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  • Some European governments get the vapors, take potshots at the Euro – and miss

    Posted by Ralf Goergens on June 6th, 2005 (All posts by )

    This started out as a comment to Jonathan’s post below, but became too long, so I’m putting it here:

    The most important point to remember here is that Europe’s problems are almost exclusively the work of the individual members, and not that of the European Union, which is not a huge disembodied entity, but an organization that can make only such decisions which are approved by all of its members’ governments.

    Take the example of Italy: Whenever they ran into problems in the past, they devalued the Lira to make their products more competitive. At the same time imports, especially imports of raw products, and parts the Italian companies need to buy abroad to make their own products, became more expensive. The result was a double-whammy: Increased demand for Italian products and an increase in prices for imports drove up inflation, which in turn led to higher wages and therefore higher inflation. To compensate for these problems, the Italian central bank again devalued the Lira etc, etc, ad nauseam.

    This vicious circle led to ever higher inflation, and also ever higher interest rates. Italy gained two benefits by joining the Eurozone: Their inflation was suddenly under control, and they had much lower interest rates. If they had reformed their ruinously expensive social systems, all would have been well, but they didn’t, so that the government now needs a scapegoat. As most governments here do, the EU and the Euro are first choice when it comes to that.

    Now to the really sad truth: If Italy hadn’t joined the Euro, it now would be in the same situation Argentina is in – the high inflation and and high interest rates would have dragged it down by now. If they left the Euro, that’s exactly what would happen, only a lot faster government debt of 106 % of GDP would see to that, if they had to pay the market interest rate rather than the interest rate payable by members of the Eurozone. And if they don’t change their ways, they might even get kicked out.

    The problems of France, Germany etc are somewhat different, but these, too, aren`t caused by the EU or the Euro, but rather by the behaviour of the governments in Berlin, Paris etc. It also should be remembered that there are similar, and sometimes even greater, differences in growth and general economic cycle between different regions of the United States, without anybody calling for the abolishment of the Dollar.

    Jonathan’s post isn’t about European constitution, but since the article in the Telegraph discusses it at length:

    The constitution is much too long and generally a mess, but it isn’t an attempt to impose uniformity on European diversity. Rather it tries to repair the EU’s democratic deficits, in a misguided kind of way; then again, any attempt to write a new constitution would end the same way, including in America. There simply are too many special interests around now.

    The EU also is liberalising force, with policies that are much more pro-market than those of the Continental members. The French voters who turned down the constitution because they saw it as a tool of the ‘neoliberals’ to open up their markets to outside competition knew what they were doing, for the EU has forced France and others to do exactly that in the past.

    A lot of Europeans are afraid of globalization, and they lash out at the EU because they see it as a tool of globalization, for it tries to move the member states towards more competition, and also open borders for goods and services from the outside world. The protectionists sit in Paris, Madrid and lately Berlin. They blame the EU for the problems they themselves have caused, and that helped the anti-globalizers to have their views accepted by the mainstream. In fact, there seems to be a nascent Pan-European movement whose program is a noxious brew of anti-globalization platitudes, right wing isolationism and a primitive xenophobia.

    In addition to this there are populist movements in every member nation, and the trouble with these populists is that they are trying to defend a status quo that is long gone, or never existed in the first place, and the EU is again blamed for the difference between present reality (or for whatever feverish hallucination they take for reality) and for what they think it should be. American observers should be wary, so that they won’t end up as suckers for this kind of nonsense.

    Charles More is guilty of this kind of populism when he claims in the Telegraph that

    “…that the “ever-closer Union” on which the European Union has been built from the beginning is one of these unreal schemes, since it believes in two falsities – uniformity where in fact there is diversity, and the primacy of government over people.

