Euro Performance to 2002

The Euro has only been introduced in the past few years, but economists with bigger calculators than I have devised a method to reverse-predict the Euro's value all the way back to the mid-70s. However, the data can really only be evaluated with any purpose starting at about 1990.

During the period of time from 1990 to 2000, the Euro is considered to be a weak currency. According to the IMF, the exchange rate from Dollars to Euros fluctuated between about 1.05 and 1.30. When the Euro was introduced in 1999, the exchange rate fell to 0.82 at one point, and fluctuated between that low and about 1.17. From 2000 to 2002, the exchange rate was almost continuously below the 1.0 mark.

How do we explain this weakness?

The following data comes mostly from here.

1. The economic performance of the Euro Zone was inferior to that of the United States during this period. The United States experienced an average annual growth rate of 3.3%, whereas the Euro Zone had only a 2.0% growth rate. Further, data from the OECD reveals that the average annual labor productivity growth rate in the United States was positive, while in the Euro Zone it was negative.

2. The Euro Zone countries can be called comparitively inflexible in comparison to the United States. Political necessity has placed a high value on social cohesion and labor force appeasement, significantly decreasing the ability of the French, German, and Italian economies to be flexible.

3. The Euro Zone tried to incorporate too much, too soon. One of the most important parts of the EMU has been the "single (or free) market". In this system, goods and services travel freely without tax within the Euro Zone. This is a necessary step in order to successfully adopt a single currency. However, as of November 2001, it is estimated that 10% of the necessary measures to successfully deploy this system had not been taken. This resulted in enormous price differences (sometimes up to 200% for specific food items) and a lack of confidence in the new currency.

Aside from these clearly economic reasons, I like to think about what investors were probably considering as the Euro was coming to market. People are emotional and compulsive creatures, and this must be taken into account. I'm sure people were thinking two things - on the one hand, they were undoubtedly excited about the prospects of a new currency, and on the other hand they were surely nervous that if they invested and the currency failed, they would lose all their money.

Since most people are risk-averse (and don't fully understand money markets), it makes sense that most people would hold off from investment to see how the currency would perform first before investing. It has been shown that a decrease in the amount of investment undervalues a stock or currency, so it is no surprise that the Euro decreased in value at this time.

It has been suggested that at the end of 2001, the Euro was undervalued by as much as 25%. 6 studies conducted at the time place the appropriate Euro value at somewhere between 1.10 and 1.20 US dollars - indicating a significant devaluation.

What if...?

A friend asks, "What if the president decided things had gotten out of hand, and politely (and convincingly) asked both corporate and public America to forgive the government's debt? And we agreed, because we're all patriots and we love freedom?"

Well, that'd be great for the government, because they'd be free of almost $8 billion in debt - more importantly, they wouldn't have to pay interest on that loan anymore. But it would be awful for the US public and government agencies that hold the debt. They would lose their initial investment, but also they would lose all that interest that they had annually been accruing.

In many ways, one can think of the national debt as a means by which to redistribute wealth. Wealth is taken from new bond purchasers, and given to old bond purchasers. It's likely that people that accept yields on old bonds will just use the money to buy new bonds, so the system is cyclical. Not that the cycle needs to be broken, but the first step in doing that would be to stop selling more bonds.

National Debt

The question has been posed with reference to the national debt, "Why did we borrow the funds in the first place?"

Data on the national debt demonstrates that as a country, we have been in debt since 1790, so it's definitely not a new concept.

National debt accumulates when the government needs to finance a project that it simply does not have the capital to support. One excellent example of this is war, specifically World War II. Overall, World War II cost the US government hundreds of billions of dollars in material resources, research, weapons, war machines, and food. The national debt in 1940 was $43 billion, while in 1945 it was $259 billion - quite a large increase in such a short span of time.

The government, unfortunately, just didn't have a couple hundred billion dollars lying around, so they had to borrow - and they did this by selling war bonds. Whenever anyone bought a war bond, they were loaning the government money (say $100), with the promise that the government would eventually pay them back with interest. People in general consider US bonds to be trustworthy, so they are inclined to purchase them; we have such a strong economy in comparison to many other countries that it is very unlikely that our government would ever default on its payments.

So debt is incurred to help the US raise capital for various projects. What this allows for is the kind of explosive growth that the United States has experienced during its evolution. When capital is widely available for investment and speculation, companies are able to take greater risks and reap greater rewards.

The "problem" that the US government runs into is that it seems to be a permanent debtor. While budget surpluses have occurred on rare occasions in any one individual year, the overall trend of the national debt is that of enormous increase. Borrowing all this money certainly helps our country in that it finances necessary projects, but it is important to keep in mind that every dollar we borrow is accruing interest in somebody's pocket. Many people feel as though the national debt is becoming too much of a burden already - that the interest we owe annually on our $8 trillion loan will overcome our ability to pay it, and the US government will go bankrupt.

An examination of the Treasury Bulletin indicates to us that about 40% of the debt is held by "Gvoernment Accounts", whereas 60% of the debt is held by public investors.
Government accounts are things like trust funds - for example, the Highway Trust Fund, or the Bank Insurance Fund. The public investors are mostly regular US citizens or organizations of citizens (mutual funds); only a very small percentage of debt-holders are foreign investors.

