There is an interesting debate going on at present about whether or not the ‘rigours of the Stability and Growth Pact’ should apply to the UK which is, let it be remembered, (a) not member of the eurozone and (b) hardly a laggard in implementing the core of the Lisbon Agenda. New Economist is pretty blunt - Brown to EC - Sod Off - but in so doing is only following in the already well-trodden footsteps of the venerable Gordon Brown himself. Any of our readers feel in the mood to take offence?
28 Responses
Feed: A Fistful of Euros
January 12th, 2006 at 1:58 pm
Gordon Brown, the British chancellor of the exchequer, rejected both the Commission’s forecasts and conclusions. “We make no apologies for investing in vital public services,”
In other words, he denies having spent too much and anyway, it was spent wisely.
January 12th, 2006 at 2:55 pm
The UK signed up to the SGP itself. Pacta sunt servanda.
January 12th, 2006 at 4:24 pm
While you’re asking, I’ll take offence then.
Why?
Well, the EC has started “non compliance” processes agaist Portugal for failing the 3% goal, and we’re under one of our worst economic crisis in many years, probably the slowest ecconomy in Europe at the moment… so if we have to comply with the 3%, quite honestly, everyone should.
Just my 2 eurocents.
January 12th, 2006 at 4:51 pm
This question really depends on your sense of democracy and crucially your sense of European democracy.
In the current context of slow European growth weighty countries such as France and Germany have long been fairing below the pact’s demands of fiscal prudence I believe. And correct me if I am wrong but was the pact not ammended some time ago to fit precise these two countries, i.e. France and Germany?
The real problem obviously is that small and “less” important/heavy countries are being sanctioned while others are not … Furthermore the economic coherence and continuity demanded through the pact is hardly possible in an “all EU-25 context”.
In any case the growth and stability pact is what we in Denmark call a “rubber paragraph” …
January 12th, 2006 at 5:13 pm
“Well, the EC has started “non compliance” processes agaist Portugal for failing the 3% goal”
Hi Luis, nice to hear from you. And nice to hear from someone in Portugal, which unfortuately all too often gets forgotten. I fully understand your feeling of offence, that’s why I invited these comments. I tend to agree with Claus though that the main object of your ire should be France and Germany (and let’s not forget Italy) who have had the political clout to get the pact tailored and re-tailored.
Portugal also has my sympathy since my guess is that this is a situation where the euro hasn’t really worked as planned - you have cheap interest rates, and a complete loss of control over your economy (exchange rate, monetary and fiscal policy etc), and it is hard to see how you can do anything at all which is really appropriate to you.
I must post on this at some stage.
“The UK signed up to the SGP itself”.
Yes, I think this is a fair point. They did this when they were thinking of joining the euro. They continue to benefit from having a put ‘option’, in that they can decide if they want to join and when they want to join. I think that the most coherent position should be that the UK withdraw from the stability and growth pact and announce that it will not be joining the euro. You can’t have your cake and eat it.
January 13th, 2006 at 11:42 pm
But the put option is a high-value card in a future poker game.
Says Ottmar Issing: “Violations against the spirit of the pact must come at the highest possible political price.” If Gordon Brown starts to suffer on that scale, a unilateral declaration of coherence will no doubt follow. For the moment, these comments from Commissioner Almunia are pinpricks.
After all, the UK figures (3.1%, and heading down according to the Treasury) frighten nobody. Everyone’s aware that the real action on the SGP is elsewhere - hence your reference to Italy.
January 14th, 2006 at 8:31 am
“But the put option is a high-value card in a future poker game.”
This Bert is why all of this is an interesting and pertinent issue, and no mere trifle.
Basically, I have some sympathy with those who live in eurozone countries and say that the UK has the best of both worlds. It isn’t in, but could decide to join when it wants to.
This issue can really only be decided in one of two ways: either the UK joins now, or the ‘option’ is terminated.
The first obviously isn’t going to happen (and, whatever Mandelson says, it is clear that it would have been impossible to address the UK housing issue if the BoE had not been able to set its own interest rates - this was really the main line of reasoning behind the advice to Gordon Brown to say no).
The second isn’t going to happen either, and this in itself is interesting. Simply put the eurosystem isn’t performing well enough for the twelve inside it to have the confidence to say ‘put up or shut up’. Terminating Britain’s option would only draw unnecessary attention to the reasons why the Uk might not want to join, and the various issues that are arising in the operation of the eurosystem, like Spain’s housing boom, or Italies public debt situation, or the problems poor Portugal is having that Luis drew our attention to.
So the motto seems to be: when in doubt do nothing! (You could also read that into monetary as practiced at the ECB).
January 14th, 2006 at 2:20 pm
It isn’t in, but could decide to join when it wants to.
