Perspective

[Annie]

http://www.opinionjournal.com/extra/?id=110004425


CONTINENTAL DIVIDE

Humpty Dumpty's European Adventure
France and Germany shatter the EU.

BY MELVYN KRAUSS
Saturday, December 13, 2003 12:01 a.m.

The current French-German axis is proving a nightmare for European unity. Not only has it fractured Europe over its foreign policy; it has split Europe's big countries from its small ones by demanding special status for French and German budgetary deficits.
The key question underlying Europe's now-defunct Growth and Stability Pact--that budget deficits for all countries using the euro be kept under a 3%-of-GDP limit--always has been "whether the big countries would be willing to sacrifice any measure of national sovereignty for the European good" as one senior European Central Bank official put it.

After Europe's finance ministers refused to punish France and Germany last month for their excessive deficits, he has his answer. Trust has been decimated. Anger overflows. The small countries feel tricked. Should European integration falter, the consequences for the United States as well as Europe could be dramatic.

How long will the smaller countries continue to sacrifice for the European good when they have been told, in effect, to go to the back of the bus and be grateful for the ride? Little Portugal had to endure sanctions and strict budget cutting when its deficit ran over the 3% limit two years ago--a painful process that no doubt exacerbated the country's recession. The Netherlands has chosen to run a tight budget even though its economy has been in a deep slump.


Second-class citizenship for the smaller countries means that the consequences from the demise of the stability pact won't be limited to the fiscal arena. Expect spillover effects from disgruntled smaller countries across a wide spectrum of EU activities and initiatives, not least on agreeing to a new EU constitutional treaty. And its effect on monetary union will be devastating.
Presumably, no one wants a monetary union that bloats the welfare state and is an engine of inflation. But this is exactly where European Monetary Union is heading. One reason the stability pact is not popular in social democratic Europe is that it has hamstrung welfare state spending. Now that the curbs on spending are off, welfare-state interest groups can be expected to make up for lost time and prior restraint.

Supply-side critics of the stability pact take note: Public expenditure will likely go up, rather than taxes down. The image of Europe's social democratic politicians, chafing at the bit to cut taxes but thwarted by the stability pact from doing so, always had an aura of the absurd about it.

The markets also are wrong over the impact of the stability pact's demise. Using defunct Keynesian logic, the market believes that increased budget deficits will boost economic growth and be good for the euro. It is inconceivable, however, that bloating the welfare state and stoking inflation will prove salutary either for Europe's fledgling currency or its economy.

"We've come to reform the stability pact--not bury it": That's the big lie being spread by Europe's big-country politicians and their Keynesian co-conspirators in the universities and media. Don't buy it! Europe's politicians lack discipline. Unwilling to follow the alleged rigid budget rules when they proved inconvenient. EU rules are made for the other guy to follow in Jacques Chirac's France and Gerhard Schroeder's Germany.


It's worth remembering why there was a stability pact in the first place. When monetary union is pursued without a common fiscal policy, there is temptation for individual member states to inflate their fiscal deficits to bolster their own economy. Then the cost of budgetary profligacy is passed on to others in the union because the European Central Bank must raise interest rates to combat inflationary pressures resulting from the increase in deficit spending. This is beggar-my-neighbor policy, pure and simple.
The stability pact was designed to preclude or limit this possibility. The deficit cap prevents individual members from running up budget deficits and "free-riding" on their fellow members. Of course, fixing the budget cap at 3% of GDP was, to a certain extent, arbitrary. That was unavoidable. But whatever the level chosen, the pact would have worked had the members been willing to cut public expenditure in good times to finance the inevitable budget deficits when business went south. The discipline--or lack thereof--of Europe's politicians to follow the rules was the reason the pact failed.

It is doubtful that the European Central Bank's Governing Council will raise interest rates to punish politicians for their misdeeds. But abandoning the fiscal rules will increase interest rates at the long end of the yield curve as inflationary expectations increase in the marketplace. Thus, the demise of the stability pact can be expected to steepen the yield curve--which will tend to slow down the economy. Who said the stability pact was anti-growth?

By liberating themselves from the burdens of the pact, Europe's politicians also seek to weaken the independence of the ECB, which is a thorn in their sides. It is too worried about inflation, too concerned with fiscal deficits, too vocal about structural reform or lack thereof, and altogether too critical of politicians. ECB president Jean-Claude Trichet--a known hawk on inflation--will prove at least as tough as his stubborn Dutch predecessor, Wim Duisenberg. But the testing is a sign of the times. And the EU is fractured along so many fault lines that the day of centrifugal reckoning appears lurking around every corner.

A Mother Goose rhyme comes to mind:

Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
All the king's horses and all the king's men
Couldn't put Humpty Dumpty together again

Jacques and Gerhard have given poor old Humpty one good push.

Mr. Krauss is a senior fellow at the Hoover Institution.


Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved.

 

[jon_forward]

I wonder what pray tell would happen if the EU fell literially apart? linked currencys, the works.... not a pretty sight to think about. and what would we do or who would we try to support? england would be fairly OK as they still have the pound. would be one hell of a train wreck!