So the reality of the situation is that we really do owe the debt to ourself - the vast majority of the $8 billion has been given to the government by the US population. People argue that the debt needs to be decreased or else we will face certain doom, but I think this is inaccurate. The market is self-regulatory in that when people believe the US can no longer pay its debts, they will stop lending money. I could compare the US government to a pigeon at the park - if you feed it, it will keep coming back; similarly, if we feed the government funds, it will continue to borrow as long as it can "get away with it".

The Euro, Part 1

When I consider the Euro as a currency, I still think of it as a brand new institution. I still remember the rough conversion from French Francs to US Dollars, as well as the Italian Lira conversion to US Dollars. In fact, the transition to the Euro as a currency began in 1993, with the ratification of the Treaty on European Monetary Union - almost 13 years ago.

Since then, several important events have taken place in the evolution of the Euro. On January 1, 1998, the name "Euro" was officially adopted. On the same day in 1999, exchange rates for the various involved currencies were irrevocably set - that is, 6.55 French Francs forever equal one Euro. From 1999 to 2002, corporations and businesses were allowed to (and later required to) conduct business in both currencies. Finally, in 2002, the switch to paper currency was made, and the population of the 11 member nations was required to begin using the Euro for all transactions. Remnants of the old currencies remained for a few months to help people adjust to the new system, but now have largely disappeared.

The European System of Central Banks closely mirrors the system in the United States. Just as the Fed uses two tools to conduct monetary policy (adjustment of the discount rate, and conduction of open market operations), so too is the European Central Bank responsible for monetary policy. In addition to this responsibility, the ECB must conduct foreign exchange operations and monitor the efficacy of payment systems across all Euro-using countries. Just as there are several regional central banks in the US, each country (of which there are currently 12) has their own central bank that is responsible for monitoring economic activity in that country. These banks also have a similar role to the regional banks in the US - they monitor the activities of foreign banks as well as private banks in that country.

I am somewhat capable in French, so I often choose to look at information about France when it is available. The site for the French Central Bank is here. The current news article is a letter from the current Governor of the French Central Bank, Christian Noyer, to the president of France, Jacques Chirac. In it, he discusses recent trends in France's economy - it is, in fact, an extremely interesting read. It contains information about everything one could possibly hope to know about the current developments. One thing that becomes obvious when reading this is that the French (or at least Noyer) is extremely aware of the US budget deficit (more accurately, the current account deficit). In this document, it is listed as 666 billion dollars in 2004. This means that the United States borrows almost 2 billion dollars A DAY to keep the economy afloat. The US is now nearly $8 billion in debt - each US citizen's share of this is roughly $27,000.

Let us compare this to the budget deficits of the European Monetary Union countries to determine relative economic strength (or at least stability). Consider these requirements:

"The Maastricht treaty sets four economic criteria for membership in the monetary union. A country's rate of inflation must be no more than 1.5 per cent above "that of, at most, the three best performing Member States," usually interpreted as the average of the three lowest-inflation countries. Long-term interest rates must be held at no more than 2 per cent above the average of the long-term interest rates of the three countries with the lowest inflation. Member states must not be found by the Council of Ministers to be running an "excessive" budget deficit, which could be triggered by deficits above 3 per cent of gross domestic product (GDP) and ratios of debt-to-GDP above 60 per cent. Finally, a government must keep its currency within the "normal" bands of the EMS and not devalue it during the two years prior to entry."

So now I pose the question - would the US qualify to join the EMU?

1. Eurostat, the entity in charge of monitoring economic data in the Eurozone, indicates that the annualized inflation rate for May 2005 was 1.9% for the Euro. For Q2 of 2005, the estimated annualized inflation rate in the US has been between 3.2% and 3.5%. In this case, then, the United States seems to be very close to an unacceptable level of inflation.

The US must be within 1.5 percentage points of the average of the best three performers. If the current average for all 12 EU countries is 1.9%, then the three best performers probably have an average inflation somewhat lower than this - perhaps 1.6% or even lower. Thus, the United States has current inflation that is too high. On this point, we could not possibly join the EMU.

2. On the point of interest rates, it is my understanding that the European Central Bank now sets interest rates for all 12 member countires. This article backs up that understanding. The current interest rate set by the ECU is 4.75%. In the US, the current yield on 30-year bonds is 4.34%. So it seems like the US and the EU are basically on the same track here, and we'd probably fit in.

3. The current US GDP was $11.75 trillion in 2004. The deficit in 2004 was $666 billion. That means that the deficit was 5.67% of US GDP last year. That's too high according to the requirement - we would only be allowed to run deficits of 3% or less.

I'm not entirely sure what it means to have a debt-to-GDP ratio of greater than 60%. This math isn't entirely clear to me. However, I will try. Our current debt is about $8 trillion. Again, last year's GDP was about $11.75 trillion. That means that the debt-to-GDP ratio in the US is 68% - again, too high for membership in the EMU.

As a separate investigation, how does the growth rate of the US GDP compare to the growth rate of the EU GDP?

