense . . . It became intolerable to work within what had come to seem like a bureaucratic nightmare that makes Whitehall look a model of simple efficiency.”

Accusations of overbearing bureaucracy are the hallmark of eurosceptic attacks on the EU but it is rare for a Brussels aficionado to echo those concerns.

In his article, Mr Dougal says: “The Brussels machine has no idea of how it should even begin to sell itself to the British public”. Mr Dougal was hired to brief the Commission on UK affairs and to help improve the British public's understanding of its workings but he describes how he quickly realised his job was impossible.

He gives a damning insight into the red tape that critics say hampers the Commission's operation. Mr Dougal also describes José Manuel Barroso, Commission president, as “hardly the first choice” and “the lowest common denominator” on which member states could agree.

Quite!

And, as if we really needed any further evidence of sheer the asininity of many EU politicians, a Financial Times editorial also concludes that:

The strategic reasons for enlargement have not changed. What has been exposed is a crisis of leadership: EU politicians prefer to blame "Brussels" rather than confront potentially unpopular Europe-wide issues. This craven capitulation is enlarging the constituency for populist and nationalist demagogues - not least in Turkey

See - Nervousness about EU enlargement

Euro accession and Hungary

2005-06-30T14:51:00.000+02:00

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!

Tax plans for Hungary

2005-06-28T11:30:00.000+02:00

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

2005-06-28T11:20:00.000+02:00

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

2005-06-28T11:05:00.000+02:00

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

2005-06-28T10:38:00.000+02:00

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

EU's old & in the way hold back progress

2005-06-20T12:41:00.000+02:00

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

2005-06-20T12:21:00.000+02:00

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.

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

2005-06-17T12:55:00.000+02:00

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.

Eurozone expansion

2005-06-16T14:29:00.000+02:00

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.

The falling Euro, and the EU budget

2005-06-14T11:43:00.000+02:00

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.

Hungary and the Euro

2005-06-13T14:14:00.000+02:00

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

2005-06-13T13:54:00.000+02:00

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

Spanish EU funding levels needed in Central Europe

2005-06-10T10:34:00.000+02:00

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.
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Hungary's new President, and debt concerns

2005-06-10T09:57:00.000+02:00

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.
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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
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Euro dreams, and the nightmare to come

2005-06-08T10:03:00.000+02:00

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.

László Sólyom elected Hungary's new President

2005-06-07T15:58:00.000+02:00

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

2005-06-07T15:31:00.000+02:00

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.

Without political union the Euro will always be at risk

2005-06-06T13:04:00.000+02:00

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

2005-06-06T12:35:00.000+02:00

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. Portfolio.hu 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

2005-06-06T12:29:00.000+02:00

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

Politics and the English language.

2005-06-03T13:01:00.000+02:00

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

2005-06-03T12:42:00.000+02:00

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.

A Kommissar's perspective

2005-06-02T13:19:00.000+02:00

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

2005-06-02T12:54:00.000+02:00

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"

2005-06-02T12:50:00.000+02:00

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.

Germany, coquettes, and relationships at the EU Core

2005-06-01T13:50:00.000+02:00

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.
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More still on the €uro at risk

2005-06-01T11:49:00.000+02:00

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

2005-06-01T11:33:00.000+02:00

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

2005-06-01T11:24:00.000+02:00

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.

Clause 30 and the process of EU treaty ratification

2005-05-31T13:35:00.000+02:00

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

2005-05-31T13:21:00.000+02:00

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

France - Europe's spoilt child

2005-05-30T13:04:00.000+02:00

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"

2005-05-30T12:37:00.000+02:00

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.

EU tax plans

2005-05-26T14:56:00.000+02:00

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

2005-05-26T11:27:00.000+02:00

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

2005-05-26T10:50:00.000+02:00

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 .....

2005-05-26T10:30:00.000+02:00

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.

EU leadership and the "NON" test

2005-05-25T10:33:00.000+02:00

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.

2005-05-25T10:17:00.000+02:00

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......

€uro rates and protectionist tariffs

2005-05-24T21:00:00.000+02:00

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

2005-05-24T14:54:00.000+02:00

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

Eurostasis

2005-05-23T15:04:00.000+02:00

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

2005-05-23T14:44:00.000+02:00

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.

EUrope heading for a split

2005-05-18T13:26:00.000+02:00

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.

Social Democracy in Central Europe

2005-05-10T14:39:00.000+02:00

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

2005-05-10T14:09:00.000+02:00

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.

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

2005-05-05T10:48:00.000+02:00

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.

Victory and remembrance in Russia

2005-05-04T13:24:00.000+02:00

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.

The €uro - A Currency union at risk?

2005-05-03T14:57:00.000+02:00

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.

The EU - just another player in the orchestra

2005-05-02T13:41:00.000+02:00

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.”

Head eastwards and beware the attention of politicians

2005-04-29T12:41:00.000+02:00

Lure of eastern Europe difficult to resist reports the Financial Times

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

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

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

A Japanese solution for the EU?

2005-04-28T14:19:00.000+02:00

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

The report takes a very pro-immigration stance

The report advocates that Japan greatly expand the skill sectors where immigrants are permitted, and guarantee against discrimination in the workplace. The report also says that Japan should recognize certifications from foreign countries, if they meet Japanese standards. Schooling and healthcare for foreign families are also advocated. Most surprising, the report says that Japan should actively establish schools in Japanese language and culture abroad, as a way of attracting talent.

