Ah. Finally the ECB cuts interest rates. But it's a lot later than it should have been. And it's too little--Europe's macroeconomy seems to be in deep enough trouble that it's hard for me to understand why ECB rates are higher than Federal Reserve rates.
WSJ.com - ECB Cuts Key Interest Rate To Boost Sluggish Economy: ...The European Central Bank Thursday cut its key interest rates by half of a percentage point, lowering rates for the first time in more than a year amid sluggish economic growth and diminishing inflationary pressures. The ECB's key refinancing rate now stands at 2.75%. A cut was widely expected after remarks by ECB President Wim Duisenberg before the European Parliament Tuesday. "Since our last meeting, the evidence has strengthened that inflationary pressures are easing somewhat and downside risks to economic growth haven't vanished," Mr. Duisenberg said. The bank is legally required to keep inflation low and aims for annual inflation rates of below 2%. Inflation is currently and has been above target for most of the past three years, making it difficult for the central bank to cut rates even as growth has flagged...
However, there is something wrong with that last sentence: if you tie yourself to a chair, you should not then complain that you find it difficult to move, and others should not pity your forced immobility...
Posted by DeLong at December 05, 2002 06:26 AM | TrackbackThat legislated inflation target is just one of the many charms of the new Euro zone. How hard might it be to return to 70's style "stagflation", so that inflation constantly exceeds their target but growth is weak?
Posted by: Tom Maguire on December 5, 2002 07:46 AM>How hard might it be to return to 70's style "stagflation", so that inflation constantly exceeds their target but growth is weak?
Exactly. The ECB has over-ridden its own adopted inflation tax of max 2%. What sort of message does that send out to financial markets about time consistency of policy?
The EU economic indicators can be checked out at: http://europa.eu.int/comm/eurostat/Public/datashop/print-product/EN?catalogue=Eurostat&product=1-eur11-EN&mode-download#ind_prix
Posted by: Bob Briant on December 5, 2002 08:33 AMThe ECB's shortcomings are as familiar to us as JLo's navel.
What puzzles me is British Labour's determination to make a lemming-like plunge into the single currency, despite the high probability of economic damage such a move would inflict on the UK.
Posted by: George Zachar on December 5, 2002 09:16 AMIt's got to be a bigger decision than the current form of the ECB. Many of the existing problems were wrought by the once highly respected Bundesbank and not so long ago (before Gordon)British Central banking was not much to boast about. A trip to Europe makes the case for the Euro very effectively. Wouldn't British companies tendering for European contracts prefer to have Euro cost bases?
Will there ever be full convergence? I doubt it. If the ECB gets its act together will that matter that much? I doubt that also.
Posted by: Jack on December 5, 2002 10:28 AMWell, if the UK joins the Euro zone it will also get a say in European monetary policy, and will bring its expertise and opinions to the table, and that shall be in the interest of both sides...
Not so long ago, American and Brittish economists used to argue oh-so-eloquently that it would be impossible to lauch the Euro. And a little while ago, even the FT was glossing about the Euro : $ exchange rate. I have never read any praise about how the ECB has successfully turned the Euro into a stable and strong currency. (Not that a strong and stable currency is intrinsically good, but you can't win both sides of the debate - unless your business is to sabotage the EU, of course...)
Will Brittain miss the chance to shape Europe's future once again? It's entirely up to the UK to decide. But make no mistake, Euro-zone there will be, with or without the UK. All aboard, the train is leaving... In a historical perspective, all skeptics will sound pretty silly.
Posted by: Jean-Philippe Stijns on December 5, 2002 11:51 AMGeorge,
>What puzzles me is British Labour's determination to make a lemming-like plunge into the single currency, despite the high probability of economic damage such a move would inflict on the UK.
Yes. The enthusiasm is most evident on the part of Tony Blair. Many of his ministers are at the very least more guarded. The other sources of conspicuous enthusiasm are CEOs or their peer group in auto industry companies and some other multinationals, for understandable reasons, and more especially some high profile trade union leaders. If anything, business generally in Britain has become altogether more cautious or even sceptical in recent years and small to medium sized businesses, with no direct trading links to mainland Europe, foresee only bearing the switching costs with no prospect of direct business benefits at all. Btw the overall costs to Britain of the switchover have been estimated at UKP 30 billion.
Several political commentators have remarked that Tony Blair doesn't really understand economics, which is almost certainly true. He thinks in "political terms" and it has been made pretty clear to him in EU heads of government meetings that he will be kept out of some top-level decision-making in the EU until Britain joins the Euro. There have been persistent rumours, routinely denied, that he nurtures personal ambitions to become president of the EU Commission or an elected President of Europe, were such a position to materialise in a reformed constitution for the EU. Obviously, prospects for achieving that career move are dimmed if Britain remains outside the Eurozone.
A few years back, around the launch of the Euro in 1999, several trade union leaders here spent much time in broadcast interviews trying to sell the Euro to the British public. A favoured line of argument then was that joining the Euro would cut house mortgage repayments because of the lower interest rates in the Eurozone - but with no mention of what that would do to house prices, which happen to have risen steeply nationwide since. Either they didn't understand how markets function - or perhaps they did, if you see what I mean.
