AkhandBharat
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Analysis: Eurozone economic government? Nein danke!
(Reuters) - Does the euro zone need an economic government? Oui, say the French. Nein danke, say most Germans.
Beyond the immediate push for stricter budget discipline to surmount Europe's sovereign debt crisis, the struggle over the future of the single currency area revolves around the idea of a political authority to coordinate national economic policies.
To many in the outside world -- the United States, China and the International Monetary Fund -- the crisis has exposed design flaws in Europe's 11-year-old monetary union and shown the need for closer political and economic union to underpin it.
French President Nicolas Sarkozy wants leaders of the 16 nations that share the euro to hold regular summits, backed by a dedicated secretariat, which French officials say would develop common economic, social and fiscal policies.
"A few months ago, it was difficult to even pronounce the words 'economic government' inside the euro zone," Sarkozy told reporters in March. "Now the euro zone has taken this up."
German Chancellor Angela Merkel reluctantly signed up to the concept for the first time in February but insisted that an "economic government" must involve all 27 EU countries to avoid new dividing lines, and must not create any new bureaucracy.
In German eyes, the purpose would be to promote sound fiscal policy and press laggards to make structural reforms to pension systems and labor markets to make their economies competitive.
After talks in Berlin last week, European Council president Herman van Rompuy appeared to endorse Merkel's view, noting that non-euro countries such as Britain were economically and financially closely linked to the euro zone.
"We need no new institutions to meet our goals. We need more effectiveness," he said.
But since Britain, under a new government led by the Eurosceptical Conservatives, has said it would not participate in closer integration of economic policies, any such initiative is likely to be based in practice on the euro zone.
DIRIGISTE TRADITION
The French have pressed for an "economic government" since long before the birth of the single currency, seeking to standardize everything from working hours to business taxes at their levels.
Governments of both the left and right, steeped in the dirigiste economic tradition of 17th century statesman Jean-Baptiste Colbert, sought a political counterweight to the independent European Central Bank.
That is precisely the German nightmare. For Berlin, the ECB must be totally independent of governments with the sole mandate of ensuring price stability in the tradition of the Bundesbank.
"When the Germans heard the French talk about an economic government, it sounded quite dangerous because of our orthodoxy that you don't question the independence of the central bank," said Joachim Fritz-Vannahme, project manager on the European programme at Germany's Bertelsmann Foundation.
However, he said the German political establishment had come to realize in the crisis that Europe needed a more solid economic union, although they remain allergic to the idea of fiscal transfers to poorer euro zone states.
Most euro zone countries now agree on the need for stronger macroeconomic surveillance to avert future crises, going beyond public finances to address other risks such as excessive private sector borrowing, asset price bubbles and economic imbalances.
Jean-Pisani Ferry, director of the economic think-tank Bruegel, argues that by better coordinating economic policies, Europe can overcome the growing gap in competitiveness between wealthy north European states and the rest of the currency area.
That would require Berlin to modify its own export-focused policies of wage restraint and dampening domestic demand.
"The problem is that the Germans don't want to take responsibility for the stability of other economies, as the United States has done for decades," he said. "They are not yet ready to pay the price, in policy terms, of their dominance."
In some French eyes, an "economic government" should also keep the euro at a favorable exchange rate for exports and pursue an active, interventionist industrial policy.
"We need at least a minimum of harmonization of labor costs and taxes in the euro zone," said a senior French government official who is a specialist in Franco-German relations. "We will also have to address social policy one day."
Such ideas are anathema to low-tax euro zone countries such as Ireland and Slovakia, which thrive on tax competition, and to those nations that insist taxation is a national prerogative, such as Britain and the Netherlands.
They also go down badly with Germany's ruling center-right parties, especially the pro-business Free Democrats, who suspect the French of protectionism and meddling in the market economy.
A former centrist European prime minister, speaking on condition of anonymity, said an "economic government" might agree maximum and minimum levels for corporate tax rates, social charges and benefits -- as the EU now has for value added tax and fuel taxes -- to keep euro zone economies competitive.
That would imply a leveling upward for most newcomers from central and eastern Europe, which would be strongly resisted. It would hardly make the European economy more competitive against countries such as China and India.
On the other hand, an "economic government" could launch a political drive to strengthen the EU's single market in areas such as services and energy, where there are still barriers defended by vested business and trade union interests.
