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News EU Stability Pact?

  1. Nov 25, 2003 #1

    Monique

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    Why don't Germany and France have to comply to the rules? According the the stability pact, a country in the EU is not allowed to have a budget deficit larger than 3%.

    France has 3.5% and Germany 4%, in a meeting last night the other EU countries voted on the issue. Spain, Finland, Austria, and The Netherlands voted to have Germany and France face the consequences as was agreed upon in the rules when they joined the EU.

    For some reason the other countries look the other way and let Germany and France carry on their deficit. This is a good thing?
     
  2. jcsd
  3. Nov 25, 2003 #2

    Monique

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    aghum, I meant this to go into politics :P
     
  4. Nov 25, 2003 #3

    jcsd

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    The exact rerasons are complex (which means I can't remember them), but it's generally thought that letting France and Germany off the hook is better for the stabilty of the EMU in the long run. It also has do with other countries thinking "if we punish them now, we are seting a precendce for when WE have a large deficit"
     
  5. Nov 25, 2003 #4

    Njorl

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    Two reasons:

    1. Those nations that voted to be leniant expect to find themselves in the same situation soon.

    2. In a disagreement between lions and antelopes, the lions will win even if they are outvoted. If France and Germany agree on something, it will be the new EU policy regardless of other nations opinions. Other nations only have a say when France and Germany disagree.

    Njorl
     
  6. Nov 25, 2003 #5

    jcsd

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    Njorl, I do rmeber hearing an in-depth analyse before the vote on why France and Germany proabbly would be let off the hook and though as I said I can't remeber the exact reasons why, it was said that it was generally seen as a healthy thing to do from a finacial poitn of view for the Euro.
     
  7. Nov 25, 2003 #6
    Healthy for the Euro because france and germany have a large chunk of the economy in their hands. This could be turned into a thread on "the war." I don't really want to do that, but I just gotta say one thing. When the US invaded iraq, I'm sure the economy of france and germany bogged down because of the lack of oil coming in. This explains their objection to the invasion in the first place, and then it explains them trying to get their greedy hands on the oil in Iraq.

    France and Germany should be dealt with objectively, not subjectively. They knew what was going to happen if this happened, and they shouldn't be immune to it.
     
  8. Nov 25, 2003 #7
    The reason it happened Monique is because the EU is an undemocratic con trick, carried out on us the people, by our so-called politicians.

    Thank God (well John Major actually) that us in the UK haven't joined the bloody Euro. It is a farce to have 'one financial policy' for so many different countries. The truth is the Euro is a child of the 50s/60s, pushed upon us by older politicians of a different era and mindset.

    The Euro will never work long term, the collapse of the Stability pact (incidentally insisted on by Germany at Maastrict) is the first sign. If the Euro starts to work against France's economy they will break every rule they want to, for as long as it suits them, with no regard for others.

    As for the democrocratic deficit at the Heart of Europe......
    (I'll stop now otherwise I'll get cross and end up kicking the cat!)
     
  9. Nov 26, 2003 #8

    Monique

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    Germany and France already have a budget deficit larger than 3% for three years now..
     
  10. Nov 26, 2003 #9
    Do you think Holland would have been allowed to break all the rules if it had been your country running up the big debts rather than the French and Germans?

    ...Oh look, A pig just flew overhead....... (an English saying that I hope you are familiar with!)
     
  11. Nov 26, 2003 #10

    selfAdjoint

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    I hope the delegates from The Netherlands are working to change that draft constitution to give small states more leverage, or you're all going to be subjected to a Franco-German jolly tyranny. Speaking of pig sayings, "Some animals are more equal than others".

    Europeans laughed at the US when the 2000 election was decided in the Electoral College instead of by popular vote. But that was a concession the small states in 1787 wrung out of the big ones to leverage sovreignty over population. Think about what you can do to achieve something comparable in the European Republic.
     
  12. Nov 26, 2003 #11

    Monique

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    Well, yes. My understanding is that the Dutch minister (Zalm) is the one fighting the hardest to play things by the rules. He was very surprised that the smaller countries seemed to have changed their minds and certainly was going to undertake more action.

    I am not sure what to think about the whole thing..
     
  13. Nov 26, 2003 #12

    Nereid

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    Don't forget the Finns!