An intriguing cause for speculation is how come the political left in Europe, not just Britain, has transformed from being a main source of entrenched opposition to the "European Common Market" - as it used to be called - into being among the most ardent exponents of the benefits of integration through to complete federalism? All very puzzling. What changed?
Bob,
is the £30bn estimate really plausible? If so I guess it would have cost the other Europeans £120bn-£150bn. Is that a lot? Does it explain the economic plight of Euroland?
Most arguments about this subject lose sight of the size of the bet being made and the adaptability of economies. While revelling in Germany's current difficulties certainly makes for a welcome change, surely the single currency is the least of its problems, if indeed such a rich country can be deemed to have problems.
The end changing of political parties is indeed strange. Is it due to a mismatch between its actual importance and its emotive power? (Or at least the parts people care about)
Posted by: jack on December 5, 2002 12:16 PMI can top your question on its head, Bob:
Would European integration be running against some vested interest on the right-wing side of the political spectrum? The FT believes this is true at least of financial market integration...
As for explaining the Left's support for monetary integration and the common market, it's no mistery: integration will ultimately allow to stem competitive dumping of social protection among European nations. The flip-side of this is, of course, why the right is not so enthusiastic about integration...
Vive Jacques Delors! :-D
Posted by: Jean-Philippe Stijns on December 5, 2002 12:23 PMThe population of the Euro countries is older than America's, though we are aging as well. Does the aging of the Euro countries have anything to do with the slow growth of the past decade? Could this also be part of Japan's slow growth problem?
There is also discussion of a possible linking of the aging of the baby boom generation in America and a continued decline in price/earnings ratios of stocks as an older generation sells rather than accumulates assets.
Posted by: on December 5, 2002 01:16 PM_continued_ decline??? do you define long-term as the week ahead?
Posted by: on December 5, 2002 02:00 PMif the UK joins the Euro zone it will also get a say in European monetary policy
That statement requires a level of trust and credulity many people don't share.
American and Brittish economists used to argue oh-so- eloquently that it would be impossible to lauch the Euro
Not true. They said it would difficult and absurd, with many many unintended consequences, but never not once had I seen it termed "impossible". Straw man alert.
I have never read any praise about how the ECB has successfully turned the Euro into a stable and strong currency.
The Europeans, whose slow motion economies cry out for a depreciating currency, are not likely to want or praise a "strong" currency. But I do think you are correct in noting the virtue of the new single currency's stability.
All aboard, the train is leaving... In a historical perspective, all skeptics will sound pretty silly.
Wrong metaphor. You mean the ship is about to pull out. The Titanic. :)
how come the political left in Europe, not just Britain, has transformed from being a main source of entrenched opposition to the "European Common Market" - as it used to be called - into being among the most ardent exponents of the benefits of integration through to complete federalism? All very puzzling. What changed?
I think it is self-evident. The Left, in the spirit of centralizing govt in friendly social-democratic hands, views Brussels as an ideal venue for slowly expanding the State, sans bloodshed and massive disruption, and apparently with minimal direct popular input.
Posted by: George Zachar on December 5, 2002 03:23 PMcompetitive dumping of social protection
Just a note on lingo: Here in the US of A, we call that the "race to the bottom".
Posted by: George Zachar on December 5, 2002 03:28 PM>>but never not once had I seen it termed "impossible". Straw man alert.<<
Self-serving and wrong. I HAVE READ that the necessary convergence between currencies prior to Euro day would not happen, just as the Snake experience had "taught" us. I HAVE READ that the Euro would be the object of successful currency attacks between the time it came to life and the time the phisical notes would appear. I HAVE READ that the lauch of the notes would be a catastrophe. No strawman alert, just the usual conservative denial of facts. If facts don't fit your argument, never ever give up on the argument, just fit the facts to the argument or, if necessary, call the facts "counter-intuitive".
>>The Europeans, whose slow motion economies cry out for a depreciating currency, are not likely to want or praise a "strong" currency.<<
Would you please wait until Sunday or a month or so, when the Dubya starts sending the price of oil up in the sky to assert that Europe does not need a strong currency. The EU does not have the luxury of having oil priced in its own currency... (Saddam did try about a year ago to price his own oil in Euro though.)
>>Wrong metaphor. You mean the ship is about to pull out. The Titanic. :)<<
Wishful thinking, George. Don't confuse what you want with rational prediction.
Posted by: Jean-Philippe Stijns on December 5, 2002 03:32 PM>>The Left, in the spirit of centralizing govt in friendly social-democratic hands, views Brussels as an ideal venue for slowly expanding the State, sans bloodshed and massive disruption, and apparently with minimal direct popular input.<<
Oh-so-intuitive... Except that interest payments on debt are a transfer from the working class to asset owners. Notwithstanding the fact that high debt levels are the best cure to Social Security as we know it... Never wondered why, oh-so-counter-intuitively, debt : GDP ratios go up (in modern history) under the Right and down under the oh-so-mendacious Left? Oh-so-strange that the European Commission is in the competition and budgetary control business (however hawkwardly at times)?
