Jacques Chirac’s proposal for a looser Stability and Growth Pact once again caused distress in Brussels. This move by the French president, however, echoes an opinion that resonates in several European capitals. In an interview last week with the Financial Times, German Chancellor Gerhard Schroder asked, indirectly but clearly, the European Central Bank to be bolder by further cutting interest rates.
The bankers in Frankfurt expressed their opposition by repeating that, in their opinion, the priority for European governments should be to push for structural reforms which would improve their competitiveness and help their economies adapt better to new realities.
It is obvious that the ECB does not intend to cut interest rates soon. If the euro continues on its present course of slowly sliding against the dollar, the ECB will be even more reluctant to cut rates. Another reason for a delay in any interest rate change is this week’s confirmation by the Council of European finance ministers (Ecofin) that Bank of France governor Jean-Claude Trichet will replace Wim Duisenberg at ECB’s helm in early November. Moreover, Trichet is considered an anti-inflation hawk. The ECB vice-president, Lucas Papademos, although not so austere a monetarist, is said not to share a belief in the policy of sharp cuts espoused by Federal Reserve Chairman Alan Greenspan.
But, whatever the bankers’ objections, the politicians are not prepared to surrender. The Stability Pact’s rule prohibiting budget deficits greater than three percent of a country’s GDP is too restrictive, must go and, eventually, will go. We should remind ourselves that this rule was imposed by the extremely conservative technocrats of Helmut Kohl’s Christian Democratic government in Germany, fearing what would happen if the Social Democrats prevailed in the coming elections (as they did).
At the same time, on the opposite shores of the Atlantic, George W. Bush obtained Congress’s approval to further extend the federal budget deficit by continuing government subsidies and providing new tax cuts in favor of the wealthy.
The European Union’s economic policy remains conservative, while the United States moves toward greater state (“socialist”?) intervention. If the European’s efforts end with a recession and the US economic recovery is confirmed, then we will face a paradox.
As if to back Chirac’s proposal, a report by a so-called committee of wise men to European Commission president Romano Prodi (“An Agenda For a Growing Europe: Making the EU Economic System Deliver”) calls for looser fiscal policies and “reinterpreting” the three-percent rule on budget deficits.
This development is not at all favorable to the Greek economy, even though its deficit is 1.1 percent of GDP. First of all, the countries that will be allowed to expand their deficits will be those in imminent threat of recession, which Greece is not. However, Greece’s high growth is mostly the result of excessive consumption and EU fund inflows, and not of internal, competitive growth. Second, Greece’s public debt is so high — at 105 percent of GDP, the third highest in the EU, and soon to become the second-highest as Belgium moves quickly to cut its own debt — that it will certainly not be allowed to loosen up its fiscal policy. On the contrary, it will be forced to take tougher measures to cut the debt. This means more, and drastic, privatizations, which will cause political problems as it will entail clashing with public sector unions.
This is not the only danger for Greece in Europe’s slippery environment. The committee of wise men also proposes drastic cuts in regional aid, proposing instead that regional aid become a national policy, funded from national budgets. The wise men propose that aid focus on research, training and new technologies.
The bankers in Frankfurt expressed their opposition by repeating that, in their opinion, the priority for European governments should be to push for structural reforms which would improve their competitiveness and help their economies adapt better to new realities.
It is obvious that the ECB does not intend to cut interest rates soon. If the euro continues on its present course of slowly sliding against the dollar, the ECB will be even more reluctant to cut rates. Another reason for a delay in any interest rate change is this week’s confirmation by the Council of European finance ministers (Ecofin) that Bank of France governor Jean-Claude Trichet will replace Wim Duisenberg at ECB’s helm in early November. Moreover, Trichet is considered an anti-inflation hawk. The ECB vice-president, Lucas Papademos, although not so austere a monetarist, is said not to share a belief in the policy of sharp cuts espoused by Federal Reserve Chairman Alan Greenspan.
But, whatever the bankers’ objections, the politicians are not prepared to surrender. The Stability Pact’s rule prohibiting budget deficits greater than three percent of a country’s GDP is too restrictive, must go and, eventually, will go. We should remind ourselves that this rule was imposed by the extremely conservative technocrats of Helmut Kohl’s Christian Democratic government in Germany, fearing what would happen if the Social Democrats prevailed in the coming elections (as they did).
At the same time, on the opposite shores of the Atlantic, George W. Bush obtained Congress’s approval to further extend the federal budget deficit by continuing government subsidies and providing new tax cuts in favor of the wealthy.
The European Union’s economic policy remains conservative, while the United States moves toward greater state (“socialist”?) intervention. If the European’s efforts end with a recession and the US economic recovery is confirmed, then we will face a paradox.
As if to back Chirac’s proposal, a report by a so-called committee of wise men to European Commission president Romano Prodi (“An Agenda For a Growing Europe: Making the EU Economic System Deliver”) calls for looser fiscal policies and “reinterpreting” the three-percent rule on budget deficits.
This development is not at all favorable to the Greek economy, even though its deficit is 1.1 percent of GDP. First of all, the countries that will be allowed to expand their deficits will be those in imminent threat of recession, which Greece is not. However, Greece’s high growth is mostly the result of excessive consumption and EU fund inflows, and not of internal, competitive growth. Second, Greece’s public debt is so high — at 105 percent of GDP, the third highest in the EU, and soon to become the second-highest as Belgium moves quickly to cut its own debt — that it will certainly not be allowed to loosen up its fiscal policy. On the contrary, it will be forced to take tougher measures to cut the debt. This means more, and drastic, privatizations, which will cause political problems as it will entail clashing with public sector unions.
This is not the only danger for Greece in Europe’s slippery environment. The committee of wise men also proposes drastic cuts in regional aid, proposing instead that regional aid become a national policy, funded from national budgets. The wise men propose that aid focus on research, training and new technologies.
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