The CIA factbook indicates that the real growth rate for the US in 2004 was about 4.4%. Eurostat reports that the 2004 EU GDP growth rate was 2.4%. That's only two percentage points, but anyone familiar with growth equations can tell you that over a period of just a few years, a small difference in growth can add up quickly to a big difference.

So the US has higher inflation and runs a greater deficit than the EU, but we demonstrate a higher growth rate. Can this rate of growth be sustained?

The IMF says no. They write, "The U.S. current account deficit and its counterparts elsewhere in the world are widely viewed as unsustainable. A gradual adjustment of the U.S. external position and exchange rate remains the most likely scenario, especially if it involves stronger growth in the rest of the world. The challenge is to support the adjustment by stronger U.S. national saving to avoid the burden falling on investment and growth, both in the United States and abroad. Moreover, there will be limits to the global demand for U.S. assets, and there is a risk that an abrupt and disorderly shift in investor preferences could have a significant adverse effect on interest rates and global capital markets."

I am very interested to discover how the relationship between the Euro and the dollar will develop over time. Currently, a Euro is worth 1.21 US dollars. If one looks at the graphs available here, one sees that the EU gained an enormous amount of value against the dollar as soon as it was brought into play - nearly doubling in value from its lowest point (.84 to 1.35). However, since last year around September, the Euro has been losing value against the dollar. I would like to investigate next why this has taken place and what market forces are in effect that impact the swing of the Euro's value against the dollar.

The Truth About Human Nature

This post has little to do with my EU Project, except for the fact that it has a lot to do with decision sciences, and economics is in reality a decision science. It stems from a discussion I had with my girlfriend's parents yesterday that didn't get finished. Hopefully I can finish it here.

I would like to preface my discussion by informing my audience that everything I say here is a fact. I have not made anything up. I am not inserting my opinion (political or otherwise) into anything that follows. I am not going to provide sources in this paper, but they are widely available, and I can and will if someone wants me to do so. If you don't believe what I'm saying, find experts in the fields of biology, sociology, decision sciences, or economics, and they will tell you that what I am saying is undeniable truth. I can put you in touch with authors, professors, or experts if that’s what you’re looking for. I've been going to school for a long time studying this material, and I've read a lot of books - if you'll pardon my language, I know what the fuck I'm talking about.

What is a human? A human is nothing but an animal that displays above-average intelligence. Let us compare a human to a rat and in that comparison distinguish the differences. Humans, like rats, are born, increase in size and physical maturity, mate, raise children, and die. Like rats, we must consume energy in the form of food and oxygen and we must purge ourselves by consuming water and excreting waste. Humans are animals, but we are a different sort of animal. It has been shown that humans as a species differ from other animals in three (and only three) extremely important ways.

First, we are the only species that makes war upon itself. No other species on the planet kills itself in the meticulously planned manner that we do. Yes, hyena cubs fight and sometimes accidentally kill each other. Yes, the female praying mantis does kill her male partner after mating. These are behaviors that have been genetically programmed into these species, respectively, for the greater good of that species. I am not enough of a biologist to explain why, exactly, the death of the male praying mantis is better for the species, but I know that it is. Why? Because animals do not evolve traits that are not successful - any individual member of a species that happens to mutate into an unsuccessful entity quickly dies. That is how evolution works. I'm sure someone can explain why this strange mating practice is a successful one, but I cannot - all I know is that it must be, because I know how evolution works. I do not think you will find anyone that can tell me that World War II was for the greater good of our species.

Second, we are the only species that practices totalitarian agriculture. Totalitarian agriculture means that we create the maximum amount of food in the minimum amount of space by any means necessary. In order to do this, we must kill the species that compete for this food, or deny them access to this food. We put up fences around our gardens, shoot the rabbits that dig under them, and spray insecticide on our plants. When we create food, we are the only species allowed to eat it. This is totalitarian agriculture. No other species on the planet practices this behavior. Consider that both the lion and the hyena compete for the same food - the gazelle. But the lion never kills the hyena so that he can control his share of the gazelle. To speak in a "green" sense, the lion does not interrupt the circle of life by killing species that he will not eat - he is an agriculturalist in that he tends his garden of gazelle as they move around the Serengeti. But the hyena is always allowed to eat the gazelle, too - the lion is not a totalitarianist. Consider if a human were hunting a gazelle and realized that there was a hyena in the brush next to him hunting the same gazelle. The human, without a doubt, would kill the hyena to end this competition. The lion would never do this. The human is a totalitarian agriculturalist.

Third, humans are the only species with the ability to imagine. This trait has developed for us because of our intelligence. We are the only species with the ability to grasp the concept of "future". Whales do not migrate because they perceive that it will grow cold soon and that they should plan ahead for the future. If a bear could talk, he would not tell you that he is fattening up for hibernation because he knows it will be cold in a few months. He would tell you that he is fattening up because that's what his instinct tells him to do. More on instincts later.

So what's the point of these three differences? Perhaps the most important point I'm trying to make here is that humans are more like animals than many of us like to admit. Consider all of the behaviors of a given species - there are hundreds if not hundreds of thousands of intricate characteristics. But humans differ from all other animal species on this planet in only three ways. If we assume that the average simple mammal has 1000 different describable aspects to their behavior, then humans are only 0.003% different in their behavior than a standard subway rat. That’s not very much of a difference.

