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05/22/2003
Update: Europe
[Hott Spotts will return June 5]
With all of the recent talk concerning the trading of the U.S.
dollar versus the euro, I thought it was a good time to review
some basic facts.
The current member states of the European Union:
Belgium, Denmark, Germany, Greece, Spain, France, Ireland,
Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland,
Sweden, United Kingdom
Of these, 12 have adopted the common currency, the euro. The
exceptions are: Denmark, Sweden, and the United Kingdom.
Earlier this spring, the European Parliament formally approved
the accession of the following to the EU in 2004:
Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary,
Malta, Poland, Slovenia, Slovakia.
Bulgaria, Romania and Turkey were told to take a hike, for now.
Back to the euro currency, British Prime Minister Tony Blair
wants to see his nation adopt it and over the coming weeks he
has asked his cabinet to form their own opinions. Meanwhile,
the Chancellor of the Exchequer, Gordon Brown, has established
five economic tests on UK entry to the euro that should be met
before it does so.
“Are business cycles and economic structures compatible so that
we and others could live comfortably with euro interest rates on a
permanent basis?”
“If problems emerge is there sufficient flexibility to deal with
them?”
“Would joining the European Monetary Union create better
conditions for firms making long-term decisions to invest in
Britain?”
“What impact would entry into EMU have on the competitive
position of the UK’s financial services industry?”
“Will joining EMU promote higher growth, stability and a
lasting increase in jobs”
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The admittance of the 10 new nations, mostly from Central /
Eastern Europe, to the EU entails all kinds of issues, ranging
from the fact that economic production per person in the Eastern
states is about 40% of the EU average, to the contentious one of
farm subsidies, with the new members potentially gobbling up
monies previously going to the likes of France and Germany.
Currently, however, the big issue for existing members has to do
with the “Stability and Growth Pact” (or “Growth and Stability”
depending on your preference) which binds the 12 euro nations
to the European Central Bank and its targets of 2% inflation
coupled with national budget deficits that don’t exceed 3% of
GDP. Germany, France and Italy, the 3 biggest in the euro bloc,
all exceed the deficit target (at last report), and in the case of
Germany in particular, have been granted wiggle room. This,
you can imagine, infuriates the smaller countries that have
adhered to the mandates. Of course with the overall European
economy in the dumper, all nations in the euro zone have no
room to borrow, cut taxes or increase spending since they have
lost their own national central banks. This was the exact
scenario that many of us were waiting for when the euro was first
created. By becoming part of it, you lose much of your national
sovereignty, a big issue with many British voters these days, for
example.
After the addition of the ten new members next year, “Mega
Europe” will have a population base of approximately 450
million and a GDP of $9.5 trillion, compared to U.S.
comparables of 280 million and $11 trillion, so no doubt the
expanded union is a considerable force, particularly if they are
able to finalize the dream of a working constitution and elected
chief executive, the latter being a position that Tony Blair would
like to hold.
But this same union, comprised of both “old” and “new” Europe,
has seen rising unrest in many of the former due to the simple
fact that aging populations are beginning to do a number on the
finances of those that have been part of the modern welfare state,
which has its origins with Otto von Bismarck. It was Bismarck
who, in the late 19th century, started a system of benefits for
future retirees, but the age at which pensioners could start
collecting was set at 70, well above the average life expectancy
at the time, so government could afford it. Today, with life
expectancy across Europe in the mid- to- late- 70s, you have a
ticking time bomb.
In France, for example, the average male worker retires at age
59, while in Belgium, according to the latest available survey
only 35% between 55-64 are still working. Retirees across
Europe count on pensions to finance up to 50% of their
retirement, on average.
So now you have governments scrambling, such as in Austria,
which is seeking cuts of up to 30% in retiree checks while trying
to keep people working for 45 years instead of the current 40.
For its part, Germany is looking to increase the retirement age to
67 from 65. Regarding parts of these proposals, though, you
obviously need jobs first.
Finally, on the current strength of the euro currency versus
the dollar, obviously imports are cheaper for Europeans, so
that helps keep inflation in check, giving the ECB some
flexibility on this front. But exporters are suffering, big
time, just as the European economy slides into recession.
Sources:
Robert Samuelson / Washington Post, Christopher Rhoads / Wall
Street Journal Europe, Business Week, BBC, Robert Kagan /
Washington Post, Joseph Fitchett / International Herald Tribune,
Eric Pfanner / IHT, John Schmid / IHT
Brian Trumbore
*Hott Spotts will return June 5.
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