    The irony is that Germany and France insisted on the pact at the beginning, fearing that the Italians and Greeks needed a strong stick to make them fiscally responsible. The Dutch and Finns (and others) took some painful measures to meet the criteria, and so join the euro from the beginning.

    The double irony is that the pact is bad economics, and Germany in particular would be much worse off if it were forced to adhere to it.

    The triple irony is that, instead of admitting they 'got it wrong' and should fix it, France initially blithely stated that everything was fine, they weren't breaking the limits, and in any case, no one could tell them what they should and shouldn't do!

    Adrian: the case for the UK to join the euro is overwhelming - everyone will be better off - but it's critically important to get the 'joining' exchange rate correct, oh, and the Stability Pact needs to be scrapped.
     
  14. Nov 27, 2003 #13
    Re: Don't forget the Finns!


    No it is not! How can handing over control of your economy to a collection of other countries, be beneficial? The fact that we are talking about how Germany and France run roughshod over the other nations seems to prove my point. If Interest rates were at a level that benefited France and Germany , but cost the UK dear, would it be changed to suit us? No.

    We are the worlds 5th biggest economy - why do we need to ask a collection of other countries to run it for us? What guarantee is there that it would be run for our benefit?

    If we get sick of the way Blair and Brown run the economy, we can vote them out... How do we vote for a change if we don't like the way the EU is running the economy? Where did the democracy go?

    Exchange rate fluctuations are a myth - blown up by the Euro enthusiasts. It cost about £20 on UK money markets at present to cover yourself for £1,000,000 of currency fluctuations. The pound is also one of the most stable currencies there is when measured against a basket of other currencies - Only 50% of out trade is with Europe, so why put all our eggs in that one basket?

    Prices went up in all the Euro countries with the introduction of the Euro, do we need that? And what about the costs involved in changing over?

    In most polls, the majority of people within the Euro zone are against it and wish it hadn't been introduced. But their politicians 'knew better' and forced it on them. What happened to democracy?

    How come the UK has almost negligble unemployment without the Euro, whilst Germany has almost 5 million with it? No major country in the Euro zone come close to our figures.

    How come the Economies of Sweden, Norway, the UK, and Switzerland are thriving, whilst those in the Euro zone are stagnating?

    There is NO sensible argument whatsoever, that joining the Euro will be beneficial for the UK. It is all political - the Euro is a POLITICAL idea, not an Economic one.

    And my final point... The people of the UK do not WANT to join the Euro. No other point, political, economic or otherwise has more weight than this one.



    Monique, you say:
    "I am not sure what to think about the whole thing.."

    Well, to help you out, you have been sold a lie by your politicians who have sold out to a Franco-German dream based on outdated political ideas.
     
  15. Nov 28, 2003 #14

    Nereid

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    Re: Re: Don't forget the Finns!

    My goodness, there's quite a lot here to comment on.
    Er, it is a union, and the UK would have a say in all decisions.
    Doesn't it rather prove the opposite? That 'the other nations' don't have to put up with it; Germany and France do NOT hold either a majority vote or a veto.
    This is a problem for all members of a currency union; indeed, even with a big country such as the US (substitute New York, New Jersey, and California). The point is the net benefit is greater than the temporary cost to any one member. While it's not really the same (initial conditions very imporant, significantly different dependencies), the logic for a currency union resembles that for free trade - the benefits are generalised but very real; the costs specific and somewhat painful for some groups.
    That's what a union is all about; giving up some control in return for a smaller say but a big, shared benefit.
    That's why it's important to get the constitution right, and ensure there is the right degree of democratic control. However, this has less to do with the economic benefits of a currency union than political horse-trading.
    Once inside the euro zone, the local currency will be even more stable. What direction is the trade with the rest of Europe going? At 50%, and rising, trade would benefit from a single currency. BTW, last time I looked, the UK was part of Europe, and a member of the EU.
    Yes, the UK economy has been well run, and has had its share of good luck. The German unemployment is part of the re-unification hang-over, and an object lesson in what can wrong if you get the exchange rates wrong when entering a currency union. It wasn't that the German government didn't have good economic advice, it's that they chose to ignore it in favour of political cookies.
    Businesspeople take advantage of every opportunity they can. Yes, there are transition costs.
    The governments and people of a country have the right to make whatever decisions they see fit. There may well be very good political reasons why a currency union is unacceptable. However, in the case of the UK and the euro, the economic case is clear-cut (with important pre-conditions).
     
