Tuesday, November 25, 2003
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The stability pact -- R.I.P., 2003
The Economist has the latest on the death of the European "stability and growth pact," which was made in order to harmonize the business cycles of European economies for the creation of the Euro (for my previous takes on this, click here and here). The good parts version:
Now, as has been pointed out in several places, the economic logic undergirding the stability and growth pact were not necessarily rational, so it's demise can be seen as a good thing. However, the combination of no fiscal rules and a unified monetary policy creates massive free rider problems, as the story goes on to observe:
Klaus is probably a bit of an outlier in terms of Eastern European opinion.
Still, it's gonna be fun to see him tangle with the EU.
UPDATE: Atrios makes some cogent points on this topic, and on the premature rumors of the death of Keynesian macroeconomics. His key point:
Czech President Vaclav Klaus said Europeans are living in a "dream world" of welfare and long vacations and have yet to realize "they are not moving toward some sort of nirvana."
I really have little to add. And no, I am not Vaclav Klaus’ speech writer! It’s about time, though, that the New Europeans take to task the childishly naive Old Europeans. Such immaturity will do little to help the latter face the challenges of the 21st Century. They cannot forevermore continue mooching off the United States. Sooner or later, they will have to act like adults instead of jealous adolescents.posted by: David Thomson on 11.25.03 at 01:16 PM [permalink]
How shocking. France and Germany setting questionable rules and then willingly breaking them. And asking for more time. Sounds like a UN resolution.
Even Schroeder facing the wrath of the Greens and liberals for suggesting moderate reforms to the structural economic problems. Oh well. They can always highlight their disdain for Bush's foreign policy, if not his economic recovery.posted by: paul on 11.25.03 at 01:16 PM [permalink]
I believe I speak for us all when i say, "Hahahahahahahahahahahahahahahaaaaaaaa. Haaahahahahahahahahahaaaahahhahaaaha, hah, hah, hah, heh, hah. Haaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa."posted by: Mark Buehner on 11.25.03 at 01:16 PM [permalink]
What is Mr. Klaus referring to when he dismisses European Anti-Americanism as a response to American Anti-Europeanism?
While I like his remarks overall, this one left me bewildered.posted by: tallan on 11.25.03 at 01:16 PM [permalink]
This has been looming for a long time, you're right. I would add that, although they are trying to unify trade and monetary practice, this "union" with no millitary, antagonistic sides (East and West and North vs. the middle [France/Germany] and the South) zero birthrate, social welfare, inflexible rules that stuck Germany into the deadly cycle of deflation, etc. has no purpose other than to make life difficult for the US.
If you take out England, which does not trade in the Euro naturally, the entire EU zone is still a smaller economy than, if I recall, Japan, China, the US and not very productive, and certainly not in possesion of a optimistic future.
If this does not sour Blair on joining, what will? Don't do it Tony.posted by: PB on 11.25.03 at 01:16 PM [permalink]
Sounds deliciously reminiscent of some of the arguments surrounding the Second National Bank, actually. The EU is closer in structure to the Articles of Confederation, but they're seeking to gain the benefits of a stronger federal constitutional union, perhaps before it can be expected given the looser organization. Even with the union we had a hard time with these things.
I expect them to regroup and try again.posted by: Dan Hartung on 11.25.03 at 01:16 PM [permalink]
"If you take out England, which does not trade in the Euro naturally, the entire EU zone is still a smaller economy than, if I recall, Japan, China, the US"
You recall incorrectly. The eurozone has a GDP about three times the size of Japan's and about 10% larger than China's.
Though with China growing at about 9% annually I expect China's GDP to exceed the eurozone's within 5 years.
GDP per capita is a different thing altogether: China's population is six times the eurozone's, so it will be quite some time before parity is achieved on that level.posted by: BP on 11.25.03 at 01:16 PM [permalink]
So, because of these huuuge deficits (in fact smaller in percentage terms than the US's) inflation and interest rates are supposed to be rocketing up and the Euro is losing ground against the dollar?