So humans are animals and behave like animals, except for the three aforementioned ways in which we differ. Now consider that an animal will always act in the best interest of its species. How do we know this is true? Because we are educated and we believe in the process of evolution, and as previously stated, animals that do not act in the best interest of their species are quickly eliminated as mutations. And because animals always act in the best interest of their species, and they cannot imagine a different possibility, they will always act in exactly the same way. A mother bear will always defend her cubs when presented with a threat. A spider will always spin his web in the exact same direction. A fly will always fly away when it senses danger. These are the instincts of the animal, programmed into that species through evolution.

Before I continue, I must sidetrack and point out a very basic biological fact that few people like to admit. People don’t like to admit this fact because it’s a cold fact, and it takes away a lot of the romance of the human spirit. All the same, it is a fact so beyond question that I need not even give credentials for it or even explain it - if you don't believe me, find a high school biology student and they'll tell you it's true. The goal of every species on this planet is to propagate additional members of that species. Every single species on the planet, without exception, behaves in this way. Every single species - animal, plant, and human.

How do I know that this is the goal of all life? Because it’s all animals do, and every animal does it, without exception. Animals don’t build skyscrapers, or paint murals, or write novels. They don’t spend their time farming, or watching television, or running for presidential nomination. They eat to stay alive, and mate to reproduce. For millions and millions of years, this strategy worked. Eat and mate. Eat and mate. Unless you are prepared to argue that the earth (and, basically, the universe) exists simply so that humans can exist in it, it is undeniable that the goal of all life is self-propagation. And if you do choose to argue that point, I have plenty to say about theology, too.

Back to the point.

In reality, instinct is a system of incentives that animal species develop over time. When the mother bear is confronted with danger, she is in reality presented with two choices, each with their own incentive. She can stay and defend her cubs, or she can run away. In a split second, subconsciously, the mother bear weighs the incentives. Defending her cubs means that they survive and her species is propagated, and that sounds like a good idea to her because that is the ultimate goal of her species. But running away means that she might live, and might have more cubs in the future. The bear doesn't know that she's making this choice, but she is - in effect, evolution has made the choice for her. While bears were evolving over millions of years, there were probably some mutations for whom the incentive was higher to run away...but these bears died or failed to propagate their species. So over millions of years, the runners died off - running away from danger was obviously a failed evolutionary strategy, so that instinct was eliminated. Now, all bears have a greater incentive to stay and defend their young than to run away - every single bear on the planet.

You may be saying to yourself, "But Drew, you're not a biologist! What do you know about this kind of stuff? I don't believe you, anyway!" Well, here's the part I've been studying for four years and have read more books about than I would care to recall. Humans are no different than animals in this system of incentives, except for the fact that we are able to imagine the future. Because we are able to think about what might happen in the future, we are able to mentally travel down the road and see what kinds of consequences each of our decisions will have. I can imagine that if I work on my economics project this afternoon, I will learn more, be better educated, and maybe get a better job when I'm older. On the other hand, I can also imagine that if I go and lay out in the sun for two hours, I will enjoy the pleasure of the sun on my face and get a really awesome tan. I'm faced with a decision here, and the way I'm going to make that decision is to think about what my incentives are - what will I get for making each decision? On the one hand, I'll have a better job in the future. On the other hand, I'll have an awesome tan.

The beautiful thing about humans is that because we can imagine, not all of us have the same animal instinct. Mother bears, as stated, will always defend their young, because it is in the best interest of their species. But not everyone will go outside and get an awesome tan like I will. Some people, in my position, would choose to stay in and work on their economics project. What that means, simply, is that we have different imaginations - we have imagined different incentives for ourselves. It is obviously more important to me that I get a tan today than it is to have a great job in the future. The most important thing that I say in this piece is right here: Just like animals follow their instincts, humans are programmed to behave in their own best interest.

Here's the part where people start to get angry, and rightfully so. It's not an easy thing to admit or realize that humans are basic, uncomplicated animals - it's cynical, horribly cynical. It's an unromantic, bleached look into the center of humanity - but it's true. Just as the mother bear will always behave in her own best interest, so too will humans always behave in their own best interest. Always.

Think about every conceivable "selfless" act that you can imagine. Donating to the needy or homeless. Going to Africa on a missionary trip to help the poor and indigent. Loving unconditionally without expectation of reciprocation or reward. These are all wonderful things that humans do - I love humanity because we do them. But every single one of these things is motivated by personal incentive. Why don't animals do things that are "selfless"? Simply put, because they do not have the ability to imagine that their behavior will have a positive impact on another member of their species.

It makes me feel good inside to donate to the homeless, because I am a human and I can imagine that the people I donate to will be happier if I help them. And I can imagine that if they are happier, perhaps they will be more successful, and they will get a job and raise a family and have kids. And because I'm an animal and the ultimate goal of life is to propagate more life, my animal instinct is rewarded. If I perceived that donating to the homeless would hurt them, make them unhappy, or decrease their chance of reproduction, I would stop doing it instantly.