Posted by: Jean-Philippe Stijns on December 5, 2002 03:45 PMYou claimed to have seen it stated that "it would be impossible to lauch the Euro". That's what I responded to.
No one claimed the "launch" would be impossible, only that its stated goals couldn't be met without a laundry list of unintended consequences. Take a deep breath, dude.
when the Dubya starts sending the price of oil up in the sky
Counterintuitively, the price of crude is roughly unchanged since W took office, despite 9/11, etc. Oil roughly doubled during the last 2 years of the prior administration.
Don't confuse what you want with rational prediction.
Please don't pretend to know what I want.
Posted by: George Zachar on December 5, 2002 04:08 PMBack into italic world. Why do you do this to this blog everytime what's said doesn't fit you??? (third time I catch you) IT'S DISRESPECTFUL, George. Conservative tactic #101: blow the place if it doesn't fit your purpose.
Posted by: Jean-Philippe Stijns on December 5, 2002 04:30 PMIn my own unrivaled slap stick manner, I must point out once again that the European Union is too far gone to be saved. The virus of socialism renders these Europeans incapable of putting a finger into the dike. We Americans must learn from their mistakes. Also, why should we allow them to continue mooching off the United States?
It’s time to seek improved alliances with countries like India and Turkey. Let the white boys of the Old World figure it out for themselves. It’s their problem, and not ours. We have been cutting them far too much slack because so many of our ancestors are from Europe. Hey, it's a New World and we have paid off our debt to these people.
Posted by: David Thomson on December 5, 2002 04:40 PMLook, JP, I closed my tags. Interestingly, here in Opera 6.05, there are no unwanted itals. They do show up in IE and Mozilla, tho, so I think it's a Moveable Type problem.
Posted by: George Zachar on December 5, 2002 04:56 PMDon't worry, George, I'd rather live a thousand times in italic mode, your "fault" or not, than to forced to live one single life in Trolland... It's now to the point where I am beginning to think that I should find an other forum to share and confront my ideas and opinions... It's too bad, because I haven't found any other blog like this one...
Posted by: Jean-Philippe Stijns on December 5, 2002 05:33 PMJP, start your OWN blog.
Posted by: George Zachar on December 5, 2002 05:40 PMI can't believe how much reflexively "bon ton" it has become to bash the ECB's policy. I am amazed by the general assumption of Greenspan's infinite wisdom. As Jean-Philippe pointed out the ECB has done quite a good job at making sound money out of the EURO. I have little doubt the Bundesbank would act similarly if it were still around; after all "Geldwertstabilität" was all it cared about. The difference would be that with all the respect the BuBa commanded, few would question its decisions. On the other side nobody seems to worry that the fed has almost no room left to maneuver and nobody questions the most dramatic succession of rate cuts in the post-WW2 US history and the lowest rate for 40 years. To me it looked like outright panic. Anyway, it'll take at least two more years to start to really evaluate those policies.
Posted by: Chris K on December 5, 2002 05:54 PMI want to ask Brad de Long (and those on this string), to comment on the fact the ECB (with 2 minor exceptions) has taken exactly the same line as the Bank of England on interest rates
bm1729@yahoo.co.uk NOT .com
Posted by: Barry Murphy on December 5, 2002 05:56 PM>Would European integration be running against some vested interest on the right-wing side of the political spectrum?
I profoundly hope concerns about fraud in public spending are not the exclusive concern of the right in politics and there are good grounds for worrying about the EU Commission. The Commission's Treasury accounts haven't been audited for years, despite concerns of Britain's National Audit Office and insider whistle-blowers. Why not check out:
http://www.freedomtocare.org/page84.htm
http://news.bbc.co.uk/1/low/world/europe/2219114.stm
http://news.bbc.co.uk/1/hi/world/europe/1298980.stm
http://news.bbc.co.uk/1/hi/business/2165767.stm
http://news.bbc.co.uk/1/hi/business/2226345.stm
http://news.bbc.co.uk/1/hi/world/europe/249425.stm
http://news.bbc.co.uk/1/hi/programmes/hardtalk/2293519.stm
The fact is that a long succession of polls in Britain over recent years has persistently reported support for joining the Euro in the range of only 20% to 30%. There is no evidence whatever that either the majority of the public or businsses want Britain to join the Euro.
>is the £30bn estimate really plausible?
The basis for the £30bn estimated switch-over costs to Britain on joining the Euro is here: http://www.no-euro.com/factsfigures/pdf/ChantreyVellacottReport.pdf
Is the figure so implausible? Britain has the fourth largest economy in the world after the US, Japan and Germany, and London is the third largest of the global capital market centres and the largest global foreign exchange market by far. On the last, see Paul Krugman and Maurice Obstfeld: International Economics (2003), p. 330: In April 1989 the average total value of global foreign exchange trading was close to USD 600 bn per day, of which USD 184 bn were traded daily in London, USD 115 bn in the U.S, and USD 111 bn in Tokyo. Only twleve years later, in April 2001, the daily global value of foreign exchange trading had jumped to around USD 1.2 trillion, of which USD 504 bn were traded in London, USD 254 bn in New York, and USD 147 bn in Tokyo.
