Sunday, June 05, 2005
Sound of discord puts Euro vision out of tune
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

It always surprises me that serious commentators do not draw the parallels more often between the two great initiatives aimed at closer European integration: the EU and the Eurovision Song Contest.

Both have similar histories. While the original six members of the EU were putting the finishing touches to the Treaty of Rome nearly half a century ago, the original seven members of Eurovision (including Switzerland, which abandons its traditional neutrality for such purposes) were having their first song contest.

For the first few years the original members — and Britain, which joined quickly — had it their own way, sharing the prize between them. Then it underwent the first of its great enlargements, a process that has continued: nearly 40 countries took part in last month’s event.

Now the “old” members of Eurovision, and I include Britain, don’t get a look in, despite putting up most of the cash. It is won by discordant tunes from places such as Latvia, Estonia, Israel, Ukraine and Greece. I used to be quite pro Eurovision but now I think we should consider withdrawing. It has become a racket in more ways than one.

Compare that with the EU. The original six (France, Germany, Italy, Belgium, Luxembourg and the Netherlands) made hay for many years, benefiting from their own free(ish) trade area during a time when global tariffs and quotas were high. The European Economic Community was not the only reason for the impressive recovery of the Continent’s war-devastated economies but it had quite a lot to do with it.

It may seem hard for younger readers to comprehend but until fairly recently Europe was much more successful economically than America. Between 1960 and 1973 the original six grew by an average of 3.3% a year, compared with 2.5% for America. Italy, now regarded as rather an economic basket case, turned in sparkling growth of 4.4%.

In the 1970s Germany was probably the world’s most rounded example of a successful economy, with low unemployment and good growth — even during global turbulence — and social cohesion.

That was when, as many Germans concede, fundamental errors were made. Regulations were introduced to enhance social protection, on the assumption that nothing could derail the German economic locomotive. Those regulations, the “Rhineland” model, became the basis of the European social model.

At the same time the six were joined by others — Britain, Ireland and Denmark in 1973 — followed by Greece in 1981, Spain and Portugal in 1986, Austria, Finland and Sweden in 1994 and the biggest enlargement, at least in terms of members, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia, last year.

Gradually, the sands have shifted within the EU. Smaller, newer members have done better than older, larger members. As with Eurovision, there is a bias in favour of the newer underdog. Often in the EU that is backed up with hard cash. Ireland is successful enough to stand on its own feet now, but there is no doubt that largesse from the EU’s structural funds and the common agricultural policy gave it a big leg-up.

New members also benefit from a honeymoon period that is almost built into EU entry. In the early years new entrants get the maximum gains from the removal of trade barriers, together with an influx of foreign investment. That, together with the fact that they tend to begin from a position of much lower per capita incomes than existing members, means there is scope for a period of “catch-up”, often prolonged.

Those advantages wear off, not just because some of them are essentially one-off in nature but also because the longer that countries are part of the EU, the more they acquire the growth-destroying aspects of the European social model. The benefits of being in the EU diminish over time, to the point where they become questionable.

Britain, interestingly, did things differently. The honeymoon period after entry more than three decades ago was pretty disastrous. But by not integrating as fast as other member states, both in terms of the single currency and the social model, it secured advantages even as a mature member state. One bit of good news last week was that Britain retained its opt-out on the 48-hour week.

What happens now? Nobody is talking about an EU break-up, but there is plenty of speculation, touched on here last week, about the euro. A report last week that Germany’s finance minister and Bundesbank (central bank) president have discussed its demise was swiftly played down but that did not kill the idea of a break-up. Stern, the German magazine that reported the discussion, says the euro is making the Federal Republic’s economy “kaputt”; no translation needed.

Stuart Thomson, an economist with Charles Stanley Sutherlands, the stockbroker, says in a paper that the French referendum was the beginning of the end for the euro. The collapse of monetary union is inevitable by 2020, he writes, as the European economy comes under increasing pressure, not least from its ageing population. But he also sees a 50% probability of a partial break-up by 2008, with one or more member states withdrawing, partly as a consequence of the currency- market backlash as China and Japan abandon their policy of supporting the dollar through large-scale purchases of US government bonds.

History is on his side. Every previous monetary union in Europe, such as the Latin Monetary Union of 1865-1927, ended in failure.

There is a difference between a “no” vote on the constitution by EU citizens and a “yes” to the collapse of monetary union. But the constitution votes by the French and Dutch show that support for the European project is thin and that people’s willingness to make economic sacrifices for what used to be seen as the greater good of EU integration is limited.

The music is coming to a close and the euro isn’t singing any more.

PS: Grim, that’s the only way to describe the data coming out of Britain at the moment. The purchasing managers’ index suggests that UK manufacturing is contracting at a faster rate than it is in Europe. The CBI says retailing remained depressed last month, while the retail traffic index from consultants SPSL showed barely any improvement in May from April’s extremely subdued levels, despite two bank holidays during the month.

Financial markets are picking up the shift from worries about inflation to concerns about growth. The US 10-year bond yield dropped below the symbolic 4% level last week.

The monetary policy committee will meet this week to consider what to do about this slowdown. It will be the last meeting for Marian Bell, who has been a quiet but sensibly dovish MPC member, before her replacement by David Walton of Goldman Sachs. A “no change” verdict this week looks assured, but how long before the first cut? The money markets, having thought the Bank would hold off any move until November, are now starting to focus on the possibility of an August cut, which would be exactly a year after the MPC’s last hike. It depends, as always, on the data. The committee will take a bit of shifting but if the figures continue as weak as they have been in the past few weeks, the markets may well be right.

Finally, thanks to the many people who pointed out a slip of the pen and an inversion of the euro-sterling rate in last week’s story on the single currency and the referendum votes. The euro, to put things straight, has fallen in the past few days from just below £0.69 to just above £0.67.

From The Sunday Times, June 5 2005

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