Actually, no. Euro interest rates aren't increasing and could actually go lower without doing any harm. French and German inflation isn't increasing. The Euro is riding high (possibly too high) against the dollar.
So the aims of the "stability pact" are being achieved even though the letter of the law isn't being followed.
Doesn't the US Government keep on reminding us how deficit spending is now a good thing?posted by: tdent on 11.25.03 at 01:16 PM [permalink]
Yeah, the EU "has no purpose other than to make life difficult for the US"... Insightful! And yet you wonder why anyone can dislike the US? It is exactly this kind of narrow-mindedness that is so infuriating. It's all about USA, right?
Oh, and by the way, I don't disagree with the original post or the Economist's take on this. It is actually not unlike the reaction in Swedish newspapers.posted by: danjo on 11.25.03 at 01:16 PM [permalink]
Speaking as a European myself, I have to say the de facto demise of the growth and stability pact is no sad thing in and of itself, ofcourse if euro zone countries didn't replace the pact with a (hopefully) more flexible agreement then it would be a problem, but I don't see that happening.posted by: Lanic on 11.25.03 at 01:16 PM [permalink]
"We could see the scaffolding of a nation-state that would retain a president and similar institutions, but with virtually zero influence," he said "That's my forecast. And it's not a reassuring vision of the future."
Thank you for correcting my incorrect memory; I never did compare on a per capita rate though as that aspect should be self-evident. (I am curious to see the numbers if you can direct me, and were the ones cited by you including or excluding England?)
China's 9% growth, BTW, is only in single digits, at least according to state news, because of the early bout with SARS. I think you will see more stagnation in the Eurozone while at the same time China experiences more double digit gains, making five years four, or maybe less if Germany flirts with deflation once more (and a large portion of Europe and its welfare state experience the mass retirement dreaded here when the baby boomers are done).
The comment is not trying to be on point with US politicians, it is simply listening to how France and Germany have castrated other nations in their goal to achieve a "multi-polar world". Who do you think is the single power now? So diplomatically, through trade-wars, and on down the line, by every objective measure, the Eurozone is antagonistic to the US interest, and IMO, that is by design. Unfortunately, without England yet adopting, with the Eastern states hampered by poorly fitting regulation and grumbling, no millitary, and declining birth rates matched by increased Islamic immigration, you are looking at a dark future vis a vis the US.
Perhaps THEY should not think its all about the US and take a stand for the Roma, the European Jewry, to name to on the HR front, businesses and labor/welfare reform, on the economic front, and actually behaving UNLIKE the outdated monstrosity on the UNSC.
OT, but if the US is some malign hegemon, what are France and England even doing on the UNSC? Shouldn't India, China, Russia and the US along with maybe a Eurozone rep. be there instead?posted by: PB on 11.25.03 at 01:16 PM [permalink]
I'm no admirer of the EU as an institution or of the French and German governments either. However, my understanding is that the stablity pact's original and very sensible objective was to prevent some of the newer EU members (e.g. Greece) from running ruinous deficits as they had done from time to time in the past, and as Germany and France generally had not. Singling out specific countries was politically unacceptable at the time (it still is) so the stability pact was written to apply to everyone. Whatever embarassment exists in Paris or Berlin now is the result of the political sensitivity both capitals felt compelled to display when the stability pact was first agreed to.posted by: Zathras on 11.25.03 at 01:16 PM [permalink]
The data I can find has the US GDP at 10.4T USD, and Japan at 3.45T USD... China is anywhere from 5.7-6.1T USD but I am having a tough time pinning down a Euro figure (although I doubt it is three times that of Japan's or 10.5 trillion).
Again, could you find the Euro stats w/ and w/o England to confirm or refute my claim?
Thanksposted by: PB on 11.25.03 at 01:16 PM [permalink]
"You recall incorrectly. The eurozone has a GDP about three times the size of Japan's and about 10% larger than China's."