Some, though by no means all, EU states are probably more advanced than Japan in this area. However, selling the need for expanded immigration, even if it is that of skilled immigrants, is proving very difficult in a Europe where popular opinion is becoming increasingly anti-immigrant with the result that more barriers to immigration are being put up than taken down. It is, I accept, a highly emotive issue, and one that is open to political exploitation .......

In the area of agriculture the proposal is for ...

... the removal of trade barriers on agricultural products, and a shift of policy to direct support of “producers with the desire and ability.” The report states bluntly that Japan should raise agricultural productivity and competitiveness, increase quality and specialization of products, and become an exporter of high-quality produce and foods.

Ending the Common Agricultural Policy (CAP) in Europe is long overdue but the French will lead the opposition to it as they receive the bulk of the subsidies under the system. It is high time Europe’s agricultural industry competed on a level playing field instead of relying on protectionism, and subsidies, to keep cheaper competition out, and guarantee itself a captive market. This is a major structural reform that has frequently been dodged, and, as RJW commented in response to my post of yesterday, the subject of stitch-ups and backrooms deals by Europe's political leaders. The CAP is a source of considerable tension with the developing world. The European Commission has in simple terms frequently said “Yes, but look at the USA” - whatever happened to leading by example??

On the issue of encouraging the population to have more children ….

The children of the baby boomers are now in their late 20s and early 30s, and still have a window to produce a larger cohort of children, if the economic burden of child-raising can be eased. To this end, the report advocates greatly expanded support for families with young children, and further expansion of daycare centers. To pay for such support, the report bluntly states that a shift of emphasis in social spending is needed, away from spending on the old and toward spending on the young. This could be accomplished by increased emphasis on preventive medicine, by expansion of the idea of “living wills,” and by a (gingerly worded) “rethinking of end-of-life care.”

Again this is a route Europe could do well to follow. However, given the demographics of the voting public, less state money for the old is going to be a difficult one to sell not to mention the rather cryptically phrased “rethinking of end-of-life care.”

The Morgan Stanley analysis concludes by observing of Japan that ...

... it will age, regardless of who may be in power. Globalization will proceed, regardless of who may be in power. Unaddressed fiscal deficits will strangle the economy, regardless of who may be in power. Hence, any government will have to adopt an economic strategy similar to that suggested in the new Takenaka report, or face extinction. Just as economics trumped politics in pushing the Japan-China relationship back on track despite recent bumps, so economics will trump politics in pushing economic policy in the direction of the Takenaka report, despite likely bumps.

Broadly speaking the same is true for Europe, unless of course populist politicians irreversibly poison the process; in which case Europe risks revisiting a past that the EU was set up to prevent happening again.

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

European Commissioner Siim Kallas on lobbying in the EU

2005-04-28T14:01:00.000+02:00

Lobbying on local agenda as EU urges transparency

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

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

“I don’t favor the approach of the U.S. on lobbying, which contains strict legislation under which all lobbyists have to declare their finances, what they spend, for what and on whom,” he stated. “We will soon have a round-table discussion with representatives of those involved in this field, after which the commission will present concrete proposals.”

Lobbying is a fact of political life. However, unlike Commissioner Kallas, I believe lobbying should be very transparent where finances are concerned; not to require it to be so is a recipe for corruption in Brussels. I’m sure that the strict regulation of lobbyists in the USA was put in place for very good reasons. At least the Hungarian authorities appear a little more aware of this, and will they will seek to apply stricter legislation than that favoured by Commissioner Kallas. Unless lobbyists get at the Hungarian government, and members of parliament, and persuade them to water down the proposed regulations to the extent that they are useless.

Hungary to get "100 Steps Programme"

2005-04-28T13:43:00.000+02:00

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

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

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

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

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

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

From PM to unveil hundred steps programme on Sunday

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

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

From the Euro Ghetto - Chirac's Protectionist Rap

2005-04-27T12:16:00.000+02:00

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

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

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

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

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

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

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

From - Economists accuse Schröder of protectionism

Fear of foreigners and foreign competition is as misplaced as it is reminiscent of a Germany that existed in the 1930’s.

On the matter of China the FT notes that:

Europe could broaden its investigation into Chinese textile exports, Peter Mandelson, its trade commissioner, indicated on Tuesday as pressure mounted on Brussels to prevent Chinese clothing from flooding the EU market

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

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

See - EU warns on China textiles market

So Chirac and Schröder are against globalisation and in favour of protecting the higher prices in the EU against the lower prices offered by a developing economy. But, they are not alone even that confused cowboy who inhabits the White House is in favour of trade tariffs. It is hard to put it more succinctly than the editorial from today’s FT:

The clamour on both sides of the Atlantic for safeguards against rising imports of textiles from China should be exposed for what it is: self-interested pleading on the part of producer interests and shameful opportunism by politicians willing to play up to them. It should be resisted firmly.

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

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

From - Protectionist piffle

Finally the FT reports on some recent OECD recommendations – the OECD is in Paris but fortunately seems to be isolated from the rabid ravings of Jacques Chirac

The Organisation for Economic Co-operation and Development on Tuesday urged governments to open up their countries' markets for services, arguing that the overall economic benefits of such a move would far outweigh job losses in some sectors.

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

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

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

Full text @ OECD stresses benefits of freeing up services market

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

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

More ministerial change in Hungary

2005-04-26T11:10:00.000+02:00

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

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

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

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

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

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

The Economics of Political Correctionism in Europe

2005-04-25T15:30:00.000+02:00

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

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

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

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

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

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

Hans Eichel, finance minister, appeared to join the debate last week when he intervened in the row between Deutsche Börse, the Frankfurt-based stock exchange, and the Children's Investment Trust, the London-based hedge fund that is the Börse's biggest shareholder. "There are reasons to think about regulations that do not favour people making quick money and moving on," Mr Eichel said. From ‘Anti-capitalist’ political debate alarms German businesses

Small wonder the German economy is all doom and gloom these days! Is Hans Eichel an adherent of Marxist economics as as well as being a former Classics scholar!??