Yes. I understand why Portugal for instance might be vexed by this. It’s an enviable position, to which Portugal’s makes an unhappy contrast. Britain is unconstrained by prior commitments and has the freedom to act according to its interest into the unforeseeable future. Once again it’s a ‘consumer’ of Europe rather than a ‘producer’. But any moral pressure that exists is in no way forceful enough to shift policy, as you note above. And in the court of Portuguese opinion, I’d have thought the British get off lightly compared to the big countries inside the eurozone.
If Britain wants to improve the atmosphere, I can think of better ways than by publicly turning its back on euro membership. A more immediate (and painless) approach might be to edit Gordon Brown’s speeches for disdain and preachiness.
when in doubt do nothing!
After I posted I realised that the Issing line I quoted can be read in two ways, depending on what scale you use to calibrate “highest possible”. It could mean the scale of all prices possible in politics (and automatic fines of percentage points of GDP would rate pretty high on this scale). Or it could mean the scale of what’s possible within the context of current arrangements. The first reading is a demand for assertiveness by eurozone ministers of the kind we expect from the ECB, particularly its Bundesbank voices. The second injects a note of fatalism, which probably reflects the situation more accurately.
January 14th, 2006 at 2:39 pm
in the court of Portuguese opinion, I’d have thought the British get off lightly compared to the big countries inside the eurozone
I hope Luis will put me right if I’ve misread this.
January 14th, 2006 at 4:29 pm
You’ll forgive me but I don’t quite understand your point there - perhabs my english isn’t as good as I like to think it is.
Either way, this isn’t really a issue in Portugal at the moment - I wouldn’t have known of it if I didn’t read this blog. We’re prety busy with the Presidencial elections so there’s hardly any “court of portuguese opinion” that I can represent explain. My coments above where exclusivly personal.
January 14th, 2006 at 5:21 pm
“I hope Luis will put me right if I’ve misread this.”
I think what he means Luis is that those people who do feel Portugal is being unjustly and unduly harshly treated when compared with the bigger countries are probably much more concerned about Italy, France and Germany than they are about the UK option, since as you suggest, they probably aren’t even thinking about it :).
Bert,
“publicly turning its back on euro membership”
Perhaps I put my view too strongly. I don’t think that the UK should turn its back in any agressive way, but at the same time I think we do need a certain integrity and a certain clarity of speaking here: the UK isn’t going to be joining the eurosystem any time soon, and there are sound economic reasons why it shouldn’t. I think it is fair if those who are in then say, OK, so make that formal.
In my Perrenial Euro Story post I quote Bernanke as follows:
“Rather than pursuing the question of whether Europe is in fact an optimal currency area in Mundell’s sense, I think it is useful simply to recognize that the European experiment in economic and monetary union has not been motivated primarily by Mundellian factors. ………Political factors, rather than economic ones, have played the dominant role. ”
I think it is now hard to deny his point. The problem is that this then presents a communication problem between those who think that economics is essentially politics (the ‘continental’ view) and hence that this is just fine, and those (the ‘anglo’ view) who thinks that economic systems follow their own laws, and that you ignore these at your peril. This difference of perspective makes rational debate about the euro a very difficult thing indeed.
January 14th, 2006 at 7:24 pm
Sorry, Luis, it’s up to me to be intelligible. And thanks for paraphrasing, Edward.
It’s a useful distinction you point up via Bernanke. It certainly made George Soros a lot of money in 1992, God love him.
There are people in Britain who view the euro issue through a political frame, but of course they are anti-EU, without exception. There are also those who’d rule out Britain ever joining the euro for economic reasons (probably citing studies on optimal currency areas, and highlighting the housing market and other structural differences in how the economy responds to monetary policy). There are also those who rule out joining now, for economic reasons, but who are perfectly able to imagine and indeed welcome a future in which Britain joins, on terms and on a timetable that suit its economic self-interest.
I think the centre of gravity of the current UK government is in that third group. (I’d place myself in that group too.) For this reason, I think the possibility of closing off the put option are effectively nil. And I think the chances of this changing with a change of government are pretty small too. In 1955, Britain turned down membership, but neglected to keep its foot in the door. What followed was the formative experience of British engagement in Europe: the humiliating veto of 1963, then eventual accession on poor terms to an EEC designed to a heavily French blueprint. Given how rapidly economic realities have changed in the past and will doubtless change in the future, any government would be rash to risk a repeat of that experience on economic integration.
Should Britain give up the put option in the name of fairness, consistency and coherence, and rely on the prospect of similarly high-minded treatment in the future? The single word ‘Chirac’ is a concise refutation of that view, if you ask me.
January 15th, 2006 at 1:35 am
The pound has been significantly overvalued with respect to the Euro zone for the last ten years or so. If the Uk would join the Euro zone it would experiences a big deflationary episode which makes it politicaly and economicaly suicide for the UK. But the UK will follow when the overvaluation has been solved.