Besides the cost of switching over all the computer accounting systems and cash tills, there are the costs of changing slot-coin machines and personnel training. I guess some favouring the switch must be enthusiastic about the prospective extra business from the switch but unless extra business benefits compensate it is a dead-weight cost for most businesses.
>As Jean-Philippe pointed out the ECB has done quite a good job at making sound money out of the EURO.
Compare the Euro-US Dollar exchange rate on launch in January 1999 and now.
>the ECB (with 2 minor exceptions) has taken exactly the same line as the Bank of England on interest rates
The BoE has just announced that it will hold its interest rate steady at 4% while the ECB has just cut its rates by 0.5% to 2.75%.
Posted by: Bob Briant on December 5, 2002 06:56 PM1. There's no doubt that the Euro has created a stable and strong currency for the Euro area. However, if the Euro had never existed, I suspect we also would have had a strong and stable Franc, and strong and stable Mark, and strong and stable Lire, etc. Why is creating a strong and stable currency such an accomplishment for the ECB? If most of the Eurozone countries were fiscally reckless Latin American countries that had recent histories and justifiable finance market fears of hyperinflations or radical devaluations, that would make sense as a great accomplishment, but I don't see why that's a point in favor of the Euro being a good thing for Europe the facts being as they are.
2. I don't understand the whole "race to the bottom" argument, that European countries would attract more business by getting rid of regulations and protections. Well, I do, but I don't see what the Euro has to do with it, or international competition in general. I mean, so such regulations make it more expensive to do business. So what? They can have lower wages to make up for the higher cost. Granted, they could move to another country, with fewer protections, and that country would have higher wages, but the same would be true even if only one country existed in the world. If it legislated widespread worker protection (non-wage/salary compensation), it could reasonably expect wage/salary compensation to be lower, even though there are no countries in the world that have less worker protection for businesses to move to. In other words, regulations and protections have costs, just like everything, with or internation trade and investment.
>>Compare the Euro-US Dollar exchange rate on launch in January 1999 and now.<<
The Euro was (voluntarily) launched at PPP with the dollar, i.e. above parity, knowing that it would not command respect as a young currency (read 'reputation', and bear in mind that the Anglo-Saxon press back then was heralding that Southern members would push for a inflationary bias - yet another wrong prediction). As of today it has achieved parity.
The proof (if necessary) is that I have stopped seeing these FT front-page graphs plotting "the progress of the Euro". They used to put that out only, I mean ONLY, when the Euro was going down. But now, now more such graph. How bizarre!
>>I guess some favouring the switch must be enthusiastic about the prospective extra business from the switch but unless extra business benefits compensate it is a dead-weight cost for most businesses.<<
Why the hell should we care about the loss of exchange revenues to change counters etc, please? They only generate disutility and extra cost... It's as if you complained that email is generating a deadweightloss by preventing people from always standing in line at the Post Office and generating revenue losses from stamp sales.
The reality is that the Brittish press is traditonally Europhobic and UK citizens often misinformed (if not disinformed) about the Euro and European Union. The influence of American economists and journalists with their typical (albeit by now means general) bias, probabaly doesn't help either.
Let's get back to those gold old horses. Talk about deadweight loss :-D
Posted by: Jean-Philippe Stijns on December 5, 2002 08:57 PMFirst of all, Julian, thanks for the smart conservative remarks. They make up for the crap we have to read through...
>>I suspect we also would have had a strong and stable Franc, and strong and stable Mark, and strong and stable Lire, etc.<<
Hmmm... Well before the Euro, stability was more of a wish than a reality to say the least. Currency crises, back then, weren't restricted to developing countries... (And currency crises do come at a cost with their self-fulfiling capital account swings.)
Re: strengh per se and hyperinflation, how do we know that Southern European countries wouldn't have kept their good old inflationary habits? This precisely the reason they were the most enthusiastic to tie their hands in the Euro and surrender their monetary autonomy, in large part, to the Buba (and in turn why the Buba allowed Germany to go down that path.)
>>2. I don't understand the whole "race to the bottom" argument, that European countries would attract more business by getting rid of regulations and protections.<<
It was not my purpose to defend that argument, but rather show the history of Labor support for the European project since Delors. His idea back then was: 1. create a European competition and free trade framework, 2. be patient, 3. when there is a federal government then counter-attack with Euro-wide labor regulations. See why Brittish conservative don't like the idea despite its largely open-market-oriented philosophy?
HUMBLE QUESTION: Is the minimum wage mostly a federal matter in the US? (Confession of ignorance, and worse, Google-laziness.) If not, that might be a candidate explaination for why it's so low :-)
I recall hearing about how some economists (Card et al. namely) used state-specific rises in minimum wages as a natural experiment to measure their effect on the labor market. (For the record, they found as puzzling paradox: when the minimum wage increased, unemployment went down! Brother and sister economists correct me or elaborate if I'm wrong.)
Posted by: Jean-Philippe Stijns on December 5, 2002 09:25 PM>The Euro was (voluntarily) launched at PPP with the dollar, i.e. above parity, knowing that it would not command respect as a young currency (read 'reputation', and bear in mind that the Anglo-Saxon press back then was heralding that Southern members would push for a inflationary bias - yet another wrong prediction). As of today it has achieved parity.