As I have frequently noted on this weblog economies such as France and Germany must reform, or they will simply find business will vote with its feet and move out. This is a view also put forward in an editorial at the Financial Times today that notes:

Saddled with bigger social costs than their Asian competitors and a higher exchange rate than their US rivals, it has never been harder for European companies to be world-beaters. Yet they need to strive for this if Europe is ever to achieve its twin goals of economic growth and social justice.

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

…………. Behind much of this popular and political railing against business lies widespread ignorance of the fact that no European country has captive companies. The latter can - and will - walk, if they feel badly treated at home. To avoid this, the politicians must do three things. First, be aware many European companies need to complete rebuilding their balance sheets before they can be expected to step up investing or hiring. Second, refrain from wrapping companies in more red tape and regulation. And third, governments should get on with the structural reform agenda that they long ago set themselves. The intimidation of European Business

"Intimdation" that is a very good word for it - those like Chirac, Schroeder and Zapatero, who appear to be obstructing and diluting structural reform, are effectively bullying the fragile buds of growth that exist in Europe. Furthermore, as we learn today where China is concerned, protectionism is making a comeback - how long before economic and political instability also makes their comeback - Europe's polticians are indeed failing in their duty.

Europe's changing social order

2005-04-22T14:27:00.000+02:00

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

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

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

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

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

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

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

Metternich's "Political Confession of Faith"

2005-04-22T14:16:00.000+02:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let them suppress Secret Societies, that gangrene of society.

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

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

More on the budget deficit in Hungary

2005-04-21T12:04:00.000+02:00

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

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

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

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

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

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

24% on spirits!! - that's quite a hike in the minimum rate and will certainly mean higher prices for many.

The Euro is at risk ? contd.

2005-04-21T11:49:00.000+02:00

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

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

The Euro is at risk ?

2005-04-20T14:34:00.000+02:00

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

I believe he makes some valid points.

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

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

Latin in the Vatican - the Papacy and the European Union

2005-04-20T11:22:00.000+02:00

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

Dave Schuler from The Glittering Eye offered the following:

Let me repeat the suggestion made by Jacob Grimm more than 150 years ago: Hungarian. It's a living language and standardized but not spoken natively by enough people that it's not likely we'd see Hungarian hegemony. It's very regular, doesn't have any difficult sounds, and, unlike Latin or English, has a perfect orthography.

In many respects I would agree but my own experience is that Hungarian is not an easy language to learn, and, unlike English, is not very forgiving where matters of pronunciation are concerned. As an aside I would add that the origins of the Hungarians, and their language, are questions that even Hungarians do not always agree upon - as good a starting point on this as any might be Chapter One of The Timeless Nation.

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

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

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

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

Here is some what is written on the late John Paul’s views on economics:

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

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

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

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

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

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

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

Hungary gets new Finance Minister

2005-04-19T11:20:00.000+02:00

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

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

The situation is as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Free Democrat leader Gabor Kuncze said confidence no longer existed between Draskovics and Gyurcsany, nor between the Finance Minister and the Socialist Party, and in such a situation a change is necessary. “We expect Veres to spearhead reforms,” he added.

Here is a link to a brief overview of the new Finance Minster, Janos Veres A former Communist like the Prime Minster he is also pretty wealthy by local standards. It is always interesting to see how rich many ex-communist party members have become since the change of political system ...... I suppose it’s something to do with being in the right place at the right time ....

Lacklustre Euroland

2005-04-19T10:30:00.000+02:00

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

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

(i) accommodative macroeconomic policies;
(ii) continued wage moderation and low inflation;
(iii) supportive financial conditions;
(iv) widening profit margins; and
(iv) progress in structural reforms.

Given recent events I really cannot see this background materialising. Oil prices are set remain high. Inflation is set to remain above the ECB 2% target. Profit margins are being put under pressure by the strength of the €uro and Asian competition, and, progress towards structural reform is being slowed down by the constant dilution of necessary reform proposals in an effort to save the European Constitution from rejection by France.

Commissioner Almunia continued in his speech to say that:

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

Public finances remain broadly unchanged over the forecast horizon. The average deficit is expected to amount to 2.6% of GDP in both the euro area and the EU in 2005. Differences remain sizeable, with nine countries above the 3% reference value in 2004. Of these, five Member States (namely Greece, France, Cyprus, Hungary and Malta) are expected to narrow their deficits significantly in 2005, i.e. by more than ½ percentage point of GDP. Still, the number of Member States with deficits at or above 3% increases to 11 this year.

This is hardly upbeat stuff. The prospects of the Eurozone becoming an engine of global growth are remote, especially with so many key Eurozone economies in breach of the deficit rules. Negative growth, and possibly even recession, may be a far more likely scenario.

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

2005-04-19T10:12:00.000+02:00

Haloscan commenting and trackback have been added to this blog.

The EU - business as usual

2005-04-18T14:36:00.000+02:00

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

Friday’s Global Economic Forum digest at Morgan Stanley

The Economist - Can the Constitution be saved?

Financial Times - Europe rallies to save French referendum

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

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

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

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

“A French no would not be so different from “business as usual”, in the EU context.” – that made laugh and I couldn’t agree more.