January 15th, 2006 at 9:24 am
Bert,
I think you put forward a coherent and plausible point of view. I am about 85% in agreement.
I agree that if the UK unilaterally terminated the put option this would be seen as more euroscepticism (which it need not bem it is in fact simply ‘euro’ scepticism). I may have seemed unduly strong worded before. What I do think is that the issue needs to be put in some clearer category than it is now (ditto btw Sweden). I don’t think you want to continually be encouraging the question “will there be a euro referendum before or after the next election”, because there won’t be one, either before or after. So I think at least this needs to be clearly spelt out, and it needs to made plain that there won’t be a decision on euro membership until it is clear whether or not “the euro experiment” itself can work in its present form. During the last year only the doubts have grown.
At present Britain and Sweden are effectively allowing themselves to be free riders on the initial dry-run, and I can understand that not everyone is happy with that. So you have to take into account the downside that this can produce, with resentment over this hampering UK efforts to advance the Lisbon agenda, or getting the badly needed transfer of EU funds from agriculture to research and development.
“There are also those who rule out joining now, for economic reasons, but who are perfectly able to imagine and indeed welcome a future in which Britain joins,”
Well, I wouldn’t put myself outside that camp, but I think here we are talking of a much longer time horizon, maybe 2020 and beyond. And even then, depending…..
Basically I take the view that the Eurosystem in its present form cannot continue for too much longer. It is ill-conceived, and lacks the necessary political coordination. Plus, it is clear that there are “asymmetric shocks” (demographic ones, although I wouldn’t call them shocks but that is another debate).
I imagine we could at some stage over the next decade we will see a much smaller eurozone - one without Spain, Italy, Greece and Portugal (Ireland is a moot point in this context).
The remaining economies could then be ’steered’ forwards on the basis of the near zero interest rates that the German economy is (Japan style) undoubtedly going to need. There is no way that the Med Club economies can accept this situation indefinitely.
I also do think it would be unwise for any of the Eastern and Central European countries to take a decision about joining at this stage. So they may decide that they want to extend their options (and this is where people may really start to get angry). Turkey likewise should make clear that it is going to retain control over its own monetary policy and exchange rate as it becomes a developed economy. Why do I say people may get angry? Well it is clear that EU association does act as a growth-anchor for a lot of countries who otherwise would find life much more difficult, and being ‘loosely pegged’ to the euro helps. However this could, at some stage create the kind of anger there is in the US towards the China peg. Again, we are looking at a hell of a lot of free riding, with the core countries not getting a lot in return except for the ‘feelgood’ effect of having done good works (which, please and kindly note, I am not against).
By the 2015-20 period we could have a series of political rule changes put in place, a much more effective version of the eurosystem devised, and then it would be time to take a long hard look at the position of the UK.
Basically what I am saying is that things are going to get worse before there is any chance of them getting better.
This presentation by Paul de Grauwe (who is pro the euro as it is but very much on the ball) makes a lot of the asymmetries clear:
Grauwe, P. (2005): The Eurozone: Problems and Prospects, Presentation at the Colloquium for the 50th Anniversary of the CES, June
This can be found under presentations here:
http://www.econ.kuleuven.ac.be/ew/academic/intecon/degrauwe/
My sympathies again go to Portugal which I feel is getting both money too cheap and an undesirable and un-necessary deflationary policy imposed for a problem which could be much more easily dealt with if they still had their own currency to devalue and were able to set their own interest rates. But then, in this sense, I’m still very much a Keynesian. I think this lesson was learnt in the UK in the 1920s.
January 15th, 2006 at 11:29 am
I imagine we could at some stage over the next decade we will see a much smaller eurozone - one without Spain, Italy, Greece and Portugal
That’s Germany, France and some small states. Where is the benefit in retaining it at all? Removing the affordable part of the Med means that not even the tourists like it.
Following your demographic arguments Germany and France cannot be served with the same interest rates.
January 15th, 2006 at 12:42 pm
“Where is the benefit in retaining it at all?”
Where, Oliver, was the benefit in starting the thing? The issue is this, is it better to scrap Concorde completely, or should we try and redesign while it is still flying? Since no-one at all in any position of responsibility is willing to discuss this yet, the whole thing is academic.
Personally I think it is better to address problems before they leave you no alternative but to do so, but this it seems isn’t the world we live in.
My chief worry is that the Italian crisis, when it comes, can so destabilise international bond and capital markets that the dollar will first be pushed up to a level which is totally unsustainable, and that this will then precipitate the dollar decline crisis that Brad Setser so worries about. This is my worst nightmare.
“Following your demographic arguments Germany and France cannot be served with the same interest rates.”
