Intergovernmental Relations: The EU vs. The World

Last November, Iran agreed to suspend its nuclear programs in exchange for beginning trade and political talks with the EU. This action was taken to prevent Tehran's referral to the UN Security Council, an action that could have swamped the burgeoning nation with trade restrictions, tariffs, and embargoes. But recently, Iran has insisted that it has "legitimate rights" to nuclear research and testing, as outlined by the laws of peaceful nuclear technology under international law.

As the EU Observer reports, the negotiations between the EU and Iran up to this point have been a paradigm for the kind of political relationships that will be necessary for safety and security in the nuclear era. A skeptical United States had wanted to refer Iran directly to the UN Security Council, but cooler heads prevailed, opening the door for negotiations that were to come to a conclusion in the upcoming weeks. On August 2, the BBC reported that the "Big 3" EU countries (Britain, France, and Germany) were prepared to make full proposals for economic, political, and nuclear cooperation within the week.

But on Monday, Iranian foreign ministry spokesman Hamid Reza Asefi revealed that Iranian workers were preparing to remove the UN seals on boxes of equipment used for the conversion of elemental uranium into enriched uranium, a key step in the process of creating a nuclear warhead. Iranian officials insist that the enriched uranium is to be used for civilian and civil programs, and not for the creation of weapons - but US and EU officials are skeptical. Even with the previously sealed equipment, however, US intelligence reports reveal that it would be almost 10 years before Iran would be prepared to arm and launch a nuclear weapon.

The question to be addressed her is what role the EU needs to have in relationships with foreign countries. In this situation, one could ask whether or not the political views were those of a select few countries (the US, Britain, Germany, France, etc.) or whether they really were the political views of the EU at large. And who decides what the EU's political opinion should be? Even with appropriate representation and a congressional lawmaking system, it would be nearly impossible to represent all of Europe's diverse political viewpoints with a single blanket statement or action. One can peruse a variety of articles on this particular incident, and read quotes from representatives of all of the major involved countries - but nowhere present is a statement from an EU official.

Consider also a recent story involving Poland (an EU member) and Belarus (a non-member country). Essentially, the story boils down to the presence of 400,000 people of Polish descent present in Belarus, a country strongly allied with Russia, old-world values, and communism. Recent political developments involve the extraction of the Polish ambassador to Belarus, and picketing and riots near the Belarusian embassy in Warsaw. Tensions came to a head on the 28th of July, when Belarusian police raided the headquarters of a major Polish political party and detained several political figures.

Now Poland is calling for the EU to take action against Belarus in the form of economic sanctions, and move designed to protect the Polish ethnic minority in the largely soviety country. Three letters delivered to the office of EU foreign policy chief Javier Solana have been thus far ineffective at producing the sanctions necessary - and the EU remains reluctant to act, indicating that they will keep an eye on the situation for now, but that action is unlikely before the next meeting of EU foreign ministers in September. Many member states have now banded together and support a process to expel Belarus from the system of preferential trade from which they currently benefit, just in time for presidential elections in 2006.

In a third, unrelated story, France has recently reopened formal political communications with Cuba, nearly two years after the EU officially closed their doors to the nation after more than 75 dissidents (including independent journalists) were sentenced to 28 years in prison. Cuba's position has been, ostensibly, "Finally, today, Europe's inevitable correction has come. It is clear that the so-called sanctions adopted by the European Union in 2003 were unjust and ineffective." The EU's position on the matter, as conferred by Portugal's ambassador to Cuba, "It is a success for France, but I would have preferred that the European Union keep a unified position."


So here we have three stories about a difference of opinion between a member country and the EU as an entity itself. How can these political differences of opinion be reconciled, especially when so many different political opinions exist?

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.

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.