Like You, Like Me: Like Me, Like You

I don’t know why I hadn’t seen it before, but it was only while talking with a colleague this afternoon, and being asked what I thought about the unwillingness of the candidate countries to reform that it came to me: with all this coming and going on the Pact, what kind of message is being sent to the new members? Obviously if you give the impression that agreements are not to be complied with, you can get reactions you aren’t expecting, and that you don’t like. The Financial Times article you can find below, begins to give an idea of the size of the looming problem, whilst this one informs us that Standard and Poor’s has just downgraded the Polish currency rating because of concerns about deficits and rapidly growing government debt.

Poland on Wednesday came under a scathing attack by the European Commission which claimed the Warsaw government had all but stopped reforms just months ahead of Poland’s accession to the European Union.

The report, the last before next May when 10 countries will join the EU, dispensed with any diplomatic niceties and instead described how Poland was failing to deliver on implementing reforms required for membership.

The Commission also did not shy away from piling pressure on Turkey, insisting it should reach a settlement by next year over the divided island of Cyprus, whose northern part Turkey occupied in 1974.

Failing any settlement, G?nter Verheugen, enlargement commissioner, made it clear Cyprus could become an obstacle for Turkey’s bid to start formal accession negotiations by early 2005.

This was despite last minute telephone calls by Abdullah Gul, Turkish foreign minister, who asked Mr Verheugen to soften the language on Cyprus before making the reports public on Wednesday.

“Our message of Turkey [over the recent reforms] is positive,” said Mr Verheugen. “As regards Cyprus, we are trying to create a political fact. A lack of a solution to the Cyprus conflict will be a serious obstacle to Turkey’s efforts. It is an incentive for Turkey to find a solution,” he said.

The tough language on Turkey reflects a growing concern that when Cyprus joins next year, part of an EU member state will be under foreign occupation. Mr Gul said Turkey “will make a great effort to solve the problem before May 1, 2004.”

The annual reports by the enlargement commission headed by Mr Verheugen monitor in detail how all the candidate countries are preparing for accession.

Poland, along with Estonia, Latvia, Lithuania, the Czech Republic, Slovakia, Slovenia, Hungary, Malta and Cyprus, will join on May 1, 2004. Bulgaria may be ready to join by 2007 while Romania, which still hopes to join along with Bulgaria, was on Wednesday bluntly told it could not be considered a functioning market economy.

The blistering attack on Poland reflects serious concern, as well as disappointment in the Commission that had placed great store on the largest of the ten new entrants to make a final push on reform ahead of accession. “The reform path has nearly come to a halt since last year’s report,” said the Commission. It said Poland had shown “reluctance” to reduce its public expenditure, had relaxed fiscal policy and was doing little to rein in the government deficit. The promised restructuring of heavy industry and agriculture “has been modest.” The pace of privatisation had “stalled”.

Polish diplomats put a brave face on the report. “It’s a fact of life. We knew from the beginning what were the weakest points of Poland’s internal reforms,” said Daniel Rotfeld, secretary of state at the foreign ministry.
Source:Financial Times

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

8 thoughts on “Like You, Like Me: Like Me, Like You

  1. To my personal surprise, I read in Friday’s FT that Trichet, the incoming President of the European Central Bank, has staked out at the very start of his Presidency a strong defence of the terms of the Eurozone’s Stability and Growth Pact:

    “Jean Claude Trichet, the European Central Bank’s new president, on Thursday warned eurozone countries that the rules underpinning the single currency were ‘now at a critical point’. In a polished performance at his first press conference since taking over from Wim Duisenberg, Mr Trichet said the stability and growth pact provided ‘an appropriate framework’ for ensuring fiscal discipline. He said the budget deficit limit of 3 per cent was ‘the anchor’ for the pact. ‘It must not be placed in doubt,’ he said.” – from:
    http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1066565695800&p=1012571727085

    So much for all the many discussions and pronouncements questioning whether the Eurozone’s Stability and Growth Pact is too “inflexible” to accommodate appropriate fiscal policies in recessions, as Prodi has previously suggested. Given Trichet’s French connection, he is perhaps demonstrating his indpendence to criticse current and forecast breaches of the Stability Pact by the French and German governments.

  2. “In a polished performance”

    It would be hard to do worse than ‘leaden feet’ Duisenberg.