Do you want something, really, really cynical? Something that's going to make you really mad? When I choose to donate anonymously, I make that decision because it makes me feel good for the aforementioned reasons. But what about when I do it publicly, rather than anonymously?

When I choose to not donate anonymously, I am aware that other people see me donating. They think that I am a good person, and more importantly that I am a generous person. Perhaps word will get around that I'm a generous guy. Why do I care that people think I'm generous? Well, females are biologically programmed to find generosity and caring attractive, because if I am generous to the homeless, I will probably be generous to my offspring, which will probably help my offspring to survive. If they are subconsciously aware that I am generous, they are more likely to choose me as a mate. This has absolutely nothing to do with me "getting laid" or manipulating women to sleep with me - but I'm biologically programmed to attempt to appear attractive. The more attractive I appear (physically or otherwise) the greater the chance that my genes will be passed on. This is evolution in action - if I am unattractive, I will not have offspring and my genes will not be passed on. Since the ultimate goal of my species is to reproduce, that would be really bad for me. So just like any other species, humans have evolved to appear as attractive to the opposite sex as possible. The male peacock does exactly the same thing, except he flares his tail feathers and gobbles seductively instead of shelling out to the Red Cross.

Humans behave in different ways because each human imagines things slightly differently – the beauty of mutation. But the one constant in human behavior is that they will always pursue the action for which they have the highest incentive, just like animals do with their instincts. This is decision science - this is fact. Let me give you a non-selfless example. I put you into a room in which there are two baskets. In one basket there is a cookie. In the other basket there are 100 cookies. I tell you that you can have the contents of one and only one basket. What will you choose?

Perhaps you will choose the 100 because you love the taste of cookies and you want as many as you can get your hands on. I bet you can’t wait to tell me that you wouldn’t choose that basket for whatever reason, but I’ve already prepared for that. Perhaps you will consider that if you eat 100 cookies, you will gain weight and people will consider you unattractive. Perhaps you will consider that you are being watched, and if you take 100 cookies I will consider you to be a pig who eats too much. Perhaps you would like to demonstrate that you are strong-willed and can survive on little, so you will take the basket with one cookie. Perhaps you know that I want you to take the basket with 100 cookies, and it makes you happy to prove me wrong, so you will take the basket with only one cookie specifically for that reason. Perhaps you think you'd get full after five cookies, and you don't want to be wasteful, so you'll just take the one.

But what if I were able to eliminate all of those pressures that I would call “societal?” What if no one was watching, and you wouldn't gain weight, and there was nobody to prove wrong, and you knew for a fact that it was impossible to be wasteful because there was an infinite supply of cookies that materialized out of thin air? Here you are, alone and weightless, with 100 cookies. You'd eat them - or at least as many as you wanted to eat until the pleasure gained from one cookie could no longer outweigh the displeasure gained from feeling full and/or sick of cookies. You'd behave this way every time, no question. I could run the experiment a million times with a million different people, and I can guarantee that they would choose the basket with 100 cookies every single time.

Even people who are considered "insane" still behave according to their incentives - it's just that we "sane" people often have a hard time understanding what their incentives are.

People often throw around the statistic that humans only use 10% of their brains, but this is false. Humans only use 10% of their brain for normal, everyday conscious thought. Ninety percent of the human brain is dedicated to the subconscious decision-making process, which goes on twenty-four hours a day and requires almost ten percent of the body's daily caloric intake. This is, in short, why human brains are so much bigger than the brains of primate or mammal counterparts. All mammals share very similar conscious-thought and sense structures - things like vision, taste, the perception of the difference between danger and safety, etc. But our subconscious structures are comically oversized by comparison.

So what's the point of all of this? A few simple sentences will wrap this up, I hope.

Humans are animals. Humans behave like animals except for three specific behaviors that humans exhibit, the most important of which is the ability to imagine the future. Both humans and animals make decisions based on incentives, with the ultimate goal of all life being reproduction. Animals make decisions subconsciously by using a series of pre-programmed evolutionarily-stable and time-tested incentives. Humans make decisions consciously by imagining the future and weighing personal incentives and consequences in real time. Both humans and animals behave in their own best interest all the time, every time. Acts that are considered "selfless" are wonderful acts, but they are motivated by personal self-interest. Every human action can be explained by examining the incentives of the human in question.

These are the basics. You have probably thought of one hundred different ways to poke holes in this argument while you’ve been reading – and I’m glad for that, because it shows you’ve been thinking. But I assure you, every argument that you could present has been presented before, and can be explained away. What about homosexuality? What about art and music and theatre? What about philosophy and theology? What incentive could a soldier possibly have to go to war? I can explain all of these things, but I think if you really understand the material in this piece, you can explain them yourself.

Germany

In her Book, "States and Regions in the European Union," author Tanja Borzel explores the relationship between countries that have traditionally had cooperative regional legislatures and their level of integration into the European Union. Using Spain as an example, Borzel explains that the legislature on the local level is very active, and it participates cooperatively with the national legislature. It is Borzel's conjecture that states that operate in this way have more success being integrated into the European Union than do states with poor regional participation rates (one example being England).