    The European Union is, for all of its imperfections not an attempt to enforce “uniformity where there is diversity”, that is nothing but a strawman argument brought forth by those who have always been against a Union in any kind and shape. And the “primacy of government over people” is, as far as it is true, due to the fact that the opponents of the EU insisted on it (by, for example, preventing the European parliament from becoming more than a mere talking-shop), to make integration as unpalatable beyond a certain point as unpalatable as possible. And now they are complaining about the very defects hey have built into the whole project themselves.

     

    8 Responses to “Some European governments get the vapors, take potshots at the Euro – and miss”

    1. DaveVH Says:

      “The European Union is, for all of its imperfections not an attempt to enforce “uniformity where there is diversity””.

      But certain stubborn facts must be acknowledged: An increasing amount of law is uniform, there’s a uniform rate of VAT, tariffs on extra-European imports are uniform, 12 countries have an interest rate that is… uniform.

      The list of things which are now uniform is endless, even if the intent was always “harmonisation” or “union”. Semantics? Perhaps, but the point is that all significant EU efforts (apart from language policy – something they learned not to meddle with from the Habsburgs) are devoted to schemes which have the effect of uniformity.

      Regards,

    2. Lex Says:

      “The European Union is, for all of its imperfections not an attempt to enforce “uniformity where there is diversity””.

      That is not what it looks like from across the Atlantic. Brussels issues regulations that are Union-wide. There is one currency for vastly different countries. The central government is not democratically accountable and it cannot make rules for one country and not another. And it has found a need to make very microscopic regulation which impinges on the daily lives of everyone in the EU. Why anyone would want this to continue baffles me. Each of these countries benefits from some degree of trade liberalization. But many don’t even want that.

      Anyway, this election was about this constitution, and it is a terrible document that no one who has tried to read it would ever agree to live under if they were thinking straight.

      As to the Italians, the facts you cite just show that it makes no sense to pretend that Italy and Germany are part of one “country.” They should have as much elbow room as they need to get along peacefully. Italy has been a complete mess for all of its modern existence. There is no reason for anyone to want to be part of that unless they live there. Moreover, the Italian police and tax authorities are totally corrupt and eliminating internal customs has turned Bari and other locations into smuggling havens. Why the other Europeans would want to tolerate this is another question.

      The only person I have seen talk about what rules now govern Europe is you, Ralf. It would be interesting to see what an EU continuing to be under the Nice Treaty would look like.

    3. Lex Says:

      Ralf, also: this, from the Spectator:

      The ideological urge to make one Europe has led to a determination to force on it one-size-fits-all policies. National parliaments have been stripped of the right to set the water quality in their citizens taps because the French model decrees that one Europe needs one water quality.

      Many people seem to think this is the case.

    4. Ralf Goergens Says:

      DaveVH, Lex,

      there is an astounding amount of laws and regulations on the level of the individual member states, If those are replaced by some EU-wide ones that’s no drama, especially because all governments have to agree to that first. And VAT is set nationally.

      And Lex, Europeans are stuck with each other, EU or no EU, and our economies are increasingly becoming a single one. And you only see a tiny fraction of what’s happening over here. Governments push through their pet-projects, and then claim that Brussels made them do it. Etc, etc…

    5. DaveVH Says:

      Ralf,

      You’re approaching the EU question in a much better way than most people do, and for that I’m grateful. I want to correct you on one important thing though. Laws are passed in two ways: By unanimous voting and by majority voting. The Constitution would have extended the number of areas subject to majority voting. Also, it’s estimated by eurosceptics that 70% of new laws originate in Brussels; europhiles put the figure closer to 50%. Either way, it’s a lot. I might not see it as a drama if the institutions making these laws were properly accountable; unfortunately we suffer something a Polish MEP recently described as being closer to the Soviet Union. And he should know. There’s a link here, it’s well worth a read: http://englandexpects.blogspot.com/2005/06/disregard-for-peoples-voice.html

      That aside, I look forward to your posts on the euro, because it’s something I’m only finding out about myself.

