Axel Merk, June 20th 2005
Polish Prime Minister Marek Belka says the inability of the EU summit
to come to a budget compromise lies squarely in the selfishness of the
wealthy EU states.
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The EU has long been a vehicle to shift money from "wealthy" countries
such as Germany and the Netherlands to "poorer" countries. German
chancellor Schröder said: "The history of the EU is a series of
compromises paid for by Germany." At the same time, some of the newer
members in Eastern Europe have extremely aggressive tax policies, with
some charging no income taxes at all. There is nothing wrong with free
market competition and offering tax incentives; but conversely,"wealthy" states should be forgiven to think that there is no need to
subsidize the exporting of jobs to these countries.
And guess what: the "wealthy" EU states have no money to spend. It
comes as no surprise that no budget deal is reached. While much of the
media calls this embarrassing, it is not so different from national
governments anywhere in the world not agreeing on a budget.
Tony Blair says "we need a fundamental reform of how we spend money in
the EU." He points out that the EU will continue to spend 7 times as
much on agricultural subsidies in 2013 as it spends on research,
technology and education. What Blair highlights is important: the EU
needs to find a way to operate in the 21st century with 25 member
states or more. It needs to focus on how to deal with the challenges of
the future. Breaking with "business as usual" is a healthy wake up
call. The greatest challenges ahead include how to deal with
globalization, how to deal with the aging workforce, and how to deal
with mass unemployment.
If the French want to protect their welfare system, while
Eastern Europe and Britain adapt to changing requirements in the world,
they should all be allowed to pursue their paths. Each country has to
be held responsible for the consequences of their actions. Most
importantly, this means that one country that is fiscally irresponsible
must not be bailed out by another. We expect the yield spread (the
difference in interest rates paid on debt) between fiscally responsible
countries, such as Finland, and less responsible countries, such as
Italy, continue to widen. This does not mean that the Euro is in
jeopardy, but it has to be made clear who is ultimately responsible for
the debt, and the responsibility must lie with the national
governments. In the U.S., different states also pay different interest
rates on their debt. In California, Schwarzenegger decided to pledge
sales tax revenue as collateral to its new debt issues, and was able to
drastically lower the cost of borrowing in a state that was on the
verge of bankruptcy.
If anything, we see the lack of a budget deal in the European Union as
a positive sign on government spending. If there is no deal, less money
will be spent. Governments need to adjust their spending habits to the
economic environment -- countries like Germany and France continue to
have deficits exceeding 3% of GDP as agreed in the European 'stability
pact.' European politicians may not like Blair, but someone questioning
the norm is a good change of pace. Europeans want reform, and they want
to be involved - Blair might end up being a catalyst for change after
all.
What are the implications for the Euro? Again, we do not see this as a
crisis, neither do we see this as something entirely unexpected. The
current turmoil may keep a lid on the Euro's rise, but eventually, the
pressures caused by the current account deficit in the U.S. on the
dollar, in our view, outweigh the temporary uncertainties in Europe. In
the meantime, gold, the only currency with intrinsic value, is shining
and has reached new highs versus the euro.