On launch in January 1999, the Euro was trading from USD 1-80 down to USD 1-60 or so (FED data). It is now trading close to USD 1 and that is an improvement from the low points, which makes me very glad I didn't put any balances into Euros.
>Why the hell should we care about the loss of exchange revenues to change counters etc, please? They only generate disutility and extra cost... It's as if you complained that email is generating a deadweightloss by preventing people from always standing in line at the Post Office and generating revenue losses from stamp sales.
???? By the standards of the other major European economies, business in the UK is already well computerised. The deadweight business costs to the UK from joining the Euro would come from upgrading accounting software in computers and cash tills, converting accounts databases, changing all coin-slot machines, as in parking meters and soft drinks machines, adapting bank ATMs, and for personnel training. The great majority of businesses will gain no direct benefits from joining but will certainly incur deadweight switching costs.
It's extraordinary how all that is brushed off lightly when the EU Commission is evidently completely incapable of upgrading its own internal computer accounting system to prevent fraud. The EU Commission's Treasury accounts have not been audited for 10 years because the system is insecure as there is no audit trail for changes in records. Why hasn't that been sorted out years back?
>It was not my purpose to defend that argument, but rather show the history of Labor support for the European project since Delors. His idea back then was: 1. create a European competition and free trade framework, 2. be patient, 3. when there is a federal government then counter-attack with Euro-wide labor regulations. See why Brittish conservative don't like the idea despite its largely open-market-oriented philosophy?
The advisory council of the No-Euro campaign includes two previous Chancellors of the Exchequer (treasury ministers) - Denis Healey (Labour) and Nigel Lawson (Conservative) - two previous foreign secretaries - David Owen (Labour then Social-Democrat) and Malcolm Rifkind (Conseravtive) - plus a string of industrialists, retired heads of civil service departments and divisions, as well as academics, some of whom are otherwise noted for their leftist connections. It is a propaganda myth that only Conservatives are opposed to Britain joining the Euro.
A long succession of polls over years has reported that only a minority of respondents, ranging from 20% up to 30% on occasion, are in favour of Britain joining the Euro. An economic rationale for scepticism about the benefits to the UK from joining the Euro is set out in the current HM Treasury paper "Macroeconomic frameworks in a new global economy" at: http://www.hm-treasury.gov.uk/Pre_Budget_Report/prebud_pbr02/assoc_docs/prebud_pbr02_admacro.cfm
With the average inflation rate across the Eurozone close on double
the UK's on the same price index, the average standardised unemployment rate about 50% higher and the current GDP growth rate about half the UK's, why would Brits want to join such a botch up?
Bob Briant said: "Compare the Euro-US Dollar exchange rate on launch in January 1999 and now."
Sorry, wrong criteria. Look at the DM/US$ rate since the DM has been floating (mid 70's if I recall) and you'll realise that rates just tend to go up and down irrespective of monetary stability - sometimes dramatically (80's: if I recall properly DM/$ rate going from 3.20 to 1.40 in just 2 years, and bouncing up later on). Neither the Dollar nor the DM were notoriously unstable. It's best to look at inflation as an indicator of stability.
As Jean-Philippe pointed, the quest for EUROability (= fulfilling the admission criteria) led many hitherto undisciplined economies (Italy, Greece, ...) to take monetary and financial stability seriously. That is nowadays seen as a given, it certainly wasn't so until the (very) late 90's.
Jean-Philippe pointed to the lack of understanding the Anglo-Saxon press (and also part of academia) has of Euroland. I fully agree. It is the ECB's main problem in my opinion. Its policy of taking care of stability first and then and only then to care of other policy goals like growth (typical BuBa priorities) is being universally portrayed as mad/crazy/stupid/irresponsible in the US/UK. Not so in Germany. A commentary in Handelsblatt congratulated the ECB for having reached its goal of stability and rejoiced at the ECB now being able to care about growth. The Anglo-Saxon world's problem here is it's incapacity to imagine any monetary policy that isn't like the Fed's being sound too; it's the typical Not Invented Here syndrome. That's really a problem as the greater majority of financial and economical commentators are from the US/UK financial tradition. The ECB should do more PR and explaining; it should especially point to the continuity with the BuBa in terms of policy priorities.
PS: does anybody know were to get tables and graphs of historical exchange rates? The economist's converter doesn't seem to work anymore.
Posted by: Chris K on December 6, 2002 01:56 AMChris,
I find
http://pacific.commerce.ubc.ca/xr/data.html
is very good for a wide range of currencies, although the back data depends on the currency (i.e. lots for the dollar, not much for the Hryvna)
For a longer time period the Fed's site is quite good
http://www.federalreserve.gov/releases/h10/hist/
Posted by: Matthew Turner on December 6, 2002 04:32 AMAmerican economists might not have said it would be 'impossible' to launch the euro, but they certainly used to say it wouldn't happen, so I'm not particularly sure they have any special competence in this matter.
e.g. Milton Friedman in 1998
- BRIMELOW When we last spoke, you predicted that the European Monetary Union would collapse. And it did. Britain and Italy came out.