 

[Annie]

Yep, they need to give serious thought to all of that. I do know they still haven't given up 'national' thoughts, which is probably just as well, considering how things are going. The idea that they deal with 'things' as a unit, yet retain individual representation in UN-isn't fair. Under those rules, we'd have 50 votes.

 

[nbdysfu]

Originally posted by jon_forward
I wonder what pray tell would happen if the EU fell literially apart? linked currencys, the works.... not a pretty sight to think about. and what would we do or who would we try to support? england would be fairly OK as they still have the pound. would be one hell of a train wreck!

So if the two powerful nations that are already under fire for evading their own budget legislation decide to take an early way out and crack the whip before the smaller nations can get out, they might end up with all the money? I never thought about that risk, but it's obviously a huge one for all the small nations that are joining. What if France and Germany pull their nations out of the EU currency?

 

[jon_forward]

man oh man, almost all of europe,scandanavia, the eastern block I dont know if you could call it a war or the worlds largest riot. as for the UN, if one member has to go to the restroom they would have to have a debate over it, by the time debate is over all members have pissed there pants. you are right on the EU as to the right to keep their vote at the un , one charter=one vote also if all countrys in EU are not on some footing it is not going to work and lordy is it going to get messy!!!

 

[nbdysfu]

Originally posted by Kathianne
Yep, they need to give serious thought to all of that. I do know they still haven't given up 'national' thoughts, which is probably just as well, considering how things are going. The idea that they deal with 'things' as a unit, yet retain individual representation in UN-isn't fair. Under those rules, we'd have 50 votes.

How many nations would actually vote against the US for the sake of being of the EU and not US? Even now the UK, Spain, Italy, Poland and other nations have acted independently of F-G. I wouldn't mind the US having 50 votes for itself in the un, but I don't think we need that kind of diplomatic force.

 

[jon_forward]

I feel we have all the cards now already, they just dont know it yet,maybe F-G do that is why they are acting in accord.

 

[Annie]

What do you think?


French Pol Blames 'Neo-Con' Ideas for U.S.-Europe Tensions

Friday, January 16, 2004



WASHINGTON — France's Defense Minister criticized "certain radical neoconservative ideas" in the United States as harmful to U.S. relations with Europe.

While France remains a major partner of the United States, Minister Michele Alliot-Marie (search) singled out on Friday what she called American aspirations for economic supremacy as well as assertions of cultural and political supremacy.

The French official did not identify whom she held responsible for asserting such views. "It is essential we recognize others' positions" as part of a trans-Atlantic discourse, she said.

In a speech at the Center for Strategic and International Studies (search), a private research group, Alliot-Marie emphasized that Europeans had "a different sensibility" from the United States toward the Arab-Muslim world.

Outlining the views of France, she said while terrorism is a great threat, its causes must be addressed, which she identified as "the sense of frustration in the face of injustice and poverty."

"The humiliation is exploited by fanatics," Alliot-Marie said, while urging "let us work together to eradicate blind violence, but also its roots."

France is neither anti-Semitic nor anti-Israel, the defense minister said, while implicitly holding Israel accountable. "We should be listening more to the Arab-Muslim world," she said.

"The sense of injustice and humiliation is really very widespread," she said.

Overall, Alliot-Marie's message was one of working together with the United States on international security.

"It is something of a paradox that France should sometimes be stigmatized in Washington as a strategic adversary of the United States," the minister said.

"To listen to some quarters, France is supposed to be trying to develop a counterweight to the United States, especially through European integration," she said. "Nothing strikes me as being further from reality."

France and the Bush administration have been at odds over the U.S.-led war in Iraq, which France tried to block at the United Nations with calls for more weapons searches in preference to going to war.

But France has cooperated with the United States in promoting economic recovery in Afghanistan. "Faced with the difficulties the U.S. is encountering in certain parts of the world, it needs the support of its European allies," she said.

Later Friday, Alliot-Marie met with Secretary-General Kofi Annan (search) at the United Nations in New York. Afterward, she told reporters it was clear from her meetings in Washington with Defense Secretary Donald H. Rumsfeld and National Security Adviser Condoleezza Rice that the United States wanted to look to the future.

"It was very clearly expressed that there is a commitment now to turn the page ... and to turn to the future to see how we can carry out cooperation between France and the United States," Alliot-Marie said.

She said it is import for the international community to ensure a successful transition in Iraq to an Iraqi government from the current U.S. administration.

"France stated that it was ready to participate in the reconstruction of Iraq when there would be a legitimate Iraqi government that would have recovered its sovereignty ... and on the request of that government," she said.

"There will be no question," she said, "of sending French military personnel to Iraq."

 

[nbdysfu]

I think this makes the DPRK propaganda machine look like Mother Teresa. Wow.

 

[Annie]

The French seem committed to attempting to check the US at every point. What will happen in my opinion is the irrelevancy of both France and the UN coupled with a financial burden on the US that it will meet at the cost of domestic and foreign good that could have been done, which will result in poverty for many.