  16. Dec 2, 2003 #15
    We'll obviously never agree on this, but fair enough.

    The economic case is not clear cut.

    You say that:

    Er, it is a union, and the UK would have a say in all decisions

    So, we go from full control of our destiny to one vote from 12 (soon to be 15, or 17 or more..). This is NOT a good deal.

    You also say:


    Doesn't it rather prove the opposite? That 'the other nations' don't have to put up with it; Germany and France do NOT hold either a majority vote or a veto


    But they ran roughshod over the smaller states and did what the hell they wanted to. How did this benefit Holland, or Italy, or Spain? They are running the Euro to suit themselves.

    You also say about interest rates not being set to benefit the UK:

    This is a problem for all members of a currency union; indeed, even with a big country such as the US (substitute New York, New Jersey, and California). The point is the net benefit is greater than the temporary cost to any one member. While it's not really the same (initial conditions very imporant, significantly different dependencies), the logic for a currency union resembles that for free trade - the benefits are generalised but very real; the costs specific and somewhat painful for some groups.


    Your answer shows exactly my point - it is costly, sometimes painful, and MAY have benefits for the whole group. No thanks! Why do you think that the benefits of free trade only occur if we sign up for the costly and failing Euro? Will Germany stop selling us their lovely cars? Will France refuse to sell us any wine if we have a different currency? How come the US is so powerful if most of the nations it trades with have diferent currencies?

    I could go on, but basically your claim that the ECONOMIC case is clear cut is not so. No one knows if it would benefit us or not. To me the evidence is clearly against joining, but to you perhaps not. But to claim that it is clear-cut is very flawed, particularly if you study the Euro countries economies at present and compare them to the UKs.

    Anyway, Blair knows that the British public will NEVER vote for it. If he thought we would, he'd have joined us up years ago. I'm just glad that Major's opt-out at Maastrict and position in the election afterwards ensured that no Gov't here can take us into the Euro without a Referendum.

    I'd welcome one, and that is real democracy!
     
  17. Dec 2, 2003 #16

    russ_watters

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    Re: Don't forget the Finns!

    I disagree.

    The way I see it, the EU was designed to try to level the economic playing field with the US. It is working, but Germany and England are big enough on their own they don't need it. And you said yourself, a major part of what the EU is is actually harmful to the larger countries in it.

    I agree with Adrian here - and a lot of economists do to. If I can find it, I'll link a good article I read this spring (I think in Money) that basically said Germany should continue to ignore the EU rules because they will not help [sorry Monique, I know it won't help Holland, but lets face it - countries are selfish]. Short term deficit spending DOES stimulate an economy. It also mentioned how England has little to gain and much to lose by joining the EU. The EU itself would benefit from England joining, sure - but thats not a good reason to join.
     
    Last edited: Dec 2, 2003
  18. Dec 2, 2003 #17

    Nereid

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    Clarification: overwhelming economically (politics is a different story)

    Russ, I'm struggling to understand your response.

    1) The UK (which includes England) is already in the EU; the question is whether the UK should join the euro club

    2) While there are tensions within the EU, AFAIK, there are no serious moves in the UK - or any other of the current 15 members - for it to leave (one wing of the Conservative Party makes noises, but it's mostly just posturing). If such a move were on the cards, 'secession' would be exceedingly painful - Parliament would be tied up for years simply re-doing all the legislation (just one small example)

    3) I'd be interested to read the Money article. To clarify one thing though: if by 'EU rules' you mean the 'Growth and Stability Pact', then you're right; it's bad economics (please see my own earlier posts). The issue is whether the UK joining the euro is in the (UK's) best interests. I stand by my comment: the (economic) case for the UK to join the euro is overwhelming. The caveats I entered are important; and I need to be quite clear that I'm talking only of economics (a great deal of Adrian's posts are about politics; beyond what I'm talking about).
     
  19. Dec 2, 2003 #18

    Nereid

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    economics? or politics?