Recalling the very first observations made in this project, the EC/EU was essentially formed for Germany; at the very least it was formed around a German/French peace agreement. For this reason, Germany's integration has never been questioned - but more importantly, Borzel's conjectures still apply. Germany has a very high participation rate on the individual citizen and regional level. Not being a sociologist or psychologist, I am timid to make assumptions about human behavior, but I think it is safe to say that political participation rates increase as people find their government more responsive to their opinions. Germans participate so actively in their regional legislatures because, on the whole, they are politically engaged. As a country that has a long history of both federalism and nationalism, it is not a surprise that the citizens take their politics seriously. A simple way to summarize this point is to say that Germans like their country, and they like being part of the European Union - and their participation, combined with Borzel's ideas, demonstrates this.

Germany's story as a member of the EU is one of a country attempting to balance economics and politics. Remember that the EEC began as a political association disguised as an economic union. It was the unexpected and enormous success of the EEC in the steel and coal industries that first introduced the idea that the EU could eventually one day be as much of a political entity as an economic one. The reason that Germany struggled with this duality is that during the years following WWII, and during the years of the cold war, economic power looked to many like a political move - possibly even a move towards war. Keep in mind that in the early years of the EC, England failed because they were too economically motivated and did not demonstrate the passionate desire for political change present in France and Germany. Thus, it was Germany's top priority to never lose this desire for political change (or at least the semblance of desire) so that they did not lose power in the community. On the other hand, it also was necessary to focus on economic ideas from time to time - it would have been foolish not to take advantage of things like tariff-free trading as they became available.

Perhaps we can learn most about Germany' s role in the EU by looking at the EU itself. Consider that the EU is very rarely thought of as a political entity in the modern world. It is a political entity because it has to be - but more importantly it is an economic being. The treaties and discussions that go on are all on the subject of economic affairs. The recent ratification of the constitution failed because of an economic issue. The EU, then, no longer serves as a peacekeeper for member nations afraid to experience the next world war. Rather, it is beginning to serve as an economic vehicle for its member nations - it brings them all onto the same currency and removes tariffs from their goods. Additionally, all member nations are required to adopt the same set of policies - agricultural, industrial, commercial, etc. This is clearly not a politically motivated requirement; rather, it is a requirement that looks out for the best interest of the whole.

I have been researching for a couple of weeks now about the politics and the way that people (and politicians) behave the way they do. I think I have a pretty decent and broad understanding of the history of the EU, and why it has come to be what it is today. I want to center my research more around the topic of economics - I want to look at stock markets, economic performance data, monetary values, M1+M2, etc. My next topic, then, will be the Euro - how it was conceived and how it has changed the face of the European Economy.

I apologize that I haven't had a post in a few days. I was sick on Monday and I've been reading up on some politics, which can be infuriating to me. Nothing in politics makes sense - there are no clearly drawn lines about what you can and can't do - no one follows any rules. I've come to realize that although I -talk- about politics a lot, I actually hate it. Sadly enough, I really love studying economics, and unfortunately the two are increasingly inseparable. Politicians seek power, and money buys power. Some might say I'm obsessed with money *ahem* but the reality is that I'm extremely interested in people's incentives. Not surprisingly, most people are motivated by money, or by getting money to purchase something they want. Not all, but most. Anyway, on to the really interesting stuff...

1. How did member states participate in the European Community, and do they participate in a different way now, as members of the European Union? What brought about this change from Community to Union?

Currently, there are two schools of thought on this particular question. The first, or "neo-realist" school believes in the principle that the interaction between most European governments is no different now than it was before a Community was conceived. These independently functioning governments continue to pursue their own personal national interest, and attempt to gain power in the Union as well as on the world stage. What's the evidence for this? Take, for example, the recent rejection of the new constitution by the Dutch. The Dutch people had to have known that it would have been good for the EU to ratify the constituion, especially after France struck it down. It would have given solidarity to the constitution, and made it more acceptable for future nations to ratify it. But they acted in their own self interest, saying "no" and taking advantage of a free opportunity. It was free because the French had already done it - the French took the bold step, and the Danish were just tagging along for the ride. That's classic freeloading, and it's a clear demonstration of self-interest.

The other party holds that there exists a group of people called "neo-functionalists", who observed what the European Community was doing for the steel and coal industries. Political lobbyists and interest groups probably observed the success that the European Community was having in these areas. Inevitably, over time, the European Community came to help out additional industries, specifically agriculture. Pinder describes this as a sort of "spillover" effect, suggesting that the success was so great that it found its way naturally into other industries. Over time, as further success (and peace) has been observed in the European Theatre, the EU Council has come to preside over more and greater issues. One excellent example of this concept at work is the adoption of the Euro as the official currency of the EU countries.

Essentially, the question we're posing is: do the EU member countries act more like individuals in a group, or more like a cohesive, equitable central government?

It is my conjecture that the EU at one time behaved like the latter. As I have previously stated, the EU was conceived to be a peacekeeping operation. But as it evolved and found success, it blossomed into a group that countries wanted to belong to. There was some nationalism after WWII - the French were proud to be French, the Germans proud to be Germans, etc. But the formation of the Community also propogated a feeling of European centrality - Europeans were proud to be Europeans. One could perhaps argue West Europe vs. East Europe, but this is not my current topic. This blurring of political borders allowed the countries to treat each others as equals - in fact, as limbs on the same body.