The issue of structural reform in the leading Eurozone economies is, in my opinion, far more crucial to the success of the EU, and EMU, than any Constitution. The Financial Times gives France some home truths on this issue today in its editorial France’s Fears:

In truth, France must tackle the creeping crisis in its public finances, whether or not the European Commission tells it to. France must deregulate some of its products and labour markets if it ever wants to tackle its high unemployment, no matter how much it wails about the EU's services directive.
The French government should start telling the whole truth to its voters and sell the necessity of reform. Further attempts to dissimulate will only be counter-productive. Mr Chirac's attempts last week to convince a sceptical television audience that all was right with France already appear to have backfired in the polls.

The main argument against reform is that it will undermine the European Social Model and lead to a "downsizing" of the welfare state. The Scandinavian countries are often held up as shining examples of how the “social model” might work. There is some interesting comment on this over at Café Hayek entitled “Do Scandinavians live better than Americans?” which quotes a report from a Swedish free market think tank called Timbro. The conclusion is that they don’t! The Eurozone's leading economies need to wake up and embrace the C21st, and the new reunited Europe that was officially born on Ist May 2004; unless of course the "old EU" stalwarts like France and Germany want to live worse than Americans!

French Focus with a bit of German thrown in.

2005-04-15T14:00:00.000+02:00

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

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

In a speech in southern France, Mr Sarkozy said that with a 10 per cent unemployment rate France should stop saying its system worked better than that of others. “In 20 years both the left and the right have doubled the credits to combat unemployment but we have not produced one fewer unemployed person,” he said.

Let's hope Sarkozy wins the Presidency because otherwise France will just continue to follow Germany down the road to economic basket case status.

The situation in Germany shows little signs of improvement. Over at Morgan Stanley's Global Economic Forum they are commenting on minimum wage legislation and how it will contribute to the ongoing hollowing out of the German economy.

The purpose of the minimum-wage manoeuvre is to appease trade unions and left-wingers ahead of the important state elections in North Rhine-Westphalia on May 22. North Rhine-Westphalia is not only the most populous German state, home to 35% of the population. It is also the Social Democrat’s longstanding home-base. If the present Red-Green coalition government were ousted, which is what polls showing the Red-Green votes at a combined 44% and thus behind the CDU 46% suggest, this would be a serious setback for the Schroeder government. As in the transition agreement on migration and the rejection of EU Services Directive, the government’s desire to fend off the competitive pressures from the new Member States will likely accelerate the hollowing-out the German economy. In today’s globalised markets, the competition is just too powerful. Erecting new hurdles just as the labour market reforms start to bite and the incentives to work increase, seems a high price to pay for a pre-election gimmick.

The prospects for the Eurozone are looking more than a little dismal these days and getting worse as each new one passes!

Finally in another article at over at the FT on the EU Referendum a respected French political analyst, Dominique Moïsi, puts his finger on the nature of the problem France is facing. "

The young, who are pro-European, are not mobilising because the cause of Europe is being represented by people they don't like," said Mr Moïsi. "It is a leadership problem from Barroso to Chirac."
From
Chiracs’s record on Europe hampers Yes campaign

This is true right across Europe; political leaders are neither respected or believed – Blair, Schroeder, Berlusconi are a few names that spring to mind.

European Union literary standards - the lighter side of culture

2005-04-14T15:58:00.000+02:00

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

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

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

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

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

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

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

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

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

D) Positive Main Characters recommended exceptionally strongly:

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

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

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

d) Erotic or Sexual Novels must have as their Positive Main Character prostitutes who as children were forced by violence, beatings and torture to provide sexual services, their passport was taken from them, but who succeed in escaping their tormentors and in helping the police imprison them, while liberating their fellow-sufferers from captivity. An additional 20 per cent support is due to the Sexual Novel whose Main Character is an Asian, African, Latin-American, Russian, Ukrainian, Kazakh or Turkmenian immigrant. It is mandatory that such Novels have detailed instructions on protection against AIDS. A failure to meet this condition means that the Novel must not be supported.
In Novels with an Erotic or Sexual content, the description of any sexual position other than those described in the Kama Sutra is strictly prohibited.

Disclaimer: Europolyphony accepts no responsibility for bloggers and novelists who take the above seriously.

Brighten up at the FT, please!

2005-04-14T10:44:00.000+02:00

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

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

More @ Divergencies in the Eurozone economy

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

In another leading article the FT remarks that:

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

Full text @ Protecting Germany

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

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

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

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

Referendum trouble in the EU

2005-04-14T09:38:00.000+02:00

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

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

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

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

He believes the immediate result of a No vote would be an attempt by some countries, including France and Germany, to form a "hard core" group, pushing ahead with closer co-operation to build the idea of a "social Europe" with harmonised taxes.

Does the EU really revolve around France, and do the French people really want harmonised taxes? These are arrogant assumptions on the part of the CEPS, and epitimoise the problem of an EU political elite out of touch with the people of EUrope. Daniel Gros has quite clearly forgotten about "Unity through diversity"!

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

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

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

EU Lisbon Strategy & the Euro-Mediterranean partnership

2005-04-13T13:55:00.000+02:00

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

Why do we need a new start for Lisbon?

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

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

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

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

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

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

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

- We need to revamp the Lisbon Strategy because the delivery process which has become too complicated and is poorly understood. It generates much paper, but little action. Responsibilities between the national and the European level have become blurred. Limited ownership of member states is the result.

The above quoted text is from a rather cryptically titled Commission press release -
The new integrated employment and economic guidelines

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

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

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

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

2005-04-13T13:42:00.000+02:00

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

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

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

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

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

For the Commission, the looming dispute could determine whether the single currency area can continue as a rule-based system.