FRIEDMAN Yes, it collapsed. I've also been predicting that the euro would never happen. I'm still not sure I'm wrong. The costs have been enormous. To preserve the link between the franc and the deutsche mark, the French had to adopt tight monetary and fiscal policy. They got double-digit unemployment and recession. Britain and Italy floated and have prospered.
I get the distinct impression that someone thinks the European Leftists have learned how to suspend the laws of economics. We supposedly don’t understand such new and bold proposals. After all, we are “from the US/UK financial tradition.” Doesn’t pride usually go before a disastrous fall?
I will predict that in less than two years the United States will have better relations with Iran than with these Europeans. The latter are too far gone down the Socialist road.
Posted by: David Thomson on December 6, 2002 05:30 AMThanks Matthew, the Pacific Exange Rate Service link is just perfect.
Posted by: Chris K on December 6, 2002 05:32 AMInterestingly, the long decline in the Euro from 1.18 to 0.85 vs. the Dollar coincided with massive buying of US assets by Europe-based corporations. An unkind spin on that would be to label it "capital flight". The recent rally back to par for the Euro accompanied the drying up of those flows as the financial bubble bursting knocked the legs out from M&A activity globally, and gutted the balance sheets of large European financial firms, particularly the insurers.
Posted by: George Zachar on December 6, 2002 06:06 AM>Sorry, wrong criteria. Look at the DM/US$ rate since the DM has been floating (mid 70's if I recall) and you'll realise that rates just tend to go up and down irrespective of monetary stability - sometimes dramatically (80's: if I recall properly DM/$ rate going from 3.20 to 1.40 in just 2 years, and bouncing up later on). Neither the Dollar nor the DM were notoriously unstable. It's best to look at inflation as an indicator of stability.
Sorry. The conjunction of higher average unemployment and inflation rates in the Eurozone compared with the UK hardly suggests that EU institutions and Eurozone economies qualify for many credit points for economic stability. There is a conspicuous reluctance here to address frequently voiced ECB concerns about tardy structural reforms in Eurozone national economies. Duisenberg, president of the ECB, has repeatedly said that he believes the conjunction of high unemployment and inflation rates is due to tardy market reforms leading to inflexibility, not general demand deficiency. The risk of the ECB's rate cut is that it will lead to a rising inflation rate with little significant dent in the Eurozone's high average unemployment rate - "stagflation", in a word.
Exchange rate volatility of a currency is relevant as to whether the currency is likely to become an attractive international store of value.
>As Jean-Philippe pointed, the quest for EUROability (= fulfilling the admission criteria) led many hitherto undisciplined economies (Italy, Greece, ...) to take monetary and financial stability seriously. That is nowadays seen as a given, it certainly wasn't so until the (very) late 90's.
And now there is pressure to weaken or scrap the very fiscal discipline introduced by the Eurozone's Stability and Growth Pact because it is now regarded as too onerous. Time and again, we have had EU institutions announce rules or issue Directives, usually with much fanfare. A little way down the road there is then mounting pressure to bend or scrap the rules after better reflection or certain member state governments just ignore the rules. This has happened so often that the EU now has a serious credibility problem. International finance markets factor that in.
>Jean-Philippe pointed to the lack of understanding the Anglo-Saxon press (and also part of academia) has of Euroland. I fully agree.
The spin about poor, misunderstood EU institutions is a hoop some of us have been through many times before. It is immensely convenient but no longer credible to suggest this is all stoked by a hostile UK press when there is a substantial specialist literature on the circumstances necessary for a successful monetary union in Europe. I have mentioned above the Treasury's own paper on: "Macroeconomic frameworks in the new global economy" but there is much more besides.
My own view, often expressed, is that the Euro was driven through prematurely for political motives to hasten the pace of European integration with insufficient regard to structural convergence, market liberalisation, and absent automatic fiscal stabilisers or political institutions for fiscal coordination.
The Treasury's paper focuses on whether and when (irrevocably) fixed exchange rates are an appropriate framework to cope with economic shocks. The spread of inflation and unemployment rates across Eurozone national economies is a clear indication that convergence conditions have not been satisfactorily fulfilled as yet. There are good reasons for believing the UK's economy would become more volatile as part of the Eurozone, notably because the UK economy is significantly more sensitive to changes in interest rates and because variable-interest home mortgage debt is hugely more important in the UK as compared with the other major European economies. I readily concede that multinational manufacturing companies with plants in Britain and exporting to the Eurozone do incur costs and risks from a floating exchange rate for the Pound but that is only one of the factors in the overall balance.
I get fed up with this 'its all the Europhobic press' line - if anything the problem with the EU is a press (outside the UK of course) which is absurdly deferential in EU matters, helping create the pernicious myth that anyone taking a critical line on eg the Euro or the general direction of integration(and heaven knows its easy enough)obviously wears union jack underpants and has a photo of Margaret Thatcher by his or her bed. There has never been a proper debate about the Euro in mainland Europe. Thank God we are having one in the UK.