It is also my conjecture that the European states are becoming increasingly Federalist. Every political system has a series of checks and balances that help to control the flow of power within that system. The EU Council is not an exception to this rule. It is a fact that the EU has been gaining power over its member countries since its conception. No doubt, after a certain point, member countries began to feel as if they were losing power - or at least not exerting as much as they used to. In what manner could they demonstrate their dislike of this idea? How could they regain their individual voice, and reject the collective voice?

I propose that the recent rejection of the constitution in France and Denmark is evidence that the member countries are growing restless - and increasingly federalist in their political maneuverings. I believe that in the future member countries will demand more sovereignty. While the trend in the past decade has been for a stronger union, I think the EU is too severely blurring cultural and political identity. I think that Europeans -like- to have nationalism. They want to be French and German and Italian - not citizens of a new United States of Europe.

What does this mean for the future of the EU, if increased federalism is what the future holds? And how will this impact the economic outlook of Europe? It's tough to say given that we have little experience with the EU heading in that direction (or at least I've wont to find any). I don't think the EU will ever move away from the Euro. It's been far too successful and is continuing to gain value against the dollar.

I have to admit I'm not a political. It's hard for me to think about how the European Union could possibly become less centralized given how much support it currently seems to have. Perhaps as I continue to gather new sources, someone will have some hypotheses about where the European Union is likely to go in the future and I can comment on those.


Coming Up Next: Country Studies - Germany

Tough Questions...and Tough Answers

1. Why did the French and then the Dutch decline to ratify the new EU Constitution?

First, it must be pointed out that both of these decisions were made entirely by the people through the method of popular vote. Politicians in both countries, most notably Jacques Chirac, strongly urged voters to approve the referendum, but they obviously declined. BBC news sources indicate that low-income workers and farmers were most likely to vote no.

I have been able to find several reasons that voters turned out in record numbers to vote so solidly:

A) Voters wanted to teach Jacques Chirac a lesson. The new Constitution was one of Chirac's pet projects, and by voting in the way that they did, they demonstrated their dislike for the exceedingly high unemployment rate - currently at 10.2 percent.

B) The French population feels as though they are losing their power in the Union. With the expansion of the community to 25 members last year, each individual countries role becomes smaller and smaller. France, as an extremely nationalistic and founding nation of the EU, resents their loss of power. Voting no was their way up standing up and demanding the attention the believe they rightfully deserve.

C) I do not have the full English text of the new Constitution, but reading it in French has provided me with some ideas about its construction. Nearly every sentence focuses on economic changes within the Union - something the French don't appreciate. The French economy is struggle right now and some French feel as if blurring their borders further will only increase the difficulty that the working class is currently experiencing.

D) Even 50 years later, the French do not forget why the Union was created. It was never meant to be an economic entity - it was a political entity designed to maintain peace between densely packed nations. As further changes are made to the Union to make it more of an economic machine, the French become more and more unlikely to approve these changes.

All of these reasons make sense to me. There's just something inside me that thinks, "You know, that's just like the French." Don't get me wrong - I'm a French major and a love of French culture, but they're well known for their strikes and their protests, and they mean to be taken seriously. They're not the kind of people (collectively) who bow their heads and vote yes because it's best for the 24 other nations in Europe - they will do what's best for themselves, selfish as that may be.

As for the Netherlands, I'm having a harder time understanding their choice to vote no on the referendum. I am unable to read that language, and most of the media reports state that they were simply following the French. I'm unwilling to accept this as a complete explanation, however. Perhaps they were trying to demonstrate their allegiance to France by voting along the same lines. Perhaps they felt the same political and economic pressures that the French do. I suspect that they were emboldened by France's "no" so they made one of their own. If I find more information on this topic I will be sure to report it.

It should be noted that many of the reasons I've stated above involve organization - millions of people do not collectively all feel exactly the same way and vote because of it. I must assume that word of mouth and the media delivered the message that the French people needed to hear to vote the way they did.

2. "So who gains and who loses by dropping tariffs as countries form unions?" - NN

Let me be more clear about what France demanded when they agreed to form the EEC. Here is an exerpt from Pinder's book:

"The ECC was also, thanks to French insistence on surrounding the common market with a common external tariff, able to enter trade negotiations on level terms with the United States; and this demonstrated the potential of the Community to become a major actor in the international system when it has a common instrument with which to conduct an external policy. It was a first step towards satisfying another motive for creating the Community: to restore European influence in the wider world, which had been dissipated by the two great fratricidal wars."

So one sees that in fact no tariffs were dropped between countries, but instead a tariff was erected as a barrier (and negotiation tool) between the US and the European states.

But...well...I guess there had to have been tariffs among European nations prior to the formation of the ECC. Ah...now I see the point of your question.

Prior to the ECC:
Firm A makes widgets in France. Firm B transports widgets from France to Germany. Firm C purchases the widgets. Firm C sells the widgets to Mr. D. Some of the money from Mr. D's purchase is given to the French government by Firm C. Let's work backwards.

