European Integration: Independenve Vs. Unity & Economic Consequences

In this recent artcile published by the EU Observer, the author (Vucheva) describes the numerous ways in which European citizens are feeling less and less confident about EU institutions and policies. Compared to a 50% confidence level measured in 2004, EU citizens of various nationalities now report that they are only 47% confident in the system. Let us take note of the fact that smaller, newer countries to the EU report higher confidence levels - this point will be an important one later.

What is confidence in this case? Is it approval? Is it satisfaction? Is it the measurable level of trust that each individual citizen has in the EU? And if so...what do citizens trust (or not trust) the EU to do? Protect them? Maintain or improve their current quality of life? Or something else entirely?

The stated purpose of the EU in the newest draft of the constitution is to act only in those areas where, "the objective of the intended action cannot be sufficiently achieved by the member states but can rather...be better achieved at Union level." Many argue that this leaves the EU with an open door to enroach on the rights of member nations. One could make the argument that nearly all objectives could be better achieved at the Union level. Who decides which tasks are allocated to the EU, and which tasks are allocated to the national governments?

Currently, the EU takes control of external trade and customs policy, internal trade and monetary policy, agriculture and fisheries departments, and many aspects of domestic law including environmental law, health, and safety at work. With the new constitution, however, the EU proposes to take another step towards monarchy: their participation in the justice system is increasing, specifically in the areas of asylum and immigration. The EU certainly doesn't mess around when it comes to doing its assigned duties; According to an OECD report, Italy, Portugal, Germany, and France are all rapdily approaching the 3% deficit mark set by the EU, and the finance ministers have approved disciplinary action (although what action will be taken is yet unclear.) Further, the EU clearly does have enough power to influence the decisions that countries make: Brussels officials (the home of the EU) have already given Portugal and Italy their ultimatums - bring the deficit within acceptable bounds within three years, or be removed from the union. Tough love, or tyrannical demand?

Either way, it seems to work. Portugal has promised to reverse the trend of their debt this year, reigning in the public deficit from 6.83 to 6.2 percent by fourth quarter, and Italy is taking similar action.

But consider the two other countries running into trouble with the EU's finance ministers: Germany and France - the two primary founding nations of the European Coal and Steel Community. As the two great industrial powerhouses of Europe for the majority of the 20th century, how must they feel being effectively criticized by the EU on matters of internal economic policy? Add to that the information found in this BBC news article, which details a record fine levied on France for persisting in the catch and sale of undersized fish, a practice one must assume has been going on for decades. Isn't France better qualified to monitor French fishing practices than the EU commission? Perhaps now the reasons behind France's rejection of the new constitution appears more clear.

Let's return to the fact that smaller, less-developed nations (usually newer members) report higher confidence rates than older member nations. First let us infer that if a person favors expansion of a political body, then that person most likely feels satisfied by that political body. Given that, citizens in Poland, Slovenia, and Slovakia are the most supportive of the EU, with approval of expansion rates in the 70th percentile. Why such strong support here, when countries like Luxembourg, France, and Austria report confidence levels below 30%?

Essentially, unity under the EU favors countries with weak economies and currencies, often accompanied by recent political and social unrest. The mission statement of the EU talks about being able to take over governmental functions and do them in a better way - exactly what these countries need. They need management over their monetary policies, they need a stable, globally-accepted currency, and they need acceptance into the global economy. I can't speak for anyone but myself, but when I think of countries like Romania, Bulgaria, and Croatia, I am reminded of a not-too-distant series of wars and political persecutions. All of these countries are now considered candidate countries for EU membership. If they are accepted as members, the global perception of these nations will change entirely; no longer will they be perceived as war-torn, unstable countries - rather, they will seem refreshingly new and trustworthy, with appreciable culture and customs. Consider the small island country of Cyprus, one hardly worthy of mention in the global economy. Wouldn't your respect for them increase if I informed you that Cyprus was an official EU member nation? It turns out they are.

EU member nations with strong economies, meanwhile, are suffering. Suffice it to say that the monetary policy that benefits small and growing nations is not the same monetary policy that benefits large, industrialized nations. As I mentioned above, the EU is becoming increasingly strict about deficit limits, and this is surely a wise choice for a growing nation that might be tempted to overborrow without the ability to repay debts. Consider the disaster that might occur if Romania became a member nation, and drew enough attention that it attracted serious interest from inernational investors. Romania would likely overborrow to stimulate growth, but might be unable to repay the debt in the long run. On the other hand, deficit limits are probably a poor choice for nations such as France and Germany, both of whom command enormous respect in the global economy, and for whom a larger buffer of deficit might be prudent.

