Hungary: Well That Didn’t Take Long!

It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:

For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.

The warning lights are flashing again – this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.

Well, well, well, scarcely three weeks later, and here it is, all on the table. Sometimes, in the field of interest of what is sometimes erroneously termed the dismal science, things do indeed move quickly.
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Who gets under the EU umbrella when it rains?

This anniversary guest post is written by the clever and wittty P O’Neill.

For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country. The last major convulsion was Black Wednesday in 1992. Yet the only real long term impact of Black Wednesday was on the electoral fortunes of the Conservatives, as the legacy of mismanagement proved very difficult to shake. But there was little other damage: the UK economy managed to shed an exchange rate straitjacket that it had never particularly liked and growth recovered quite quickly, and the Eurozone project, then its in infancy, shed its most reluctant large member, setting the stage for monetary union 7 years later. Furthermore, the crisis itself was limited in scope, as it never concerned the ability of the UK government or the country as a whole to pay its bills.
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Spy kids

Huge flap in Romania this week, as it’s been revealed that the Communist-era secret police recruited children to spy on parents and classmates.

This should come as no surprise. Nicolae Ceaucescu was a creepy little thug, and his Securitate were the scum of the earth. If you can think of a sleazy, evil activity, there’s a good chance Old Nic was into it. Assassinating troublesome Romanians abroad? Absolutely. Torture? Dude, they had training courses. Rewriting history, complete with forged photographs? They had a building full of people for that. You can argue whether Ceausescu was a “Stalinist” or not, but his regime knew all the tricks, and used them.

So, of course they had kids spying on their parents. For everything from Mom’s habit of listening to foreign radio stations to Dad’s jokes about the Ceausescus. While people may not have known this, exactly, it’s not something that should come as a shock.

So why the fuss?
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Not as exciting as the World Cup

If anyone has the energy to think about the European Constitution at the moment, I’m afraid this entry will not encourage you to keep up the effort.

Last week, the Centre for European Policy Studies (CEPS) put on a show for those of us in Brussels who are interested: a lunchtime meeting, discussing the way forward after the “period of reflection” on the fate of the Constitutional Treaty. The speakers were the leaders of the three main pan-European political parties – for the European People’s Party, former Belgian prime minister Wilfried Martens; for the Party of European Socialists, former Danish prime minister Poul Nyrup Rasmussen; and for the Liberals, Belgian politician Annemie Neyts.

I found it a depressing meeting, depressing because of the complicit complacency of the three.
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The Czech Growth Engine?

Interesting news from the Czech Republic in this week:

The Czech republic has joined Slovenia among new member states with higher levels of wealth per capita than old member Portugal, according to European Commission statistics.

The central European country enjoyed gross income per capita of 73 percent of the EU 25 average last year compared to 71 percent in Portugal, according to the latest estimate by the commission’s statistical wing, Eurostat….

The results have left Slovenia and the Czech republic chasing Greece, on 83 percent, as the next old member state to overtake, with Slovenia set to draw level with Greece by 2007 and the Czech republic to narrow the gap further in the next two years, the study predicts.

This now raises some interesting questions. How will Slovenia’s future growth compare with that of the Czech Republic (remember Slovenia is about to join the eurozone on 1 January 2007 while the Czech Republic is in no particular hurry to join)? What is the relation between Portugal’s low-growth and eurozonemembership? Will the Czech Republic now overtake Greece?

We can also, I think, see more clearly some appropriate comparisons for testing the ‘euro has been a spectacular success’ hypothesis: we can look at the UK vs France, Finland vs Sweden and Denmark, and we can look at the Czech Republic vs Portugal.

Something Seems To Be Working

According to the Turkish news agency Hürriet Turkish Deputy prime Minister and Foreign Minister Abdullah Gul spoke last night to the NTV news channel regarding:

“the recent wave of legal battles being held against Turkish intellectuals and a senior member of the European Parliament. Gul criticized the actions that were being taken under the controversial article of the country’s new penal code and said, “There seems to be a chain of systematic complaints. There appears to be a mentality deliberately aiming to create chaos.”

The FT quotes Mr Gul as saying:

“There may need to be a new law. As a government we’re watching closely how the existing laws are being implemented.”

The law in question is the one which makes it an offence to insult “Turkishness”. This law has been highlighted recently by the Orhan Pamuk case and now by the strange threat to prosecute Joost Lagendijk, a Dutch member of the European parliament, for suggesting the Turkish army provoked Kurdish rebels in the hope of extending its influence. Interestingly enough Joost Lagendijk supports Turkish membership of the EU. State prosecutors are reportedly studying the complaint against Lagendjik.

Now I have to say that not of this surprises me. Turkey is a society in transition. Fortunately the transition is from a bad equilibrium to a batter one, and we in the EU are doing our bit. I feel that Gul’s statement confounds the fears of the sceptics. In this case EU pressure will be rigourous, and change will be far reaching, but the process will, obviously, have its ups and downs.

So I was really surprised to read in the FT:

“Turkey knows that gaining entry to the EU will become an increasingly arduous task in the coming years, because of widespread antipathy inside the 25-member club towards future enlargement. “

No! Turkey gaining entry to the EU will be an arduous task because it is good for Turkey and good for the EU that it be so. If some people are using their ‘enlargement fatigue’ as an excuse for trying to make things more difficult, then they are the ones who will end up even more fatigued (and frustrated) as time after time Turkey complies with their demands.

