Euro Decay

Collin May at Innocents Abroad points out the grim truth of European economic growth (or lack thereof). He draws a parallel between the EU and the USSR, in that the EU leaders view their nations, as Soviet leaders once saw theirs, as economic competitors of the U.S. The parallel isn’t perfect – especially when you consider that the EU lacks serious military power, not to mention the will to use it, which are what really got the U.S. to pay attention to the Soviet empire. Still, he has a point.

Of course, the USSR eventually collapsed. It’s difficult to imagine the EU nations, relatively open societies whose governments are, at least on the margin, accountable, suffering the same fate without first being forced by voters to reform. But it’s also difficult to see how their stagnant economies can possibly outcompete the relatively low-tax, low-regulation, dynamic U.S. Something eventually will have to give. As Collin puts it,

. . . When are the Europeans going to finally wake up and see that they’re busy rebuilding the Kremlin in the heart of Brussels? Not possessing a crystal ball, that is a question I’ll leave to the Europeans, but maybe the realization will soon sink in as they find that their economies are fast bogging down and their moralizing European empire has nothing but illusions to offer.

The EU is on a collision course with economic reality, and it’s a good bet reality will win. I wouldn’t be surprised if the EU survives in some form, though to do so it may have to narrow the scope of its ambitions. The next few years should be interesting.

UPDATE: Iain Murray is thinking along the same lines as Collin.

UPDATE: Joe Katzman develops the EU-as-incipient-USSR theme at greater length, and includes many links and thoughtful reader comments.

Our Warriors

Don’t let anyone tell you the war against Iraq was a cake walk, nothing to brag about. Strategy page has two emails which you must read. The suicidal Syrian Jihadis died hard … . The T-72 tanks were less than 100 yards away … .

This is how it really was, and the word is finally trickling out. God bless our American soldiers.

Money Problems

Don Luskin is right about how a “strong” – i.e., appreciating – dollar is not in itself a good thing. But neither is current dollar weakness, because with fiat currency everything that pols and central bankers say takes on excessive, even superstitious significance that can be economically destructive.

There’s no way around it. Any verbal fart by a major official could be the first indication of a policy change. Vague talk by treasury secretaries that weakens the dollar is therefore just as bad in its own way as are deflationary policies that keep the dollar appreciating. Nobody would care what Snow or Greenspan – or James Baker – said, if the U.S. Govt’s established (ideally, legislated) policy had been to maintain the money supply such that the price of gold stayed in a range of, say, $345-355/oz.

Even when a discretionary currency regime seems to work well, there’s a strong risk that eventually the people in charge, being people, will overdo it and screw things up. That’s why investors are not unreasonable to fear that the Bush administration may, in a shortsighted political attempt to aid big-business exporters or otherwise boost the economy before an election, or even to punish Europe, be going overboard in weakening the dollar. Sure, Bush said that he doesn’t want a weaker dollar, but he wouldn’t have said that if there weren’t a problem.

And even in a discretionary-policy environment it’s possible for officials to have enough sense to keep their mouths shut. Clinton and Rubin seemed to understand this, while Bush and Snow apparently do not. That’s reason enough for dollar-holding investors to be nervous.

Currently the dollar seems to be stalled in a range of 1.17-1.19 Euros. We’ll know soon enough whether we’ve seen the bottom.