But being part of any union, especially the one described in the new constitution, means that everyone has to follow the same rules. And there's no reason to believe that what's good for the goose is good for the gander. One section of the EU constitution indicates that the European Commission sets out, "rights, freedoms, and principles," under the heading of "Charter of Fundamental Rights." That sounds an awful lot like the Bill of Rights to me. The current charter includes things like the right to life, the right to liberty, and the right to strike. But are all EU nations ready for this? Consider also that the new constitution outlines a "legal personality" for the European Commission, indicating that in any area where the EC has jurisdiction, EC laws will supercede national laws. If this is the case, what is the continued function of national presidencies, parliaments, or monarchies? Considering Europe's fiercely nationalistic past, I think nations will want to hold on to a lot more of their independence than the current constitution will allow.

Economically speaking, the EU has probably had a negative impact on the quality of life in most advanced industrialized nations. That is to say, the quality of life has improved under EU membership, but not as much as it could have. An examination of economic growth rates before and after the Maastricht treaty in France and Germany indicates a general slowdown. Current Euro inflation rates are higher than historical averages for the Franc and Mark. Of course, one could suggest that other factors have played into this economic picture - I'm simply suggesting that EU membership could have something to do with it.

The new EU constitution isn't dead yet, despite resounding "nos" from France and Denmark. Earlier this month, Luxembourg gave a meek 56% yes vote - this from a country that receives more EU money per capita than any other.

Although I'm not an American history expert, to me all of this resembles the shaky formation of our own nation. But will a single nation arise from the EU, as our colonies formed together into a single nation more than 200 years ago?

Euro Performance Present - Future

How is the Euro likely to perform in the future?

1. The Euro isn't going to be going away anytime soon. Currently, it makes up 30% of the world's debt market, while the US dollar accounts for 44%. Further, it accounts for 25% of international bank liabilities. Also, many EU and non-EU countries (Kosovo, Montengro, etc.) are using the Euro as an "anchor" currency when calculating the exchange rates of other currencies. Basically, lots of people are counting (haha, it's a pun) on the Euro - it simply could not be removed as a currency at any point in the forseeable future.

2. Most modern currencies are freely convertible - that is to say, there is no restriction on the amount of international purchases or sales of that currency. This is one trait that the Euro shares - Article 56 of the Maastricht Treaty provides that there be no restriction on payments between member states, or between member and non-member states. This effectively means that no amount of political disagreement between two member countries could ever stop the flow of money from one country to another. If this ever becomes an issue in the future, the Euro will not be affected - adding to the Euro's long-term survivability.

3. Currently, the EU is experiencing steady long-term growth. While the economy has suffered in recent years for reasons mentioned in previous posts, an overall view indicates that as the European financial and capital markets become more integrated, the Euro will become even more attractive to borrowers and investors. As previously mentioned, financial instruments that trade frequently tend to be overvalued - a higher level of interest indicates that the Euro would be more frequently traded and used, possibly raising its value relative to other currencies.

4. The stated current and future objective of the European Central Bank is to maintain price stability. As stated by the ECB, "Price stability is a prerequisite for sustainable growth, investment, and employment. It anchors expectations, reduces financing costs, and facilitates an efficient allocation of resources."

But there are many people who are not so confident about the Euro's future - in fact, the majority of people feel this way.

1. The fact that the French and Dutch rejected the new EU constitution indicates that there is an uneasiness amongst the member states. Since the Euro derives some of its value from the confidence that the world has in the stability of the EU, these actions called the current value of the Euro into question. In the days following these referendums, the EU was significantly devalued. This demonstrates that political disagreements are set on the world stage, and that anything that enters the public eye can possibly damage the EU's reputation and the value of their currency.

2. In Fratianni's paper, "Dominant Currencies and the Future of the Euro", he states that, "The transaction domain of an international currency depends on its ability to lower transaction costs relative to alternative currencies." His argument is that the EMU financial markets are not as integrated (and therefore not as liquid) as the US financial markets, thus favoring the use of the dollar as a median of exchange. He gives words to concepts that I've been searching to explain, indicating that "inertial" and "reputational" considerations also favor the dollar - the US economy is still the most respected economy in the world and has favorable short- and long- term growth. His final point is that the ECB needs to carefully follow the fundamentals laid out in the Maastricht Treaty if they hope to appreciate the value of the Euro.