Indeed! If Italy treats the warnings from the Commission with the same disdain that Germany and France have then I would say that the rules that underpin the €uro will be well and truly redundant, with all that implies for the stability of the single currency.

Currency crisis if France rejects European Constitution

2005-04-12T11:21:00.000+02:00

Currency crises for new EU states if France votes No

The chief economist at Deutsche Bank, Norbert Walter, told FT Deutschland that a French No might cause a currency crisis in the new member states. "There could be speculative attacks on currencies of the new EU member states", Mr Walter said. "These countries would then have to raise their interest rates. It could cause enormous exchange rate fluctuations", he warned. Mr Walter explained that a rejection of the Constitution would jeopardise new member states' euro hopes, sparking the currency attacks.

This article from EU Observer sounds very dramatic and will no doubt delight many of those campaigning against the Constitution. Before getting too exicited I think one needs to pay attention the use of the words “could” - at no point does Norbert Walter say it “will” happen.

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

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

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

European secession - Britain's dreamers

2005-04-12T08:40:00.000+02:00

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

..... the Tory manifesto fails to recognise how the European Union is changing since the arrival of the former communist countries of eastern Europe. The EU is becoming the more flexible and liberal organisation the Conservatives want to see, but instead they are advocating a form of partial withdrawal. There is no explanation of how a Tory government could achieve this without leaving Britain on the margins of Europe - subject to EU legislation but less able to influence it.

I tend to agree. People who believe that a Conservative government would be able to successfully achieve a renegotiation of the terms of Britain’s EU membership are dreaming – this is one election promise that would certainly be broken.

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

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

EU wine tax faces veto

2005-04-12T08:34:00.000+02:00

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

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

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

Minimum tax rate on alcohol in the EU set to rise

2005-04-11T16:16:00.000+02:00

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

Commissioner Kovacs will state his hope that the Council can agree to allow the Commission to draw up proposals to adjust and modernise the existing system of minimum rates at least to re-establish the real value of the Community-wide minimum rates in the light of inflation since 1992 when the current minimum rates were set.

No doubt this will provide an excuse for tax increases on alcoholic beverages - it will take some time for this measure to get agreement but I'm sure it wil pass.

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

2005-04-11T09:55:00.000+02:00

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

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

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

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

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

Despite record unemployment, the Federal Labour Agencies last year issued 870,000 authorisations for companies to seek foreign workers for jobs that could not be filled by Germans

One of the greatest abuses of the "freedom of services" is the restriction Germany, and others, have put on the new EU member states to supply services, not to mention that most fundamental of EU freedoms, the freedom to work anywhere in the EU .....

...... to return to the subject. The FT today also reports on a survey on the cost of labour in EU Europe. Not surprisingly it is countries like Germany that are hugely uncompetitive - See Labour costs in the EU

Employment costs in the EU as a whole were about 15 per cent less than in the US, but after taking eastern EU countries out of the equation western European countries were 23 per cent more expensive than in the US and among the highest in the world said Mercer.

The highest annual employment costs according to the European study were in Belgium, Sweden and Germany where the total financial burden of employing a worker, including benefit costs, was more than €50,000 ($58,500) a year. This compared with €4,752 in Latvia; €5,649 in Lithuania; €8,257 in Poland and $9,540 in the Czech Republic.
Annual labour costs of €45,879 in France and €46,541 in the UK were in line with Japanese costs of €45,839 but almost 40 per cent higher than US costs of €33,195. Chinese and Indian labour costs of €13,884 and €2,024, respectively, were even more competitive said the study.

Agreed the weak US$ / strong €uro makes a difference to any comparisons with the US, nevertheless, the failure to reform is going to hold back the EU and the Eurozone in particular. No doubt there are those in the European Commission who believe that such reform could put the whole project at risk so dare not push it too hard. Decisive and bold leadership are often unpopular but it is what the EU needs if it is to make its collective economy work.

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

Another EU reform dropped to succour the French

2005-04-10T18:01:00.000+02:00

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

Brussels delays overhaul of state aid

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

The Commission and the French government have repeatedly clashed over state aid, especially state-backed bailouts for large French companies such as Alstom, Bull and France Telecom. Brussels has the power to block or limit such injections of state funding

The European Constitution has proved divisive and controversial - it has in many respects been a step too far. The wisdom of seeking its ratification so soon after EU enlargement, and the divisions caused by the Iraq war, is looking increasingly suspect - as a French General is said to have remarked after witnessing the Charge of the Light Brigade - "C'est magnifique, mais ce n'est pas de la guerre!"
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A further thought on the previous posting. I would guess that Brussels may suggest a minimum rate of corporation tax - it is isn't quite harmonisation via a flat rate, it would guarantee much needed income for squandering governments, it would still allow a degree of tax competition, and, it would probably satisfy Chirac and Schroeder.

EU tax harmonisation & the M&S judgement

2005-04-08T11:10:00.000+02:00

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

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

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

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

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

High oil prices may perpetuate Eurozone gloom

2005-04-08T10:17:00.000+02:00

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

The FT reported today -

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

EUrozoners will have to do more for less

2005-04-07T14:24:00.000+02:00

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

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

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

Full text @ Europe is working Longer

EU, USA, China and arms sales

2005-04-07T14:16:00.000+02:00

The FT reports that France defends EU lifting China arms embargo

Well the French would wouldn’t they! I think the comment by Per Ahlmark, Sweden's former Deputy PM, on The EU & Asia’s Arms race hits all the right buttons about the motives of the EUropeans.

