Hope and uncertainty in Europe

[Sven R Larson <slarson@xxxxxxxxxxxx>]

There is turmoil in Europe right now. The constitutional talks have
stalled, which is basically good, and the stability pact has in
practice ceased to exist, which is also good. At the same time, the
euro has appreciated vs. the US$ to uncomfortable heights:

http://euobs.com/?aid=13928&rk=1

Part of the reason is that the ECB only focuses on inflation, and not
on growth and employment. Therefore they see no problem in keeping
interest rates relatively high. Another part of the reason is that the
Federal Reserve and the Bush administration are tired of helping the
Europeans recover from their recessions by opening the US market to
European exports. They're merrily keeping interest rates low and
flooding the markets with US government bonds. The message this sends
is that it's about time Europe stopped passing itself off as an
economic superpower and actually got the work done to become one.

In extension of this, the failure in the constitution talks might lead
to an institutional weakening of the euro, since a constitution,
properly designed, would have strengthened the case for a common
fiscal policy. That is unlikely to happen now, at least in the short
run, and the EU will still spend a good half of its budget on the
agricultural industry. With Germany, France and Britain not giving a
dime for the stability pact, and most of the small countries
strenuously defending it, it is uncertain whether Europe will be able
to get its fiscal policy act together within any reasonable period of
time. Hopefully Germany, France and Britain will be strong enough to
demand-pull the continent out of its recession, but it will take more
than passive underbalancing of the budgets. I hope we'll soon see
active deficits created by large, coordinated cuts in sales (value
added) taxes or liberation of a higher bracket of low incomes of
income taxes.

Europe needs a Bush tax cut, but turned upside down so the bulk of the
cuts are given to the lower income. Unlike in the US, low income
Europeans do in fact pay significant income taxes.

/srl

--
Dr. Sven R Larson
Department of Economics
Skidmore College
815, North Broadway
Saratoga Springs, NY 12866
(518) 580-5278