      Regards,

    6. Robert Schwartz Says:

      I like Mahalanobis, he runs a very good economics blog with a european perspective. Here is what he has to say about the Euro:

      A “Suboptimal” Currency Area

      Even before the euro was adopted, in 1999, it was clear that neither the EU nor the 12-member subset that has joined the monetary union was an optimal currency area. Ideally, currency zones should be compact and homogenous enough to show little regional variation in business cyclesotherwise a one-size-fits-all monetary policy will leave some regions lingering in recession, while others grow so fast they overheat. Many argue that this is what is happening in Europe, where a few countries, like Ireland, are experiencing rapid growth while big economies, like Germany and Italy, stagnate.

      There are ways to mitigate imbalances within big currency areas. Even America is not an optimal currency zone; its regions sometimes boom or shrink out of sync with the rest of the economy. But America has important features that temper the problems of unified monetary policy. Federal programmes act as automatic fiscal stabilisers, siphoning off tax revenues from booming areas and transferring them to ailing regions as unemployment insurance or health benefits for the poor. Americas labour market is also highly flexible. This allows wages and prices to adjust downward, giving depressed regions a competitive advantage that can attract new companies and thus smooth out regional disparities. And workers in declining industrial towns frequently pack up and move across the country to find work; capital flows freely as well. Without these mitigating factors, people in depressed areas could easily be trapped in a cycle of stagnation.

      In Europe, by contrast, few mechanisms exist to bring the euro areas widely divergent business cycles into sync. The ECB has been trying to chart a middle course between slow- and fast-growing countries while establishing its credibility as an inflation-fighter. The result has been a monetary policy that is too hot for some, too cold for others, and just right for almost no one.

      The lack of adjustment mechanisms means that ever closer union is not just a glowing ideal; it is a matter of survival. Language and cultural barriersnot to mention wide differences in social insurance and retirement programmesencourage workers to stay in their own country, no matter how bad the economy, closing off one of the easiest avenues of convergence. If Europes economies do not drive forward towards a single market, with labour markets that are more flexible (and international), there is a growing risk that some of its members will eventually find the gulf between their economies and their monetary policies too wide to endure.

      Unfortunately for euro-boosters, recent policy moves have all been in the wrong direction. Not only has the stability and growth pact, which was supposed to help force fiscal policies into rough alignment, been weakened. Progress has also stalled on measures to widen market access, such as the EUs services directive. And fierce public resistance to eroding generous worker and consumer protections has made governments unwilling, or unable, to implement the kinds of deep structural reforms that could help.

      Without these changes, the euro will probably be able to limp along, at least for a whileparticularly if the ECB cuts interest rates, as it has begun to hint it might do: politicians have an easier time enduring a monetary policy that is too loose than one that is too tight. But if nothing is done, the instability will mount. Already Italy is being compared to Argentina, where a currency peg to the dollar made exports uncompetitive, sparking a recession and, ultimately, a fiscal crisis that forced the country to ditch the peg and devalue the peso. At this point such comparisons are scary possibilities, not likely outcomes. But it is only one of many plausible scenarios in which the economic ills of its members prove fatal for the euro.

    7. Ralf Goergens Says:

      Dave, thanks.

      Point is, the EU replaces the many rules and regulations in the individual states with unified ones, so those mostly aren’t really new ones that cover areas previously unregulated.

      Robert,

      Europe is a supoptimal economic area, so the currency area has to be suboptimal, too. Even so, Europe is the only area we have. ;)

    8. Robert Schwartz Says:

      “Even so, Europe is the only area we have.”

      Yes, but that doesn’t mean you should throw your money around heedlessly. The Euro has a real cost and that cost is a deadweight loss to the members of the Euro Zone. When they throw that cost overboard, as they will undoubtedly do in the not too remote future, nothing will change except for your bookkeeping and the removal of the cost of maintaining the Euro.

      My appologies to all. The quote above should have linked to the underlying article from the Economist. Here it is.