Posted by: jc on December 6, 2002 07:11 AMI get fed up with this 'its all the Europhobic press' line - if anything the problem with the EU is a press (outside the UK of course) which is absurdly deferential in EU matters, helping create the pernicious myth that anyone taking a critical line on eg the Euro or the general direction of integration(and heaven knows its easy enough)obviously wears union jack underpants and has a photo of Margaret Thatcher by his or her bed. There has never been a proper debate about the Euro in mainland Europe. Thank God we are having one in the UK.
Posted by: jc on December 6, 2002 07:11 AMI get fed up with this 'its all the Europhobic press' line - if anything the problem with the EU is a press (outside the UK of course) which is absurdly deferential in EU matters, helping create the pernicious myth that anyone taking a critical line on eg the Euro or the general direction of integration(and heaven knows its easy enough)obviously wears union jack underpants and has a photo of Margaret Thatcher by his or her bed. There has never been a proper debate about the Euro in mainland Europe. Thank God we are having one in the UK.
Posted by: jc on December 6, 2002 07:11 AMI get fed up with this 'its all the Europhobic press' line - if anything the problem with the EU is a press (outside the UK of course) which is absurdly deferential in EU matters, helping create the pernicious myth that anyone taking a critical line on eg the Euro or the general direction of integration(and heaven knows its easy enough)obviously wears union jack underpants and has a photo of Margaret Thatcher by his or her bed. There has never been a proper debate about the Euro in mainland Europe. Thank God we are having one in the UK.
Posted by: jc on December 6, 2002 07:11 AMI get fed up with this 'its all the Europhobic press' line - if anything the problem with the EU is a press (outside the UK of course) which is absurdly deferential in EU matters, helping create the pernicious myth that anyone taking a critical line on eg the Euro or the general direction of integration(and heaven knows its easy enough)obviously wears union jack underpants and has a photo of Margaret Thatcher by his or her bed. There has never been a proper debate about the Euro in mainland Europe. Thank God we are having one in the UK.
Posted by: jc on December 6, 2002 07:12 AMBob: monetary stability and economic stability are related but different things.
Bob and jc, the events leading to "Black Wednesday" at the time made it massively evident that even highly intelligent and qualified people like the Chancellor of the Exchequer and the head of the Bank of England did not have a clue about how the BuBa operated. This was also true of most of the UK press. To this day the only plausible explanation I have why they knew far too little is that they just didn't care. Little has changed up to this day and for example the ludicrous argument about the "intolerable unaccountability" of the ECB (i.e. the fact it is independent, just as the Fed and since '97 the Bank of England) is a still UK favorite. If you want to understand the ECB you can learn a lot by studying the BuBa's past. But I'm realistic and I don't expect that those who were happily ignorant at the time to get smart retrospectively now that the BuBa is just an ECB subsidiary.
By the way, there was a proper EURO debate at the time; you just had to read the continental press for example.
Posted by: Chris K on December 6, 2002 08:30 AMDoes the ECB head have to testify before the EuroParliament?
Posted by: George Zachar on December 6, 2002 08:49 AMSomeone will correct me if I'm wrong, but I believe not. The European parliament is of limited democratic relevance in any event.
I would like to know if the ECB's deliberations are published (as with the MPC of the Bank of England), or whether like the European Council of Ministers, it is veiled in secrecy. Open-ness is at least a form of democatic accountability. I suspect its all in secret. Again, correct me if I'm wrong.
Posted by: jc on December 6, 2002 09:20 AM"Does the ECB head have to testify before the EuroParliament?": dunno. Is it relevant?
Posted by: Chris K on December 6, 2002 09:25 AMthe ludicrous argument about the "intolerable unaccountability" of the ECB (i.e. the fact it is independent, just as the Fed...
The Fed chair appointment must be ok'ed by the Senate, I believe, and Greenspan testifies at least twice a year on the Hill.
While many Congressmen fawn over him and toss softball questions, others, ranging from conservative Republican Jim Bunning of Kentucky to Independent (and quite "liberal") Bernie Sanders of VT are quite harsh in their interrogations.
The ECB is certainly independent, but I believe it is far less accountable than our Fed.
Posted by: George Zachar on December 6, 2002 09:40 AM"I would like to know if the ECB's deliberations are published": you'll find a description of the ECB's accountability starting from page 45 of this document. On page 53 there is a table comparing the reporting duties of the main central banks. The ECB's obligations are very similar to those of the Fed. There's more on transparency starting from page 59.
Posted by: Chris K on December 6, 2002 09:54 AMPage 54 of the above mentioned document: Testimonies before Parliement.
Posted by: Chris K on December 6, 2002 10:03 AMExcellent link, much obliged.
Page 54: Unlike the Federal Reserve System, the Bank of England or the Bank of Japan, the ECB does not publish the minutes of the meeting of its main policy-making body, nor does it publish the votes of the members of the policy-making body.
Page 55: the President of the ECB appears
four times a year before the Committee on
Economic and Monetary Affairs of the
European Parliament, which was designated,
by way of the European Parliament’s Rules of
Procedure, as the competent committee for
relations with the ECB. These quarterly
testimonies have become the mainstay of
the Parliament’s activities in holding the ECB
accountable.
I found nothing on how the ECB head is himself selected, except for The political process whereby national governments appoint the members of the ECB’s decisionmaking bodies, i.e. the members of the Executive Board and the members of the Governing Council...[page 47] which seems to verify the notion that backroom horsetrading is the selection process, as exemplified by the Germany-France dustup in the sprint to the ECB's establishment.