3. In Arestis' paper, "The Future of the Euro: Is There an Alernative to the SGP?", the authors call into question the necessity of the Stability and Growth Pact, the document that lays out the long-term economic goals of the EU. They critique the shortcomings of a few of the imposed restrictions of the SGP: mandatory fiscal austerity, separation of fiscal and monetary policy decisions, undemocratic structure, the lack of accountability of the ECB, etc. The most important point they bring up is to criticize the ECB's single-minded focus on price stability - aren't they neglecting other (and possibly more easily attainable) policy objectives, like employment?

4. Arestis has another paper entitled, "Will the Euro bring Economic Crisis to Europe?" In this paper, he suggests that the Euro as launched at the wrong time, when unemployment was at a remarkably high 10%, and disparities between the wealthy and the working poor were relatively severe. This abnormally high level of unemployment is unlikely to continue, but the current ECB policy remaining standard, the Euro will have what Arestis calls a "deflationary bias". Arestis points out some other reasons for instability, most notably the competition that is likely to ensue between the USD and the Euro. He argues that the ECB has inadequate power and focus to deal with this problem.

5. I have attempted to access Hartmann's paper, "The Future of the Euro as an International Currency..." but the authors seem to be quite possessive of it, and demand that I pay for it. I can't really afford to do that, so I just read the abstract. Hartmann seems to agree with Arestis for the most part, with the additional stipulation that the current planned expansion of the EU may outpace the integration capabilities of the Euro. He indicates that the EU should take their time and achieve current stability before adding more member nations to their list and further extending the Euro's responsibilities.

The Euro has things working both for and against it. It amazes me that there are so many factors that influence the occurence of any one event. There are a billion conceivable ways that the value of the Euro could be changed. Like the butterfly effect, my purchase at the supermarket today will influence the future value of the Euro. With that in mind, I'll make sure to use my Kroger Plus card.

WW3?

Modern wars are no longer fought over territory or religion or Helens of Troy. They're fought over money, plainly and simply. We're not in Iraq right now to kill terrorists or liberate people or establish democratic governments. While we'll undoubtedly accomplish all these things (eventually), I think it's clear to just about everyone that we're in the Middle East to control the oil. Oil is gold, and now that our planet is beginning to show signs of running out of it, it's more important and expensive than ever. Suffice it to say that the current administration of the US will pay any short term price to have control of the world economy in the long run. We'll pay in monetary debt, in the lives of young soldiers, and we'll pay with our international reputations.

I haven't looked at the data yet, but I'm pretty confident that I will find reason to believe that the Euro will continue to increase in value far into the future. As more and more countries see the benefits of belonging to the EU and adopt the Euro as their currency, the EU will become more and more like a single entity - a single country. It won't be long before the EU is the largest economic entity on the planet - and this may already be the case.

I support our president as a fiscal conservative, but I think he's kind of a cowboy - literally and figuratively. How long will conservatives in this country be willing to play second fiddle to the Europeans? How long will it be before it's going to be made clear who's really in charge of the world economy? And once we realize it's the EU, how long after that will we tolerate paying higher prices for European goods?

Not long, I don't think. War is good for the economy, and there are plenty of political buddies in the defense industry. Will we negotiate with the Europeans to try to come to some sort of agreement about pricing and tariffs...or will we nuke Berlin?

I foresee that the US is going to have a lot of problems with the EU in the not-too-distant future. I think that war between the US and the EU is an inevitability - maybe not in my lifetime, but shortly thereafter. Resources on this planet are becoming scarce, and one need look only as far as the nearest history book to find out what happens when resources among humans get too scarce - people start killing each other. I just hope that people have enough sense to prevent this when it happens.

Euro Performance 2002-Present

When one looks at a graph of the Euro's performance in comparison to the US dollar, one sees an enormous increase in value beginning on almost exactly January 1, 2002. This, of course, is the day that the Euro was officially released as a hard currency - in the form of more than 15 billion notes and 60 billion coins. Formerly, beginning on January 1, 1999, the Euro had become the official accounting currency of the Euro Zone and had suffered because of concerns addressed previously. I would like to examine today why the Euro increased in value so much following its public release.

What were the concerns about the Euro?

1. Proctor and Gamble feared that their international market would tank because people would not be prepared for the changeover. They anticipated "long lines and confused consumers". They ran ads in Europe encouraging people to change their money to Euros early, and to stock up on soap and diapers. Whether this was a marketing campaign or a genuine concern, it indicates that at least some major players were paying attention.

2. The Dutch finance minister put voice to a minor concern when he stated that he worried that bad weather might prevent people from venturing to the bank to exchange their currencies. One might dismiss this as negligible, until one considers that a big snowstorm (properly timed) could have put a stop to all financial activities in a small country a day or more.