But let’s not forget that US criticism of the EU on this is also pretty hypocritical. I believe the US has decided to sell F16’s to Pakistan – Pakistan is not a stable country. Or is it that the man White House thinks that the dictator General Musharraf is a deserving “champion of democratic freedom”!

Hungary proves Eurowreckers wrong on labour migration

2005-04-06T10:17:00.000+02:00

In Budapest the future is bright. The sun is shining and with the early spring temperatures now well over 20 degrees centigrade “old Europe” is looking increasingly grey, dull and stagnant. In the circumstances it is no surprise that Hungarians are not migrating to “old Europe” in any great number.

In the Eurowreck, otherwise known as Eurozone Europe, the leaders of economies like France and Germany, with their burgeoning armies of structurally unemployed, will not be able to blame EU Enlargement for the failure of their miserable policies.

Hungary wonders why bother with labour restrictions

Western European worries about hordes of job seekers from new EU members were overdone as recent figures show less than expected Eastern workers, and only a trickle from Hungary, have found jobs in Europe's most advanced economies since the new countries joined the EU in May 2004, a national daily said on Tuesday. Between May and the end of 2004, a total of 3,740 Hungarian workers took up jobs in the United Kingdom, while 2,100 were employed in Ireland and some 4,000 in Sweden, Nepszabadsag said quoting fresh job market figures.

Eurowrecker Mandelson spins again

2005-04-06T10:04:00.000+02:00

Writing some 2000 year ago Plutarch was well aware of the nature of politicians, and while technology and has advanced in the intervening period the characteristics of politicians have not. “Spin” was used in ancient Athens and Rome and it is still being used today – Peter Mandelson, the EU Trade Kommissar, is a high priest of “spin” who continues to use these techniques in Brussels as is evident from the Financial Times report today that

Zoellick blasts Mandelson “spin” on subsidy dispute

Robert Zoellick, the chief US trade negotiator, on Tuesday lashed out at his European Union counterpart, Peter Mandelson, accusing him of using “spin” in a contentious dispute over aircraft subsidies and comparing him unfavourably with his predecessor, Pascal Lamy.

The unusually personal attack marked a serious deterioration in US-EU trade relations, increasing the likelihood that the battle over state aid to Airbus and Boeing will require arbitration by the World Trade Organisation. The fallout could also harm transatlantic co-operation on other trade issues.

He (Zoellick) said: "If you don't have an authorising environment [from EU member states], you just tell that and you don't have to spin."

A senior aide to Mr Mandelson said Brussels would not respond to "personal derogatory remarks”. He added: “This is a policy issue, not a personality issue. The US side appears to have been determined to get it from the WTO from the start."

Vive le EUrowreck, Kommissar Mandelson!

EU & China on collision course

2005-04-05T12:58:00.000+02:00

Today the FT reports that the EU is to adopt rules for curbing Chinese textiles

The European Union's response to higher Chinese textile exports shows "a growing and worrying protectionist trend" which could eventually undermine the EU's economic competiveness, Sweden's trade minister has warned.

Highlighting a growing divide within the 25-nation bloc over the benefits of trade liberalisation, Thomas Ostros told the FT: "There is an increase in protectionist ideas which I feel is very troublesome, not least in the light of the Lisbon strategy (to turn the EU into the world's most competitive economy.) In the long run, it will mean less economic growth and fewer jobs if we use that type of strategy."

Curiously some in the EU (Chirac, Schroeder) are seeking to lift the ban on selling arms to China. Seems the EU is confused about its policy toward China. The Swedish Minister has a point but then the US government is coming under pressure to put up barriers to China too, and there is the samll point that protectionism is nothing new in the EU. Some would also argue that jobs are being lost to China.

China is causing more than a few headaches in the "western economies". Rapid Chinese economic growth is one of the reasons why oil production needs increasing, and, I might add, why the price of oil has risen so dramatically. Then there is the vexed question of the undervalued Chinese currency. The dragon has been woken up; just wait until it starts to roar and breathe fire!

Hungarian investors go local

2005-04-05T12:17:00.000+02:00

In "New Europe" the future looks bright.

No wonder the French and Germans are bit bitter about EU Enlargement - the fact that they're economies are stagnant and structurally weak doesn't help matters. Here is just a taster of what is going in here in Hungary.

Hungarian investors focussing on neighbours

Budapest, April 4 (MTI) - Hungarian capital investors focus on the new member states of the European Union and the countries aspiring for membership, a daily paper reported on Monday.

Hungarian investors are mainly attracted by these countries' relatively less developed economic environment, making it easier for them to enter the market, the chance of quicker returns and geographical proximity, Magyar Nemzet said.

The main destinations of Hungarian investors are currently Slovakia, Romania and Croatia.

Slovakia's recent tax reforms and EU entry have given a boost to Hungarian direct investment, Tibor Varga, head of the Bratislava bureau of the Hungarian Investment and Trade Development Agency (ITD Hungary), said.
Until last September, Hungary has been the seventh biggest foreign investor in Slovakia, trailing only Germany, The Netherlands, Austria, Italy, France and Britain with a market share of 6.6 percent. Hungary's total investment in Slovakia has reached USD 1.7bn, the bulk of which came from large investors, primarily the Hungarian oil and gas company Mol. In the first three quarters of 2004 Slovakia received the highest FDI from Hungary in the value of USD 186.3m, ahead of Austria (USD 151.9m) and the United States (USD 101.8m).