This could be another example of shooting-yourself-in the-footism as in complying with the demands Turkey will become an increasingly modern and economically competitive society, which means, of course, that when it does join in 2014 it will, as the largest member state, have even more influence :).

Austria Would Prefer Not To

Earlier this year, Eurobarometer started asking members what they thought about future EU expansion. The results (which can be found here, as a pdf) were pretty interesting.

52% of Europeans support membership for Croatia, while only 34% oppose it. (War criminals? What war criminals?) And 50% support membership for Bulgaria. But only 45% support Romania coming in. Which is a bit embarrassing, given that the EU has already firmly committed to Romanian membership, even if it might be delayed for a year.

Still, the Romanians can take comfort; they’re well ahead of Serbia (40%), Albania (36%) and Turkey (dead last, with 35% of Europeans supporting Turkish membership and 52% against).

Where this gets interesting — in a Eurovision-y sort of way — is when you start to break it down by country.
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Something Worries Me About Peter Bofinger

Really I realise I have been remiss in another important sense. I have long assumed that in fact the decision to reduce deficits was taken due to the coming fiscal pressure from ageing. This certainly was the background to the discussion. However now I look at the details of the SPG this area is not mentioned (as far as I can see) and the other – the free rider and associated – is the principal consideration.

So those who criticize the bureaucratic and infexible nature of the ECB are in the right to this extent. Of course the underlying demographics *should* be part of the pact, but that is another story.

I find myself in a tricky situation, since I am deeply sceptical that the euro can work, and now after the French vote even more so, but since it has been set in motion, the best thing is obviously to try and make it work (even while doubting). So I am thinking about all this. Obviously I should try and write a longer post making this clearer.

The SGP was adopted at the Amsterdam Council 1997. A history of the implementation of the pact, and a summary of the debate over the new pact can be found here. The Stability and Growth Pact was designed as a framework to prevent inflationary processes at the national level. For this purpose it obliges national governments to follow the simple rule of a balanced budget or a slight surplus.

Now if we go back to the origins of the pact, to the communication of the European Commission on 3 September 2004, you will find the following:

“As regards the debt criterion, the revised Stability and Growth Pact could clarify the basis for assessing the “satisfactory pace” of debt reduction provided for in Article 104(2)(b) of the Treaty. In defining this “satisfactory pace”, account should be taken of the need to bring debt levels back down to prudent levels before demographic ageing has an impact on economic and social developments in Member States. Member States’ initial debt levels and their potential growth levels should also be considered. Annual assessments could be made relative to this reference pace of reduction, taking into account country-specific growth conditions.”

Now curiously I have found nothing in Bofingers argument which seems even to vaguely recognise this background.

A good starting point for this topic would be the conference “Economic and Budgetary Implications of Global Ageing held by the Commission in March 2003.

The European Council in Stockholm of March 2001
agreed that ?the Council should regularly review the
long-term sustainability of public finances, including the
expected strains caused by the demographic changes
ahead. This should be done both under the guidelines
(BEPGs) and in the context of the stability and
convergence programmes.?

This document on the history of EU thinking on ageing and sustainability is incredible.
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EU Enthusiasm Study

According to a new study released today by the commission, the EU’s image amongst its citizens is deteriorating and confidence in EU institutions is decreasing:

The EU’s image is worst amongst British (28%), Finnish (30%) and Austrian (30%) citizens but best amongst the Irish (68%), Italians (63%) and Luxembourgers (58%).

Support for the thorny issue of further enlargement lies at 50% in the EU – a slight decrease since 2004 (53%) – but the figures show a large discrepancy between old and new member states.

Forty-eight percent of EU citizens from old member states support Croatia’s membership of the bloc with the number reaching 72% amongst the new member states.

Croatia is followed by acceding countries Bulgaria (46% support among old member states and 70% amongst the ten new members) and Romania (43%, and 58% respectively).

Turkey has gathered the least support particularly amongst the old member states (32%) and picking up 48% support from new member state citizens.

Christian Noyer: Much Ado About Nothing?

The euro fell briefly below $1.19 yesterday. There is nothing surprising or exceptional about that, the common currency has been drifting steadily downwards against the dollar for a number of, by-now, pretty well known reasons – better economic performance in the US, a growing interest rate differential between the ECB and the Fed, political issues following the referendum noes, and an incapacity to decide what to do with the SGP. Yesterday however, an apparently new element was introduced: Christian Noyer, and his appearance before the Foreign Affairs Committee of the French National Assembly.

That this should have caused a stir surprises me. Christian Noyer is Governor of the French national bank (and not simply, as much of the press report, an ECB governing council member). It is therefore perfectly logical that when asked whether any country could leave the eurozone, he should reply in the affirmative. EU member states are, as Noyer says, still sovereign nations. He would therefore have been lying to answer ‘no, it is impossible’. Curiously, the other part of M. Noyer’s recorded testimony, that any exit would put in question continued membership of the EU is far more debateable, yet seems to have attracted far less attention.

Membership of a currency union is (or should be) an economic, not a political decision. Decisions on entry or exit should therefore be taken on economic grounds, and discussions of the issues involved should be possible without an atmosphere of emotional hysteria. Of course, if your currency falls simply because someone states the obvious (I mean the information content *is* zero), then this may indicate that there is a rather deeper problem knocking around somewhere or other.

Update: Jean-Claude Trichet yesterday defended the current ECB TWIRP stance (two per cent interest rate policy) before the European parliament?s monetary affairs committee and understandably rejected a call for an annual evaluation of the benefits of the common currency for zone-member citizens.
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