Now that tariffs have been removed from between France and Germany, Mr. D doesn't have to pay as much for his French-made widgets. Whereas formerly he may have purchased an American-made widget at a lower price, now the French widgets are cheaper so he buys those instead. He can either buy more widgets, or more of something else, depending on his optimal basket. His quality of life improves because he is able to reach a higher level of utility. Firm C probably is going to do more business. They can now charge less for their widgets, which is going to increase the demand for them. Firm C will probably make more money. Since Firm C is selling more widgets, Firm B will have to be contracted to transport more of them - which means more business, and more profit for them. Firm A will have to produce more widgets to keep up with the expanding demand in Germany. They'll make more money because they're producing more.

Sounds good! Everyone's better off! But who gets hurt?

The French government. Because they're no longer receiving the tariffs from the exported goods, they're not receiving as much income. Further, because French widgets are more likely to be sold in Germany instead of in France, they won't receive any sales tax on them either. And when the government is making enough revenue, the population suffers. Defense spending, education, public works - these services now compete for increasingly scarce resources. Where does the money come from to support these services? Likely in the form of higher income or other taxes for the population of France. So while citizens may benefit because of the increased profits of their employers, they may end up paying a higher tax. Thus, indirectly, the French citizenry might lose out. But their government now has more power in the world arena - when buying goods only made in America, for example, or when going on vacation, they'll get a much better deal.

Who else loses out? The US. Now that Germans are more likely to buy French goods and vice versa, American goods don't sell as frequently there. American companies now face a whole host of problems including cost control, government lobbying, and wage adjustments to continue to support their workers. Economically speaking, the construction of the ECC and then the European Union must have looked like a nightmare to many corporate executives whose companies exported most of their goods to Europe.

This Just In...

The Dutch also just rejected the new European Consisitution.

Uh oh!

Check it out here.

Day 1

My very first selection is:

"The European Union: A Very Short Introduction"
by John Pinder, 2001
Oxford University Press, Oxford, England

I had expected that reading about the start of the Union would be sort of dry - that there would be a lot of intricate political details that would seem meaningless 50 years later, but I find that this is not the case at all.

Pinder explains that the first European community was actually the European Coal and Steel Community, which formed in 1950 and included France, Germany, Belgium, Luxembourg, the Netherlands, and Italy. In reality, the two major players were obviously France and Germany. While the name indicates that this was an Community driven by economic motives, Pinder explains that France was actually trying to control Germany's military power in an embodiment of the phrase, "Keep your friends close, and your enemies closer." France had tried to keep Germany down in the years following WWI, but found out the hard way that by keeping their neighbors down, they were restricting themselves economically as well.

The war machines of World War II were driven by coal and steel, and a union that controlled and shared these resources would have been unable to go to war against itself. If conflict ever did arise between the member nations, production would simply stop, and opponents would be forced to glare at each other across meeting room tables rather than bomb each other - there simply would be no ability to produce tanks, planes, bombs, or guns. As the French Foreign Minister Robert Schuman explained in 1950, "any war between France and Germany [would become] not merely unthinkable, but materialy impossible." It is important to note, however, that the French were not keeping secrets from the Germans. Political leaders did not think that by forming this community they were somehow disguising their motives - it was broadly realized that the European Coal and Steel Community was a peacekeeping measure first and an economic agent second. Further, Germany saw the community as a means to seek acceptance in the world theatre again after the atrocities committed their during WWII - yet another motive for their enthusiasm.

In the 1950s, the ECSC found that they were a successful economic union. This makes perfect sense - by removing the boundaries between raw materials and their production sites, as well as the boundaries between the producer and the consumer, one increases the efficiency of the system. As Pinder says, "This, together with the evidence that peaceful reconciliation among the member states was being achieved, encouraged them to see the European Coal and Steel Community as a first step, as Schuman had indicated, in a process of political as well as economic unification." There was a slight wavering in 1954 when the French failed to ratify a proposal for the European Defence Community, but a second step was made in 1958 when the European Economic Council was formed between the six founding states. This council allowed for the creation of the common market while respecting the interdependence of the various member states' economies. Notably, the French insisted that the ECC be protected by external tariffs. This would give the ECC a bargaining tool in the coming years, especially in negotiations with the US; European presence in the world economy had been decreasing throughout the 20th century as a result of the two wars, and this would give them a chance to restore their power.

I don't want to focus too much on individual countries just yet, put Pinder makes some interesting points about England's role during these formative years. Broadly, he explains that the English just didn't get it - they were too much concerned with the economic possibilities of the Community in the 50s and did not appreciate the political motivations. As a result, England was largely left out of the process until 1973. British influence has certainly helped to improve the economic situation for the European Union since then, but they continue to lack the necessary political motivations for unification that many other member states have. This is one reason that England is still using their native currency rather than the Euro, despite the fact that one might argue that it would be in their best interest to do so.

This will be the end of my first post today. As I continue to read about the intial formation of the European community, it becomes clear that there are two opposing viewpoints.

I am still reading about the recent events in the EU regarding the French. I was not satisfied with the reported reasons that the French people vetoed this proposal, so I am reading French news sources, and the translation is taking me a bit longer.