Romania is another favourite destination of Hungarian capital investors. To date more than 5,000 Hungarian-Romanian joint ventures were established, with Hungary becoming the seventh biggest investor and accounting for 2.65pc of all FDI in that country. Hungarian investments in Romania, including recycled profit and capital raises, have exceeded USD 700m. In value terms, 60.5pc of Hungarian capital landed in the retail sector.

Croatia, which used to be considered a risky place for investors, attracted USD 930m worth of Hungarian capital from 1993 to 2004, Tibor Sult, head of ITD Hungary's Zagreb office, said. Hungarian investments in Croatia comprised manufacturing, retail trade, tourism, services, privatisation and greenfield investment projects alike.

MOL and OTP Bank have lots of cash to spare and are making numerous acquisitions. MOL is now reported to be due to takeover Croatia's INA oil company, and OTP are very busy buying banks in Serbia ......... Yes, tourism in Croatia; the potential is huge, the decision to invest is almost a no-brainer.

Eurozone growth spirals downwards

2005-04-04T14:33:00.000+02:00

Oil prices are on the rise again and the EU has cut its growth forecasts. The EU’s growth forecast has been looking pretty poor for some considerable time and this is simply an admission of the obvious by the European Commission.

In its Spring Forecast the European Commission says that its sees -

…… a number a downside risks to its spring forecasts, including further oil price hikes, disorderly exchange rate adjustments and more subdued consumer confidence which, if confirmed, would weigh on private consumption growth and could also hold back investment plans.

That’s putting it mildly. The EU, and specifically the Eurozone, is structurally weak and without reform to the bloated welfare states in many member states the chances are that the Eurozone will continue to see rising unemployment; its's economic stagnation at best, and a slide into recession at worst.

I’m not in the habit of promoting marketing gimmicks but I think this mug from the people at 2DTV is worth a look even if you don’t buy it – Charles & Camilla

EU / US Visa war on the horizon

2005-04-04T13:12:00.000+02:00

Buried by all the news coverage of the Pope's death it appears that Brussels has raised the prospect of an EU/US visa wa r. This has the potential to seriously damage business and indeed inconvenience citizens on both sides of the Atlantic. The following, from the linked text, appears at the Financial Times;

The European Union might consider demanding visas of US citizens if the US Congress sticks to an October deadline for EU countries to start issuing high-tech biometric passports, European officials warned on Friday.

............. Under the new US rules, passengers with fresh passports issued after the deadline must have a biometric version - which includes a digital photograph embedded on a chip - or apply for a visa, which can take weeks.

The threat of imposing visas on passengers from most of the 27 currently visa-exempt countries, which include 15 EU states, worries US business, in particular, the tourism sector.

US companies and universities have also complained about tighter US border policies, with visitors sometimes facing lengthy waits even to obtain a visa interview.

The trouble with European mediocrity and centrist compromise

2005-04-01T15:17:00.000+02:00

Politicians and scruples are a contradiction in terms. People generally regard politicians and political parties with mistrust. Too many lies, too much corruption etc. etc.

People are disappointed and they no longer bother to vote. They are disappointed with politicians because they mistrust them.

Here is a theory that I will admit I am not certain is correct.

There is another source of disappointment that brings this back to the issue of ‘compromise’. The cause of that disappointment is centricity and the ‘compromise’ that is inherent in the politics of centricity. Compromise means that no-one is ever entirely satisfied – concessions have to be made.

Mainstream politics all over Europe is facing the lack of distinction between left and right and the growth of the politics and economics of centricity where the differences are more in the minutiae and nuances of policy. Politicians and their economists are more interested in GDP growth, headline inflation, fiscal and monetary responsibility and, keeping up the appearance of being economically competent.

I did not write the above quote but I didn’t save the url and cannot remember where it came from so regret I cannot provide the source. But it seemed to be spot on.

People are disappointed with the choices that face them on the ballot paper – there is a choice between more of the same non-committal centrism or something that is only marginally less non-committal. Centrist politics has become the norm because it is largely non-partisan and follows the middle of the road path; that is the essence of its success. It is what is fashionable today but will it always be like that. Agreed it is better to have more of the same Centrism if the alternatives are extreme but it does nothing to stimulate people’s interest in participating in the political process - “why bother to vote? It doesn’t matter who you vote for the government still gets in and all government is the same these days” – “even if I do not vote I know that I can trust those who do to elect more of the same” – “politicians are all the same they’re only out for what they can get for themselves.”

Centrist politics removes the differences between political parties to the extent that many registered voters don’t bother to vote because there is no need; the product is the same the difference is in the packaging and the packaging has become transparent. Turnouts have been decreasing in elections because of centricity and disappointment at the lack of choice.

There is no alternative to Centrism. I would agree with this in one sense but disagree in another because there is always an alternative, at least there should be, and, if there is no alternative then we could be in trouble.

Centricity is a refuge. It offers stability in the face of extremism and makes sense; it is the wall behind which we can retreat and it is a known quantity. But look carefully at what is happening within the walls and it appears that centricity is in itself giving birth to extremes. Centricity at the macro level is starting to be controlled by minorities at the micro level who are exercising power beyond their democratic franchise and disproportionate to their size.

In itself this is not a crisis for democracy as long as Centricity holds sway. Maybe we are entering the ‘age of centricity’? However, Centrist politics means there is no real opposition and that can be dangerous.

