Europe Ponders Tougher Budget Rules

Europe’s finance ministers agreed last week to review each other’s national budgets in the future to prevent one or several member states from imperiling the stability of the common currency as happened in Greece this April. The move may end being a step in the right direction but little more than that.

The finance chiefs of the European Union met in Luxembourg on June 7 where they first approved the €750 billion rescue mechanism that was put in place by their government leaders in the wake of the Greek crisis before discussing broader measures that should help prevent such a calamity from developing again. Besides the controversial peer review procedure — which, according to The Blue Nation, Britain, for one, will never accept — tougher sanctions should be enacted whenever member states violate the eurozone’s budget rules.

The existing Stability and Growth Pact prescribes that eurozone countries cannot maintain deficits over 3 percent of GDP and must prevent the size of their national debts from rising above 60 percent of GDP. The treaty allows members that are in violation of its rules to be fined yet throughout the euro’s eleven year history, many countries, including France and Germany, have waved the rules several times while no one dared propose sanctions.

The new peer review scheme is similarly lacking in strength. Germany has pushed for tougher sanctions since March with support from smaller Northern European states like the Netherlands, but the European Commission, so far, has hesitated to submit to such ideas. Before anything else, it is desperate to prevent further discord among the member states.

Measures that could actually force European government to abide by the rules — such as temporarily denying them voting power or withholding access to European funds — have quietly been pushed off the table, in part because many governments are struggling to cope with increasing Euroskepticism at home and dread the prospect of having to enact another major accord after the eight years it took to pass the Lisbon Treaty.

Another initiative that been silenced to death was Germany’s suggestion, supported by Finland and the Netherlands, to introduce the possibility of an “orderly sovereign default” for eurozone members. Other governments feared that to so much as speak of default in this climate would unnecessarily upset financial markets.

In general, much of Europe has been annoyed by Germany’s unilateral push for austerity and reform. Chancellor Angela Merkel startled markets and neighbors alike last month when her administration abruptly banned naked short selling of eurozone government debt and financial stock, as well as naked credit default swaps involving eurozone debt which are blamed by some for deepening Europe’s ongoing debt crisis. Both European Council President Herman Van Rompuy and European Commission President José Barroso told the chancellor last week that they oppose new institutions and treaties to deal with the situation. “We do not need new institutions to meet our goals,” a statement released by Van Rompuy’s office read. “We need more effectiveness.”

The chancellor should prepare to face many frustrated colleagues in Brussels June 17 when European leaders convene to discuss European economic governance. They will discuss economic policy again in Toronto a week later when the G20 summit starts there on June 26.

Europe Braces for Spending Cuts

Euros
Countries across Europe are bracing for deep public spending cuts

While the Greek debt crisis and subsequent decline of the euro continue to worry investors around the world, the people of Europe are preparing for severe austerity measures, and not just in the troubled south.

With hundreds of billions of euros pledged to stabilize the common currency, European leaders are forced to make major cutbacks at home.

The new Conservative-Liberal Democratic coalition ruling Britain unveiled its financial plans on Tuesday. Shortly after Queen Elizabeth II opened Parliament, Chancellor of the Exchequer George Osborne and his Chief Secretary to the Treasury David Laws announced a reduction in public spending of £6 billion to be enacted this year.

Nearly all departments of government in the United Kingdom will be affected by the spending cuts except education. According to The Blue Nation, not included in the £6 billion savings are those set to be made in the departments for health, international development and defense as they are to be reinvested in the “frontlines” of those services.

The money saved will be allocated almost entirely to reducing Britain’s deficit. Business leaders were quick to support the measures while further encouragement came from growth figures also released on Tuesday. The British economy was able to boast a modest growth rate of 0.3 percent compared to last quarter.

The German government announced heavy spending cuts on Monday. Starting next year, Germany will have to cut at least €10 billion each year until 2016 to bring its public finances back under control. Chancellor Angela Merkel is reportedly considered to raise taxes in order to bring down the deficit — in spite of her campaign promise not to.

The Dutch are already among the most heavily taxed people of Europe yet they, too, will be confronted with spending cuts in health care and social services. The retirement age is set to be raised with two years, from 65 to 67, while several political parties have proposed to drop out of the Joint Strike Fighter program in order to save billions of euros.

Italy, finally, joined the ranks of other South European economies as Portugal and Spain in announcing multibillion euro spending cuts. The Berlusconi government is preparing to cut so much as €25 billion both in 2011 and 2012 according to plans leaked to Italian media. Gianni Letta, the prime minister’s lieutenant, spoke of the need to make “heavy sacrifices” lest Italy follow down the path paved by Greece.

In order to rein in spending, government will freeze salaries in Italy while refraining from hiring additional public servants. Financial support for provincial and local governments will be cut with almost €6 billion and measures to fight tax evasion are expected to be announced soon.