More China magic! China's US dollar GDP is still only about $1.5 tn, far smaller than either the Euro-zone or Japan.posted by: Dave L on 11.25.03 at 01:16 PM [permalink]
Second quarter 2003 - in millions of euro - seasonally adjusted - at current prices
I can say most Europeans enjoy their "dreamworld", averaging 6 to 7 weeks of paid vacation, and other "welfare". So compare the numbers, but remember there's more to it than just the numbers.
So Euro-zone is just under 7.5T EURO, the US at 9T+ EURO, and Japan is slightly under 4T EURO... so I was wrong about Japan... what about China? The doc. cited has no reference; is there one?
As far as China having 1.5T USD GDP, is that supposed to be their 2nd 1/4 GDP? Where did you get that? Because if it is, then that is not much less than the Euro-zone, but about where BP put it, plus, considering their growth rate...posted by: PB on 11.25.03 at 01:16 PM [permalink]
I also would like to second Luc's opinion. Sure GDP is a handy measure, but what does it really tell you? That a larger part of the US economy is governed by markets? Yes, no disagreement there, but does that mean that GDP is a good indicator of where we should be heading? I certainly don't think so. Europe could probably increase output quite a lot by cutting down vacations, maternity leave and by lenghtening work weeks. But why?
Here's some data about China. Don't know how reliable this is:
According to the preliminary measurement, the GDP in the first three quarters totaled 7911.4 billion yuan, a year-on-year rise of 8.5%
which would translate to
7911.4 * 1.33 * 0.105 (exc. rate) =~ 1.1T Euro for a full year.
As far as I know people who manipulate GDP statistics don't simply use exchange rates but use some kind of formula to correct for price differences etc.
As for European politics and negotiations - you can't and will never comprehend them. No politician/country will reveal all his negotation
The stories of a counterweight to the US are just that. A sideshow to the real issues in Europe. Like the expansion of the EU. That is the big economic gamble facing Europe.posted by: Luc on 11.25.03 at 01:16 PM [permalink]
Shoddy economics yes, but they'll get away with it for as long as the US dollar is in a dive and the Fed holds off on interest rates. Seems illogical that it should continue to do so for much longer, and yet political pressure indicates that it will. The Economy is really smoking. The Fed has got to back off from these rates, or we'll start to have monetary inflation. Even as in earlier periods, somewhat illogical US trade and fiscal and financial policy were allowed by the preminent economic position of the US now Europe may at least temporarily have its cake and eat it too with lack of fiscal discipline in its own ranks. Ah yes, while the haha-bird Thomson yucks it up about the old europeans the US trade deficit and long term fiscal deficit is causing the greatest single wealth transfer in history. The end result? *We* may end up being globalized!!! With average house prices going up 6% yearly and well above wage increases, in a few decades the US dream of Home Ownership will be just that - a distant dream.
But wait a second how can the economy be smoking and we are getting poorer? That's why it's called wealth transfer. The economic activity represents a long-term capital destruction. In a starving human body, the cells canibalize the muscles and tissues to stay alive a while longer. That's what's happening on a mass scale, and is a Dem and Repub problem. So sayeth Andrew Grove, who notes that by 2010 there will be more software engineers in India than in the US.posted by: Oldman on 11.25.03 at 01:16 PM [permalink]
Point well taken, and the wording was intended to be course and not really engage the issue in depth...
I see the EU as an amazing idea being handled completely wrong. Wouldn't it be nice if we knew that Europe would not have wars spilling over into the rest of the world? I am sure the feeling might be the same about the US, at least in some quarters... however, while Americans are combative, I never get the indication that the US would turn on its "allies" the same way Europe has and might still do so to itself.
Let me ask you this... do you think that the EU concept is homogenizing Europe of entrenching/stagnatig local culture, or neither? And yes, if they took away those days they might be more productive, however let me ask this: if they don't become more productive, social services will be cut or taxes will be raised - which one do you think? Looking at labor reform, and how Japan has made the politically painful, but right, move towards cuts, I think the former.
And back to the China GDP: that is appallingly low. I am amazed that it is only that...posted by: PB on 11.25.03 at 01:16 PM [permalink]
The EU and the Euro are doomed. They will come apart like a cheap suit.
