CAP Research File

In the internal political life of the EU the Common Agricultural Policy seems guaranteed to hold and maintain pride of place as the topic which produces the highest level of acrimony and vitriol per paragraph of debate space. It has also featured of late as the hotspot which lead to the summer low-point in Franco-British relations. Yet while the debate is strong on heat, it is often poor on detailed information. A report whose final draft is being made available to a wider public this week may help to do something to remedy this failing.
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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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The Low-Fertility Trap

I suppose by-now every right thinking and reasonably well read adult knows what the ‘poverty-trap’ is, even if most of us aren’t too clear about what there is to do about it. Being stuck in one of these traps could be thought to be like being stuck in a (not necessarily very deep) well with a slimy surround wall. The more you struggle to get out, the harder it gets: your strength disippates, and the walls get to be even more slippery. This could also be called a negative feedback loop.

Well now there is the suggestion that something similar may exist in the world of fertility. As Wolfgang Lutz suggests in this power point presentation, the critical level may be 1.5. No society which has fallen below this level has -to date – returned above it. (Many thanks here to commenter CapTvK who sent me the link).
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Oooops It Isn’t Baaack….

Morgan Stanley team members Steven Jen and Eric Chaney (joined by Takehiro Sato and David Miles) debate today the interesting question of whether the eurozone economies have entered a liquidity trap (LT). Those who have no idea what one of these would look like could do worse than read Paul Krugman’s classic article on the topic: It’s baaack! Japan’s Slump and the Return of the Liquidity Trap (pdf).

So what is all the fuss about?
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Sweden Acts On Interest Rates

Well Sweden has just put the cat among the pigeons. Taking advantage of its ability to apply an independent monetary policy, the Riksbank has decided to cut its base lending rate from 2.0% to 1.5%. The reason why is not hard to discern, apart from the reduced growth forecast for this year, the inflation rate is falling dangerously low, at just 0.2% year on year in May, dropping from a 0.4% y-oy in April and 0.5% y-o-y in March. Obviously Sweden is on deflation alert, and in fact a greater reduction (say 1%) might have been justified.

This is bound to spark all sorts of additional debate about the euro, and its advisability. Finland would be the best point of comparison here. The Finnish inflation rate was 0.6% y-o-y in May, but it has been hovering precariously near the zero level for the last month, anything which gave a sudden push to the disinflation process, like a sudden bust in commodity prices, would certainly clearly knock Finland over the line.
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The First Chink of Light

There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB – Lucas Papademos – has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.
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Prodi Strikes Back

I think one of the topics for next years election in Italy is just being decided. Romano Prodi (former President of the EU Commission) has just spoken out against Sinascalco. He is in favour of making cuts. Prodi is quoted as saying that:

“Credit downgrades will follow if there is not quick action in fixing the situation, and I do hope Finance Minister Siniscalco makes some decision……The government lost control of current expenditure. The situation is very serious.”

Prodi is about to become the whipping boy, having to go into an election with the ‘popular’ policy of making widespread spending cuts.

Incidentally,
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The Calm Before The Storm

Following the turbulent river of news which has flowed unrelentingly through the principal European media outlets since Sunday night, today we seem to be swimming in a relative ocean of calm. This is very deceptive. Today the Netherlands is voting and tomorrow the ECB will have a closely watched meeting which may potentially have significant consequences for the EU economy.

If at this stage there seems little doubt about the outcome of the Dutch vote (more worthy of interest will be the level of participation and the size of the ‘no’ majority), we are also unlikely to see anything earth shattering happening over at the ECB. It is unlikely that there will be any change in the Central Bank’s two per cent interest rate policy (or twirp, as some wit at Morgan Stanley has christened it, after the rather better known zero rate (or zirp) policy at the Bank of Japan). All the watching eyes inevitably be focussed on the press conference, and on Trichet’s handling of the inevitable questions (worth a look at the 2:30pm webcast).

So if today we are enjoying a ‘day of reflection’, tomorrow we will undoubtedly see battle rejoined. In particular, it will be ‘D’ – or decision – day for Barroso and the EU Commission.
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Czech Republic Having Second Thoughts

I missed this at the time, but apparently officials responsible for monetary policy in the Czech Republic are begining to have second thoughts about joining the euro.

“Czech central bank policy maker Robert Holman said the government should abandon plans to adopt the euro by 2010 because joining the single currency may stifle growth, the first central banker in the country to call for a delay.

“I would not rush with euro adoption because it represents significant risks for us,” said Holman, 51, who joined the bank’s board on Feb. 13, in a May 18 interview in Prague. “The euro zone economy has been growing very slowly in the past five years, and among other factors, it could have been caused by having the common currency.””
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Crisis Looming At The ECB?

A right royal row is brewing at the ECB. Basically the old guard theorists of the ‘one size fits all’ monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray.
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