Writing with reference to Russia the authors of an article that appeared in Izvestia a few years back made the point that “Countries without a recognized political opposition are likely to find that the social and political space such groups normally occupy will increasingly be filled by extremists” and that “they are likely to play a role far out of proportion to their numbers and poison the political system that gave them birth.” The article concludes that:

"Initially, such extremists may appear to both the leaders and the broader society to be of little more than unwanted nuisances. But if the regime does not allow the emergence of and more importantly the institutionalization of a genuine political opposition, one that is expected and allowed to challenge the current government and even seek to replace it, such extremists are likely to serve as magnets for others in society who may be disaffected.

And because the movements that form around such people are inevitably going to be coloured by their attitudes, such new movements will be even more threatening to the prospects for democracy than anyone might have expected."

The full commentary on this article can be found by clicking the link - When There Is No Opposition

While there are no ‘regimes’ as such in the EU that deliberately stifle opposition the growth of centricity achieves the same end. Minority rights are championed with positive discrimination and political correctness. Look at what has happened to Huntingdon Life Sciences and, the fear that all too many corporations, including Banks, have of targeted campaigns by ‘activists’. Observe too, the often dis-proportionate influence groups like Anti-Globalisation, Anti-Abortion, Anti-Vivisection, Anti-etc.etc. have been able to gain – sometimes this can be a force for good but not often. Is it only a matter of time before this spills over into the wider political spectrum and gives birth to an extreme left or right political group that is able to exercise an influence far beyond its’ mandate?

It is not that the conditions for a ‘normal’ opposition to emerge do not exist, they do. The problem is that centricity obviates the need to cast a vote and pushes the disaffected to extremes and extreme movements tend to orientate around the attitudes and opinion of the leaders. Should a charismatic leader come to the fore and express in a seemingly reasonable manner the darker side public opinion, something always more likely to surface during times of economic hardship and high unemployment, the possibilities of that leaders election and their ability to wield power beyond their true franchise becomes a real possibility. Milosevic was an example, Haider in Austria is another ever hopeful that his time will come and, I have no doubt others will emerge and exercise power with varying degrees of success.

The trouble with Jacques

2005-04-01T15:06:00.000+02:00

National politicians are railroading the EU in pursuit of short-term electoral gain. This has been evident for many years but perhaps it is only now, when it has become so blatant, that newspaper editors have decided to write about it.

There is more of the same to come before the year is out. It seems despite, or rather in spite of, Britain conceding some ground on the services directive to help out France in the forthcoming referendum, Chirac has now rounded on Britain and attacked the budget rebate. This was foolish as Blair is now likely to seek a long overdue review of the CAP - France receives colossal payments under the CAP. Britain holds the EU Presidency later this year.

Blair, however, is as nothing compared to Chirac when it comes to epitomising all that is wrong with the EU. Not only is Chirac blackmailing the EU into redressing his unpopularity at home, he is putting national interest before the community interest. Raising the UK budget rebate is another populist move designed to distract attention from problems at home. He will certainly gain popular support for a review of the UK budget rebate, but by the same token Britain will also gain very considerable support for a review of the CAP.

Chirac is, I believe, deeply unpopular in France. He was only so overwhelmingly voted into power because of democratic apathy, which resulted in the alternative candidate for the French Presidency being Jean-Marie Le Pen! The choice was poor to say the least. And, Europe, and indeed the wider world, now has to live with his attempts to garner favour with a people who didn’t really want him in the Elysee Palace.

Chirac has persistently engaged in demagoguery and populism to generate some semblance of support among the French electorate. It was one the key factors informing his position on the Iraq War. It has underlain his championing of French cultural exceptionalism. It has been a major factor in his requiring a referendum for the French on Turkish EU accession. It has lately been a driver behind his opposition to the services directive, and it is now manifest in his raising the matter of the UK budget rebate. The result of all of this has been to create division in the EU. It is time France removed Chirac from the French Presidency, depriving him of immunity from prosecution for corruption when he was Mayor of Paris.

Chirac stands in the way of progress in Europe – in ancient Athens he would have long since been ostracised. Who will rid us of this turbulent Frenchman!

EUrope is getting into another fine mess.

2005-04-01T12:27:00.000+02:00

This Blog is under construction, and may well always be so, however at present it is more than a little embryonic. In the meantime here is something to start it off.

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Unemployment is a disaster in the EU but there are others. No, not simply that the EU25 and Eurozone trade surplus has turned into deficit.

The European Commission press bureau reports that: Following a significant decline in February, the Business Climate Indicator (BCI) for the euro area fell again considerably in March. The indicator now stands at a value of -0.08, down from 0.20. As in February, all components of the BCI went down in March. The biggest fall in industry managers’ opinions was observed for the production trend observed in the recent past. The assessments concerning the export order books, the total order books and the stocks of finished products declined significantly, too. Finally, the remaining component, production expectations, decreased more moderately.
See - Eurozone expectations decline again

But that’s not all. The EU is gearing up for trade sanctions against the USA. The Commission took this latest step in the dispute over the Byrd Amendment in light of the continuing failure of the United States to bring its legislation in conformity with its international obligations. The Commission proposes that an additional duty of 15% applies as of 1 May 2005 on a range of products which include paper, agricultural, textile and machinery products. See - EU proposes trade sanctions against USA

And, in another move it looks as if the US is unlikely to extend the deadline for the introduction of biometric passports. This latter has the potential to escalate into something far more serious for EU / US trade than any trade sanctions the EU might impose. See the FT - Warning to EU on passport deadline

The indications are that the Eurozone may yet be heading for economic catastrophe, and that social unrest and political extremism are likely to grip many EU states. Not to mention the impact of rejection of the EU Constitution ........

Note to readers - FT links are subject to disappearing under subscription. I support Open Access , but understand that the FT prefers to put a value on its material.