    “Mr Trichet said the stability and growth pact provided ‘an appropriate framework'”

    He is simply re-iterating the ECB orthodoxy here. I think you are right Bob, being a central banker is all about acting and playing poker. He is out to set an expectation of how he will act. This he does to try and ‘steer’ the markets. In this sense it is important that he is ‘seen’ as being independent.

    The big question mark I have is whether or not he is sensitive to the deflation problem. His ‘chief economist’ Otmar Issing certainly isn’t.

    I’m sure everyone will have been reading about the 7.3% US GDP growth, and the 8.1 % productivity growth. You will also note that Greenspan is keeping rates at 1% as far ahead as the eye can see. There is a reason for this: Greenspan (and his ‘chief economist’ Ben Bernanke) understands that there is a deflation risk. This is one example of where the US are well ahead of us here in Europe. Let’s hope Trichet is listening to them.

  3. Other press reports on Trichet’s first press conference:

    “Yesterday, during his first press conference as ECB president, Mr Trichet said: ‘Fiscal developments and the stability and growth pact are now at a critical point at which the credibility of the institutional underpinnings of EMU must be maintained.’ The 3% borrowing limit laid down by the pact and by the Maastricht Treaty – which paved the way for the creation of the euro – was the anchor of fiscal policy. ‘This anchor must not be placed in doubt.’ ” – from: http://www.guardian.co.uk/business/story/0,3604,1079801,00.html

    “But Mr Trichet was not frightened to add to the controversy surrounding the rules that underpin the euro. In comments with hardline undertones, Mr Trichet said that the three percent ceiling of the EU’s Stability Pact – which France and Germany have both breached – ‘must not be placed in doubt’. Mr Trichet also indirectly criticised the behaviour of the European Commission in the recent controversy – ‘it is the view of the Governing Council that the proposals of the Commission push the room for interpretation of the rules and procedures to the limit’. Stressing the importance of keeping to the rules, he added, ‘it is the overall credibility of the fiscal framework and, hence, the prospects for economic growth in the euro area that are at stake’. The situation was ‘now at a critical point at which the credibility of the institutional underpinnings of EMU must be maintained’, he concluded.” – from: http://www.euobserver.com/index.phtml?sid=9&aid=13446

    The text of Trichet’s speech is at: http://www.ecb.int/key/03/sp031106.htm

  4. Antoni,

    Sorry if I was obscure. I’m not saying he would be soft on the deficit. I’m sure your’re right. His background seems to be as an inflation fireman, and strong currency person.

    The deflation point is that precisely this emphasis may be wrong. Here we get into monetary not fiscal policy. I suspect Germany is already on the point of having a brush with deflation.

    If this situation deteriorates we may need interest rates at or around zero, and what the Americans call ‘unconventional tools’. I think on this site I will get into talking about this only if it becomes necessary, since it is so technical and controversial. However part of any anti-deflation strategy would undoubtedly involve *dropping* the value of the euro, not watching it rise. So this is my question: is he sensitive to this, and is he prepared to change?

    OTOH: it doesn’t seem there is much interest in talking about Poland and the other candidate countries.

  5. Probably I agree on the fact that deflation is maybe a worse problem, but the EU is tied by norms that were drawn in the early 90, as I understand, and that did not allow for deficit spending by the member-States as a remedy. Now we find that two of the main economical actors are failing to comply. And it seems, I am not qualified to say more, that not allowing for this deficit or something equivalent would drag down the whole “euroland” and allowing it will do at least moral harm to the EU.

    Sometimes I think the big States should divide in four or five. That would be apt to solve a lot of problems.

    As to the candidate countries, I don’t trust what little I know to be insightfull on their pledge.

    DSW

  6. Correct me if I’m misremembering, but wasn’t there an article on Trichet’s position regarding this in the Economist this week?

    If I’m thinking of the correct article… a very good point was made regarding the difference between running the ECB from the perspective of the entire Euro Zone versus overfocusing on the effects of specific Euro members. Taking that view the prospect of deflation in a single Euro member shouldn’t determine policy for the entire currency zone.

  7. You are probably right: that is why some are convinced that the Euro will fail, in fact. However now I believe that the tree bigger economies, Germany, France and Italy have a bad shape. And I seems to remember that Portugal and maybe Ireland too. However the mandate of the ECB was defined on “absolute” terms, instead of relative like was the case for other economical magnitudes unless I am wrong. The ECB has to defend stability of prices in the Euro-area, period. Silly when looking backwards, I feel, due in part on Germany, but not only them, hubris respect to “Club Med” or “PIGS”.

    DSW

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