    Actually, I think the economic part needs clarification: in the euro zone, the ECB (European Central Bank) makes the same sorts of decisions as the Bank of England (and the Fed) does. Who sets the broad economic goals for the ECB? How are these changed?

    To take your comment from another (political, not economic) perspective: under what conditions would you favour secession, of, say, Wales? or Cornwall?
    In the case of a properly constructed currency union, it's 'WILL (not may) have benefits'. The difficulty with 'general benefits, some short-term local pain' opportunities is how to clearly demonstrate that these courses of action can indeed deliver more + than -.
    Er, I don't. What I actually said was: "While it's not really the same (initial conditions very imporant, significantly different dependencies), the logic for a currency union resembles that for free trade - the benefits are generalised but very real; the costs specific and somewhat painful for some groups." (emphasis added). Free trade and currency unions are not the same thing; there are few (if any) circumstances under which free trade is economically contra-indicated; there are many in which a currency union is. However, in the case of the UK and the euro, it's a winner (caveats apply).
    Perhaps. Clearly politics can trump economics any day - just look at Bush's steel tariffs, the direct economic costs (e.g. to US manufacturers who use a lot of steel) far outweigh the small number of steel-workers' jobs (temporarily) saved. Clearly the Bush team felt the political prizes were worth the economic cost.
     
  20. Dec 7, 2003 #19
    Nereid, as you are so convinced about the wonders of the Euro, perhaps you would like to help Monique understand the benefits to her country...

    Holland is forecast to break the Stability pact next year as their budget deficit is aiming for about 3.25% of GDP. This is despite the fact that they have had big cuts in disability benefits and a freeze in civil service pay, but still costs are spiralling.

    The Dutch economy has contracted by 0.75% in 2003 and house prices are falling. The jobless rate has jumped from 4.2 to 5.4% and is expected to reach 7% by next summer.

    For this 'benefit' they have lost control of their destiny, and have a massive influx of EU regulations to cope with. The open border policy also means that large numbers of immigrants will be swelling the unemployment figures. The recent rise in the Euro on foreign exchange markets is a big and unforseen worry that will further depress the Euro zone countries. The future looks bleak and big majorities of the people in most Euro countries wish that they had never joined. However, due to the undemocratic nature of the EU, 'their' governments didn't give them the choice.

    In the (non-Euro) UK, unemployment remains very low, house prices are stable (falls in some areas, rises in others) the economy is doing well and we have an interest rate that suits the UK. As the pound has remained stable on the world currency markets for many years, our trade just moves from the beleagured Euro zone and thrives elewhere. Our flexibility encourages this.

    And you still think that we should give all this up for a 1/12th say in a failing project!! Your politics must be obscuring your view......
     
  21. Dec 10, 2003 #20

    Nereid

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    Nereid, restrain yourself!

    Adrian, I really don't know where to start. :frown:

    First, I think I said the Stability Pact is bad economics; the sooner the UK, the Netherlands, Finland, et al wake up and get it scrapped, the better.

    Unemployment rising? economy contracting? house prices falling? sounds like a recession. As our PF friends in the US (and others) learned, the economic cycle is not dead (despite the hype of some during the dotcom bubble). Recessions happen in all economies (yes, even the UK's ).

    EU regulations are just that, EU regulations . The case I was arguing (and continue to argue) was the benefit of joining a currency union. The Netherlands enacted the core regulations for the euro quite some time ago now, so whatever regulations they are working on now, for sure but a tiny fraction relate to the euro.

    Immigration is good for an economy, on balance, and very good socially. The success of the US as an economy owes a great deal to its immigrants, ditto Australia. Given the age structure of the 'native' Dutch, I submit that the pension/social security time bomb would be far, far more damaging without the immigrants (the UK will just as surely face many similarly painful challenges, and these will also be just as surely more painful if immigration is restricted).
    That tells you that the UK is not in a recession. Hence it is out of synch - business cycle-wise - with the euro zone. As your Treasurer (and PM) has said, it doesn't make sense to join the euro while the cycles are out of synch. They are right.

    One day, before too long, the business cycles will change, and the UK will enter a recession. Perhaps at the same time the Netherlands will be in a boom. Then there will be rising unemployment in the UK, falling house prices, and a contracting economy.