How many of you have ever actually heard a broken record?posted by: Robert Schwartz on 11.25.03 at 01:16 PM [permalink]
I think some would argue that the US acting unilaterally is a way of turning on your allies. Personally I think both sides should've acted like grown-ups and sat down and talked instead of slinging ultimatums (ultimata?) at each other through news media...
I also see the EU as an amazing idea being handled wrong (but not compeletely), but I probably have totally different reasons. The EU concept is definitely homogenising Europe in some sense in terms of regulation and governance. But then again, the differences in culture and language is something we will have to work around for the forseeable future. I am not sure what you mean by stagnation, but I would say that Europe is more progressive than the US on many policy areas, with the environment as the prime example.
Finally, on whether to cut social services or raise taxes, I think the solution would have to vary depending on which country you look at, because there is a considerable span between different EU countries. Especially counting the accession countries. I really only have experience from Sweden, where some painful cuts in services have been made over the last ten years, and I generally agree with those. But do I think that cutting services is always preferable to raising taxes? No, certainly not. That is what you get when you use GDP increase as a welfare measure. Instead I think a lower increase in GDP can be preferable if other aspects of well-being increases instead, as long as it is sustainable in the long run. And that has some bearing on the whole discussion in this thread. Using GDP to keep score is really not sufficient.posted by: danjo on 11.25.03 at 01:16 PM [permalink]
The dispute here over the size of China's GDP has to do with whether you convert the yuan into dollars by using the market exchange rate (MER) or purchasing power parity (PPP). By the former, China's GDP is about $1.5 trillion. By the latter -- and more accurate -- measure, China's GDP is around $6 trillion, trailing only the US and EU in size.posted by: Dan Drezner on 11.25.03 at 01:16 PM [permalink]
As Dan says, all GDP estimates are PPP. My ratios stand as stated. Look them up in the CIA Factbook, whichgives PPP GDPs.
As for the EU and US being enemies: that's an extremely nasty thing to say, given that British, Spanish, Danish, Dutch, and Italian troops are as we speak risking their lives in Iraq for this particular US adventure, and German and French troops are working with the US in Afghanistan to secure the country.
If that makes the EU an 'enemy' I'm curious as to what your definition of 'ally'.
China? The country that shot down a US spyplane not too many years ago, and does not have a single soldier in Iraq? 'New Europe', where popular opposition to the war was often greater than in Old Europe? Russia? Japan?
Or is this another case of unending pique at the Villepin-Powell waltz in January?posted by: BP on 11.25.03 at 01:16 PM [permalink]
BP (my alter ego?)
"As for the EU and US being enemies: that's an extremely nasty thing to say, given that British, Spanish, Danish, Dutch, and Italian troops are as we speak risking their lives in Iraq for this particular US adventure,"
If I said enemies, I apologize, however, I believe the term I used was "antagonistic", and I stand by that. In trade, diplomacy and on down the line, we are, more and more in the last decade, diametrically opposed to one another. The problem with mentioning these countries, whose help is noted and greatly valued, is that their support is tempered by their alliance to the other nations, as evinced by the French repraisal of Poland for their support. Moreover, nastiness by some nations is increased by the forging of interests with France, to take on example.
"and German and French troops are working with the US in Afghanistan to secure the country."
Which is great, although when a more "valuable" (in their analysis of the motivation and thus their calculation of value) nation was in question, they could not divorce themselves from their bogged down inspections, their sales of nuclear reactors, weaponry, the French accounting of the 'Oil for Palaces... Food Program" at the UN, and so on. This, IMO, is at least partly due to their assumption that we want Iraq for conquest, and such a score in oil would forever relegate the EU to the second tier behind the US and emerging Chinese interests.
Is that way off, or unfair? Curious to hear.posted by: PB on 11.25.03 at 01:16 PM [permalink]
PB (yeah I'm your bench-pressin' alter ego BP)
"The problem with mentioning these countries, whose help is noted and greatly valued, is that their support is tempered by their alliance to the other nations," etc, etc, with a few slams at France down the road.