I agree and accept. We live in a second best world. My assumption was that political coordination between France and Germany would be more possible, and that the French would be prepared to accept some sub-optimality in the conduct of their fiscal and monetary policy to help Germany in the interest of the greater good. But I may be a ’starry-eyed optimist’ here.
The question is, when Italy goes, and some of the others are forced to follow suit, this is the problem which will face France and Germany: are the sunk costs worth accepting the disadvantages?
January 15th, 2006 at 3:11 pm
was the benefit in starting the thing?
It was a political project. A positive symbol of European Integration or a propaganda effort, depending on your point of view. However, without Italy, a founding member, it is a political failure. The costs were estimated to be acceptable and the fiscally better of members were expected to bear them.
the French would be prepared to accept some sub-optimality in the conduct of their fiscal and monetary policy to help Germany in the interest of the greater good
5 years - probably, 10 years - maybe, a generation - no
And what would the greater good be?
The reverse would be equally true, btw.
are the sunk costs worth accepting the disadvantages?
Sunk costs are an argument only if eventually the running gains outweigh the running costs. Without Italy, they never will.
January 15th, 2006 at 10:36 pm
The difference betwen East and West Germany is bigger than between Germany and France so why won’t you suggest that East germany leaves the euro zone?
January 15th, 2006 at 11:05 pm
In birthrates?
The cost of transfer within Germany is consequently large, 4% of GDP. Transfers of that level between the big states of the EU are inconceivable.
January 15th, 2006 at 11:24 pm
Would surprise me if it wasn’t so. A lot of East germans move to West Germany and get their children their
January 16th, 2006 at 4:18 am
Thanks for linking to de Grauwe. Funnily enough, I was catching up with the FT and had his piece from Friday’s paper in front of me. Strikes me as a more plausible take on the dollar than the Economist’s effort.
And it does the heart good to see a BLINK tag in its natural environment. You rarely see them outside a zoo these days.
de Grauwe is a big fan of a political eurozone, in part to coordinate fiscal transfers to counter asymmetric shocks. I guess the big difference when we look at the two halves of Germany is that there is political coordination under a federal government, and fiscal transfers on a massive scale. Plus labour mobility, as Charly notes.
I think we’re all pretty realistic about the prospects of that happening on a European scale. Does that mean the euro is doomed? Is it only political precommitment and sunk costs holding the thing together? Could it be that we’re underselling the advantages of membership - reduced transaction costs, increased intrazone trade, greater capital liquidity, etc - from which the UK and Sweden have for now chosen to exclude themselves? Might those advantages become a bit more obvious a couple of years along in the cycle?
January 16th, 2006 at 11:29 am
“so why won’t you suggest that East germany leaves the euro zone?”
Because Germany is a Federal State, and the other Lande pay for the health care of the elderly in the East, this is clear. If France and Germany were to form one common Federal State - like the USA - then the euro would be like the dollar, and this set of difficulties wouldn’t exist. But up to the moment of writing this hasn’t happened.
When I say - “My assumption was that political coordination between France and Germany would be more possible” - this is what I am implying, some states my decide that they really want to keep the euro, and effectively form a Federal Union: I am completely in favour of that.
BTW
“The difference betwen East and West Germany is bigger than between Germany and France ”
I’m not sure that you are right Charly. Life expectancy in the east is now near to the western levels, and fertility, has dropped very rapidly due largely to the ‘postponment effect’ also happening very quickly. I am not sure that the underlying ‘real TFR’ is that different between East and West. What does matter is that the labour market works a lot better in Bavaria than it does in the East and a lot of young people end up working there, effectively producing ‘melt-down’ in the Esat.
January 16th, 2006 at 1:37 pm
If France and Germany were to form one common Federal State - like the USA - then the euro would be like the dollar, and this set of difficulties wouldn’t exist.
Most Germans don’t speak a useful amount of French and the reverse is also true. There is no common labor market outside the international english speaking elitist level.
January 16th, 2006 at 4:23 pm
I don’t think you can say that the market works better in Bavaria. There are more jobs in Bavaria but that is something else than claiming that the market itself works better.
Also France and Germany do have transfer payments and they don’t have to be so big as for example the US because their innerstate markets have more protection (because of language barriers)
January 16th, 2006 at 7:20 pm
Divided labor markets mean more need for transfer payments, as differences in demand for labor are not met with migration.
January 17th, 2006 at 3:49 pm
Not only the market for work has a language barrier but also most other markets and many of those markets have more trouble in climbing that barrier than workers
January 17th, 2006 at 6:59 pm
But none comes close in importance to the labor market.
January 18th, 2006 at 12:10 am
Duh, every other market is dependend on the labour market as on of its inputs. And in most cases it is the most important input.