3. The plates used to make the Euros were stolen just a few weeks before the official release. Many officials were extremely concerned that on opening day, the market would be flooded with counterfeit Euros.

4. There was little consumer education about the Euro outside of the Euro Zone. Some individuals were concerned that money laundering or even amateur counterfeiting could take place in foreign countries. I certainly wouldn't have known what a Euro looked like if someone tried to sell me one pre-2002 - I'd have to trust them that they were handing me the correct bill.

5. Working with a whole new currency imposes a cost on European businesses. Changes in currency must be accounted for within a business, which creates more work to be done, which equates to more man-hours, and more expense. If changing accounting procedures proved to be too costly or too difficult, confidence in the Euro would decrease.

Why has the Euro increased in value since 2002?

1. European countries trade extensively with each other. When each country had a different currency, the cost of trade was very high because of the necessity of changing currency at least once. Anyone who has had experience with international travel can relate that currency conversion is an expensive proposition, if only because the rates charged are so high. If a German company buys French goods, the French company wants Francs, not Marks. It costs the German company to change some of their money into Francs for the purchase, effectively increasing the cost of the French goods and encouraging the Germans to look elsewhere for their purchases.

One important factor here is "exchange rate uncertainty" - this is the uncertainty that forces the questions, "Am I getting a good deal on this exchange? The value of this currency changes every day - how do I know that tomorrow my money will be worth the same amount?" If one imagines that the price of bread varied daily between $1 and $2, one begins to understand the reason for this uncertainty. You want to buy bread on cheap days, but who's to say that it won't be cheaper (or more expensive) tomorrow? Should you wait, or buy now? This hesitation adds up to missed opportunities, which can be equated to inefficiency.

By having a single currency, the Germans are just as inclined to buy French goods as German goods, or Italian goods, or Spanish goods. This increases the amount of competition in any given market, because it increases the number of suppliers - always a good thing. Consider that with the adoption of the Euro, every international business transaction in Europe suddenly became 3% less expensive. That adds up to a lot of money very quickly.

2. Several major central banks were persuaded to buy large quantities of Euros. More importantly, they advertised their purchases to the public. Specifically, the People's Bank of China, the Bank of Japan, the Central Bank of Taiwan, and the Bank of England all made large Euro purchases in early January 2002. When people see large and trustworthy banks investing in a currency, they gain confidence in the currency and its ability to enable trade. After all, the People's Bank of China would not spend all that money if there was any uncertainty about the Euro's viability, right?

3. In modern America, the magic word is "IPO" - a result of the 90s stock market explosion. So many initial public offerings in that decade were hugely succesful that even into the 21st century, individuals who know nothing about stock markets or trading are suddenly willing to invest fortunes when an IPO is made. Sadly, the European investment market is no more intelligent than that of the US. The Euro promised to be one of the biggest "IPOs" that many European investors had ever seen. When studying decision theory, economists sometimes divide people into risk-takers and risk-averse individuals. It's no surprise that the risk-takers (usually young professionals with few financial obligations) jumped on the Euro as an investment and inflated its value - possibly too much. Nevertheless, the enthusiasm surrounding a new currency certainly helped the Euro find success.

4. Said one Frankfurt-based currency trader, "You can now hold the euro in your hands, you know it is a real currency with intrinsic value. The successful introduction of the notes and coins is of immense psychological importance and could change people's attitudes towards the currency." Enough said.

5. The European economy experienced a slowdown in the first two quarters of 2001, experiencing just 1.2% annualized growth. An increase in foreign aquisition of European-based companies and the economic recovery of 1st quarter 2002 provided an excellent boost to the new currency.

6. One economist describes that the Euro's "basic balance" - the sum of current-account balances plus long-term capital flow - is growing. She indicates that, "This indicates that during the course of 2002, the Euro might at last have the opportunity to appreciate."

7. When talking about an increase in the Euro's value, it's important to realize that we're measuring its value against our own currency, the US dollar. One of the reasons for the Euro's "increase in value" can actually be attributed to the declining value of the dollar. A report from the WSJ in November 2002 reminds us of the very serious recession that the United States was encountering during that time: "The official US unemployment rate increased slightly to 5.7 percent in October (from 5.6 percent the month before) as businesses continued to carry out substantial layoffs, resulting in a net loss of 5,000 jobs. More than 8 million people are currently registered as unemployed, while another 4.3 million work part-time although they would prefer full-time employment."

Clearly the Euro has had a number of reasons to increase in value, and it's no surprise that it's done so. Next I'm going to look at whether or not these trends are likely to continue into the future.