"These countries" comprise more or less the entire bulk of the EU, PB.
Your beef is with France: more specifically, your beef is with France vis-a-vis the runup to Iraq. That's an entirely fair beef, but France ain't the EU.
The Atlantic rift is widening. You make the point correctly, I think. The question is, whose fault is it? It ain't your fault. It ain't mine. We're both just average joes with near-zero political power.
Is it Chirac's fault? De Villepin's fault? Maybe. Both gentlemen have not been particularly social towards their US counterparts. But you might also want to stand back and take a look at the unilateralism George W (or to be fair, the chattering classes in Washington DC, Dubya hasn't personally said many nasty things) has been preachin the past three years.
Ain't worth rehashing all that talk here; suffice it to say that if ya want to stand alone, chances are you'll wind up standing alone. And ya can't blame that on the Yerpeans: say what you like about 'em, but they're really into this whole "international co-operation and organisation" post-historical thing. If ya like the way the US is headed, that's OK with me. To each his own. As long as ya realise that "My Way or the High Way" is more likely to get ya raised middle fingers than kisses and flowers. Bummer, but that's the wierd way people are.posted by: BP on 11.25.03 at 01:16 PM [permalink]
“But you might also want to stand back and take a look at the unilateralism George W (or to be fair, the chattering classes in Washington DC, Dubya hasn't personally said many nasty things) has been preachin the past three years. “
Is it possible that you might wish to provide evidence of Bush’s “unilateralism?” Even a single example would be nice. Are you possibly referring to our rejection of the Kyoto agreement---the same one that Putin also later found to be scientifically unconvincing? Is the United States suppose to embrace every dumb Old European proposal merely to prove that we aren't acting unilaterally?posted by: David Thomson on 11.25.03 at 01:16 PM [permalink]
Actually the US had no intention of adhering to Kyoto long before Bush was elected. The Senate voted against the treaty immeadiately after it was completed. Clinton did not sign it until after Bush was elected.
Clinton signed it, knowing that it could not be ratified, just to pimp Bush. Bush was then stuck with a treaty that he did not want to push, (Why use up political capital to follow the doomed policy of a previous administration?) and which he knew would not be ratified. So Bush announced that he would not pursue it, and he gets slimed by the (yes, liberal) press and the Froggies.
I'll bet Clinton thought he was being real clever.
"France ain't the EU."
That's not what theyn think.
posted by: Robert Schwartz on 11.25.03 at 01:16 PM [permalink]
David Thomson sez:
I give you ... David Thomson. You are the perfect example of the carping, chest-thumpin', xenophobic, abusive, innuendo-slingin' chattering classes I was talking about. Nothing constructive to say. Old Yerp this, New Yerp that, Dubya this, Dubya that, traitors here, traitors there, hail the leader, bla bla bla. I've seen ya on other blogs often enough.
As you have so often stated in the past, you think Democrats, anti-war activists and the anti-war paleocons are all freedom-hatin' traitors. Ya think Yerpeans are the sworn enemies of the US. Ya can't stand damn near the entire Middle East, Asia, Africa, or Latin America.
Dude when ya get to the point that ya think half of yer own countrymen are freedom-hatin' traitors, and the rest of the freakin' world are yer sworn enemies, ya got to stop and reconsider whether yer moral values have actually been calibrated in this universe.
With all due respect, of course.posted by: BP on 11.25.03 at 01:16 PM [permalink]
While I not necesarrily stand behind BP's rant I must admin that "childishly naive Old European" thing of yours is really ticking me off as an European.
Isn't it kind of..let's just say, very stupid to say such things when "Old" Europe isn't a big zone where everyone thinks the same? Truly weird to see someone in your political position instead of a socialist think in such "all people are equal" ways. What happened to freaking individualism?
Get real. In the Netherlands for example right-wing parties have the majority.
Blah blah.posted by: Frank Quist on 11.25.03 at 01:16 PM [permalink]
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