Frankly, given we're still in the gestation process of Eurpean union, from a pure management perspective, greater "accountability" would be nigh unworkable. That is, once you set upon the goal of centralizing monetary policy and interest rates in one set of hands to hold sway over wildly different economies, any attempt to democratize the process would introduce chaos and instability.
Again, that assumes one has made the decision to go forward with the centralization.
Posted by: George Zachar on December 6, 2002 10:20 AMjc: Someone will correct me if I'm wrong, but I believe not. The European parliament is of limited democratic relevance in any event.
Yes, but it does provide outstanding opportunities in its capacity as a Gravy Train: http://www.yorkshiretoday.co.uk/ViewArticleMore.aspx?SectionID=55&ArticleID=223357&Page=1&ReturnUrl=NewsFrontMore.aspx
I never denied the Euro could happen. But I think it's a damn bad idea. Unless you think that all regions in the Euro Zone should be governed by the same monetary policy. Which I don't.
Posted by: Ian Welsh on December 6, 2002 11:20 AM'Why is creating a strong and stable currency such an accomplishment for the ECB?'
I thought all along the point of the ECB wasn't economic integration, or currency, or whatever, but an unspoken hope: that if all of europe switches to a single currency and quasi-transnational government, they won't end up fighting again.
Countries have long institutional memories. If I lived in France or Germany, I'd be looking for something to tie everyone down, even 50 years after ww2, and 80 after ww1.
Posted by: Jason McCullough on December 6, 2002 12:12 PMWhere’s George Orwell when you need him? May I suggest that some of you cease employing macroeconomic rhetoric? It seems to keep from getting to the nitty-gritty. Uniting the economies of Europe may be analogous to a desire to partner with one’s lazy and irresponsible brother-in-law. How do you prevent some nations from taking unjust advantage of the others? It’s really as simply as that.
Do you really want that wastrel in-law being able to get his beer money out of your personal bank account? Should this idiot be allowed to set up the work rules where he labors for only two hours to your four?
Posted by: David Thomson on December 6, 2002 12:19 PM“Countries have long institutional memories. If I lived in France or Germany, I'd be looking for something to tie everyone down, even 50 years after ww2, and 80 after ww1.”
This is definitely a laudable long term goal. it’s best, though, that the Europeans slow down and do it right. The current concept of a European Union seems like nothing more than a power grab by the arrogant socialist elite. A rushed marriage usually ends in a disaster.
Posted by: David Thomson on December 6, 2002 12:27 PMGod bless America!
Posted by: on December 6, 2002 04:28 PM>The current concept of a European Union seems like nothing more than a power grab by the arrogant socialist elite.
We really need to adjust perspectives when looking to see what's motivating political pressures for closer integration in Europe.
An appetite for power is certainly part of the assessment but it is seriously misleading IMO to take it that is the main motivation and that hunger for power is peculiar to socialist elites in Europe for it has not been so historically. If the centralising tendencies of socialist elites are certainly part of the present action, that is only one part of the emerging picture. Giscard d'Estaing, chairman of the Convention on the Future of Europe, is no socialist even if he is unquestionably a member of an elite - for a profile of him, see: http://news.bbc.co.uk/1/hi/world/europe/1712728.stm
A relevent question is whether some special symbolism was intended in his selection to head up the Convention. In 1970, as prime minister of France, he appointed Jean-Jacques Servan-Schreiber to his otherwise non-leftist cabinet. The significance of that was not, as I recall, lost on news commentators at the time for Servan-Schreiber was author of a late 1960s French best-seller: Le Defi Americain (1968), and a notable member of the distinctly non-Marxist soft-left in France, a somewhat sparsely occupied position on the national political spectrum then.
A central thesis of this book, published in translation as: The American Challenge (1968), is that Europeans should seek to resist the pervasive influence of American culture in Europe as intrusive. We can, I think, reasonably interpret Servan-Schreiber's appointment to Giscard's cabinet as intending to signal then that his views had some special resonance with the prime minister. There is no special reason since to suppose that Giscard d'Estaing has changed his views on American influence in Europe.
The other important insight is that credit for introducing state pensions in Europe goes back to Bismarck, as first chancellor of the German empire (1871-90), whose political sentiments were anything but socialist. The roots of what's called the European Social Model can be traced back to there and its latter day proponents are not necessarily socialist. Indeed, that has been the cause of many of the political impediments to reforming the Social Model.
President Chirac recently called upon the EU Commission for a plan to bail out the losses of EU ex-state telecoms companies because they paid too much at the auctions for 3G mobile licenses. That would make a useful precedent if it turns out that post-convention new Europe gets stuck in stagflation mode - high average unemployment rate across the Eurozone along with highish inflation. How long before a New Trade Strategy for Europe surfaces, as that sounds so much better than the benighted concept of Fortress Europe, which so alientated the left in Europe 20 years ago? Friedrich List was not a socialist, at least not of the mainstream variety: http://www.socsci.mcmaster.ca/~econ/ugcm/3ll3/list/