The trouble is that neither France nor Germany wants that.
http://uk.reuters.com/article/idUKTRE65D0TO20100614
(Reuters) - Does the euro zone need an economic government? Oui, say the French. Nein danke, say most Germans.
Beyond the immediate push for stricter budget discipline to surmount Europe's sovereign debt crisis, the struggle over the future of the single currency area revolves around the idea of a political authority to coordinate national economic policies.
To many in the outside world -- the United States, China and the International Monetary Fund -- the crisis has exposed design flaws in Europe's 11-year-old monetary union and shown the need for closer political and economic union to underpin it.
French President Nicolas Sarkozy wants leaders of the 16 nations that share the euro to hold regular summits, backed by a dedicated secretariat, which French officials say would develop common economic, social and fiscal policies.
"A few months ago, it was difficult to even pronounce the words 'economic government' inside the euro zone," Sarkozy told reporters in March. "Now the euro zone has taken this up."
German Chancellor Angela Merkel reluctantly signed up to the concept for the first time in February but insisted that an "economic government" must involve all 27 EU countries to avoid new dividing lines, and must not create any new bureaucracy.
In German eyes, the purpose would be to promote sound fiscal policy and press laggards to make structural reforms to pension systems and labor markets to make their economies competitive.
After talks in Berlin last week, European Council president Herman van Rompuy appeared to endorse Merkel's view, noting that non-euro countries such as Britain were economically and financially closely linked to the euro zone.
"We need no new institutions to meet our goals. We need more effectiveness," he said.
But since Britain, under a new government led by the Eurosceptical Conservatives, has said it would not participate in closer integration of economic policies, any such initiative is likely to be based in practice on the euro zone.
DIRIGISTE TRADITION
The French have pressed for an "economic government" since long before the birth of the single currency, seeking to standardize everything from working hours to business taxes at their levels.
Governments of both the left and right, steeped in the dirigiste economic tradition of 17th century statesman Jean-Baptiste Colbert, sought a political counterweight to the independent European Central Bank.
That is precisely the German nightmare. For Berlin, the ECB must be totally independent of governments with the sole mandate of ensuring price stability in the tradition of the Bundesbank.
"When the Germans heard the French talk about an economic government, it sounded quite dangerous because of our orthodoxy that you don't question the independence of the central bank," said Joachim Fritz-Vannahme, project manager on the European programme at Germany's Bertelsmann Foundation.
However, he said the German political establishment had come to realize in the crisis that Europe needed a more solid economic union, although they remain allergic to the idea of fiscal transfers to poorer euro zone states.
Most euro zone countries now agree on the need for stronger macroeconomic surveillance to avert future crises, going beyond public finances to address other risks such as excessive private sector borrowing, asset price bubbles and economic imbalances.
Jean-Pisani Ferry, director of the economic think-tank Bruegel, argues that by better coordinating economic policies, Europe can overcome the growing gap in competitiveness between wealthy north European states and the rest of the currency area.
That would require Berlin to modify its own export-focused policies of wage restraint and dampening domestic demand.
"The problem is that the Germans don't want to take responsibility for the stability of other economies, as the United States has done for decades," he said. "They are not yet ready to pay the price, in policy terms, of their dominance."
In some French eyes, an "economic government" should also keep the euro at a favorable exchange rate for exports and pursue an active, interventionist industrial policy.
"We need at least a minimum of harmonization of labor costs and taxes in the euro zone," said a senior French government official who is a specialist in Franco-German relations. "We will also have to address social policy one day."
Such ideas are anathema to low-tax euro zone countries such as Ireland and Slovakia, which thrive on tax competition, and to those nations that insist taxation is a national prerogative, such as Britain and the Netherlands.
They also go down badly with Germany's ruling center-right parties, especially the pro-business Free Democrats, who suspect the French of protectionism and meddling in the market economy.
A former centrist European prime minister, speaking on condition of anonymity, said an "economic government" might agree maximum and minimum levels for corporate tax rates, social charges and benefits -- as the EU now has for value added tax and fuel taxes -- to keep euro zone economies competitive.
That would imply a leveling upward for most newcomers from central and eastern Europe, which would be strongly resisted. It would hardly make the European economy more competitive against countries such as China and India.
On the other hand, an "economic government" could launch a political drive to strengthen the EU's single market in areas such as services and energy, where there are still barriers defended by vested business and trade union interests.
The trouble is that neither France nor Germany wants that.
http://uk.reuters.com/article/idUKTRE65D0TO20100614