    Joining the euro will, on balance, make recessions in the UK milder; ensure more stable economic growth; etc.

    As always, of course, the decision is political, no matter how clear-cut the economic benefits would be.
     
  22. Dec 10, 2003 #21

    Monique

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    Re: Nereid, restrain yourself!

    Who says the immigrants are going to work and not make profit out of the welfare system? Who says there are enough jobs too, The Netherlands is already in the top 5 most densely populated countries and you have to be on a list for 4 years before a house becomes available to live in..

    The popularity of the Euro has decreased with 11% in The Netherlands (and this was before the decision that the pact needn't be obeyed), although 62% still view it as positive. In the Union the popularity has decreased with 6% in the past half year.
     
  23. Dec 11, 2003 #22

    russ_watters

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    Re: Clarification: overwhelming economically (politics is a different story)

    Yeah, musta been the "Growth and Stability Pact" and the Euro. I keep forgetting that its more complicated than just being a member of the club or not being one.
     
  24. Dec 11, 2003 #23

    Nereid

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    I'd forgotten that there were still countries where making a profit from the welfare system was possible

    Economics is founded on the 'assumption'* of human self-interest; if there are situations where the cost of profitting from the welfare system (e.g. length of gaol-time x probability of getting caught) is less than the benefit, an economist wouldn't be the least bit surprised that some people will take advantage of this. If this were not the intended result of the welfare policy, they'd say the policy didn't make economic sense. (In another culture, such 'rip-off' behaviour would be called entrepreneurial.) Time to change the welfare system?

    How much serious discussion is there in the Netherlands about the pension time bomb? For those already retired, or nearing retirement, it's not too much of a worry I guess; for young people like you, it must be giving you nightmares.

    *although it's an assumption, there's a lot of economics research done to characterise the nature and extent of 'self-interest'
     
    Last edited: Dec 11, 2003
  25. Dec 11, 2003 #24

    Monique

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    Actually, I haven't heard anything on that topic.. I know they are worried about the greying of society and that retirements are probably going to postponed when time requires it, not sure when the problem is going to become significant though.

    What is the retiring age anyway? 65 right? :O How is that even possible, what is the average age people live? 73 for males maybe?
     
  26. Dec 11, 2003 #25

    Nereid

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    Perhaps 73 is the life expectancy at birth for males in the Netherlands; it would certainly be considerably greater at age 65 :smile:

    You might be interested to do some research into this pension time bomb issue (as might Adrian, he seems to be relatively young too).

    Basically there are three ways to fund a revenue stream for people who have retired from the workforce due to 'old age' - government-backed schemes, employer schemes, and personal/individual schemes. The underlying principles of all schemes are similar - money is put away (and invested) now and the account drawn down upon retirement; the differences are in whose money is being put away, how it's being invested, and the arrangements for drawing down.

    Governments essentially have only one option for the source of money - taxes.

    Employers' source is something accountants call 'contribution', or 'gross profit'.

    Individuals can only use their own income.

    Investments, at the level we're considering here, are essentially the same in their outcomes; by definition (?), on average, governments, companies, and individuals can only do as well as 'the market', whether it's equity (stocks, shares), bonds, or cash (money). For simplicity, these returns are essentially the same as the rate of growth of the economy (in constant euros).

    Now, look at the age structure of the current population, the birth rates, immigration, long-term returns on investment (only a fool would bet they'd be greater than the long term economic growth rate), workforce participation rates (what proportion of the people ages 18 to 65 are already employed), etc. Make some conservative projections (note to Zero and Adrian: 'conservative' here means 'prudent'; it's not a political term).

    Last, project this into the future (again, making conservative assumptions), to estimate what sort of retirement income you, Monique, can realistically expect to get.

    I contend that if you do this using good data, and are realistic, you should be having nightmares.

    For Jonathan and Russ: the same calculations done in the US should certainly make you nervous, but seeing as the Latinos (especially) are so fecund, and as lots and lots of talented and energetic young people still want to migrate to the US, you may not worry too much.

    Oh, except for the fact that the Bush Administration can't keep its hands out of the social security 'lockbox'; that's your kids' college funds they're spending, as well as your monthly retirement checks.
     
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