The situation is complicated by politics in many of the aforementioned countries. While the British just elected a new Parliament, the necessary spending cuts have become part of election campaigns in Germany and the Netherlands. Angela Merkel’s ruling coalition was robbed of its upper house majority earlier this month after losing a local election in Germany’s most industrious of states. The Dutch are likely to elect a center-right government once again two weeks from now to deal with the cutbacks while the Italians may also head for the polls ahead of schedule as Silvio Berlusconi’s governments appears on the brink of collapse.

Saving the Euro

Bending the rules of euro management, European leaders and finance ministers agreed to an unprecedented effort to guarantee the stability of the eurozone with loans adding up to nearly $1 trillion (or €750 billion) this weekend.

In spite of the multibillion euro rescue package previously pledged to Greece, investors continued to worry about the unsound fiscal policies of other eurozone members, including Ireland, Italy, Portugal and Spain. The value of the euro sharply decreased in recent days while protests in the streets of Athens last week shed further doubt upon the country’s chance to recover — and pay back its loans. Read more “Saving the Euro”

Merkel Loses Upper House Majority

View of the Reichstag building in Berlin, Germany, September 12, 2009
View of the Reichstag building in Berlin, Germany, September 12, 2009 (Javan Makhmali)

In response to the Merkel government’s decision to support a Greek bailout last week, voters in Germany’s western state North Rhine-Westphalia voted overwhelmingly against the chancellor’s ruling party, robbing her coalition of its majority in the upper house of parliament.

North Rhine-Westphalia held elections on Sunday. The state, with its capital at Düsseldorf, is the economic powerhouse of Germany, bordering on the Netherlands with close to eighteen million inhabitants. Boasting the industrial Ruhrgebiet, with over €541 billion, North Rhine-Westphalia is responsible for about 20 percent of German gross domestic product.

Germans at large have been skeptical of coming to Greece’s aid with Angela Merkel pushing for tougher sanctions that are meant to prevent a similar calamity from ever developing again. Her promises failed to persuade voters however. The Christian Democrats lost heavily in North Rhine-Westphalia, down from 89 seats in 2005 to 67 today.

The party’s foremost contenders, the Social Democrats, also lost seats: they went from 102 in 2000 to 74 in 2005 to 67 today. Neither major party holds a majority therefore, nor does Germany’s ruling coalition of Christian Democrats and liberals which now commands eighty seats in North Rhine-Westphalia’s legislature, eleven short of a majority.

The Greens were the election’s greatest winners, doubling their share of voters from 6.2 to a little over 12 percent to win 23 seats. With the Social Democrats, they are just one seat short of a majority.

It seems unlikely that either party will agree to a coalition with communist successor parties, including Die Linke. The far left enjoys support in East Germany but has never partaken in government in the western part of the country.

A grand coalition between Christian and Social Democrats is no less attractive; the latter risk further alienating left-wing voters if they agree to a coalition with the right.

The alternatives include an alliance of Green, liberals and Social Democrats. Such a coalition previously ruled the state of Brandenburg between 1990 and 1994. The other variant would see the conservatives, Greens and liberals working together as they have in Saarland since November of last year. Both coalitions might be plagued by infighting between the smaller parties, both vying for support with the majority partner.

At the federal level, Sunday’s election denies Chancellor Merkel and her coalition a majority in the Bundesrat, the upper house of parliament that represents the sixteen different German states. North Rhine-Westphalia has six votes in the council. The ruling parties are now three votes short of a majority. For future legislation, the government will have to win support from states that are governed by other coalitions, such as Mecklenburg-Vorpommern or Hamburg. Both have three votes on the council and are respectively governed by alliances of Christian and Social Democrats and Christian Democrats and Greens.

German Soldiers in Afghanistan Protest

Defense Tech reports that German soldiers in Afghanistan are silently protesting against the perceived ambiguity of their mission’s purpose by snapping up patches that read “I fight for Merkel.”

The patches, technically illegal, are a big seller among German soldiers at Mazār-e Sharīf. The country’s ISAF forces have been hit hard in recent weeks, losing seven of their troops during the last month alone. Forty-four Germans have been killed since they first entered Afghanistan eight years ago. Adding to the losses is frustration with the relatively restrictive rules of engagement under which Bundeswehr personnel is forced to operate. Only under the rarest of circumstances may they aid fellow NATO countries in combat outside of their own zone.

Increasingly, German public opinion is turning against the mission. So much as 80 percent of the people is now in favor of pulling German forces out of Afghanistan. As more lives are lost, opposition to the mission is steadily mounting.

The government has in part itself to blame. From the start, politicians tried to portray the Afghan mission as little more than a police effort, stressing aid and development work while downplaying the very real risks involved. “Deaths, injuries, battles and heavy weaponry — none of these suit the picture that was painted back then,” observed the Financial Times Deutschland earlier this week.

Chancellor Angela Merkel’s failure to explain just what German troops are fighting and dying for is cause for concern both at home and abroad. German troops, evidently, are equally disheartened by their political leadership’s inability to state explicitly for once what their comrades are sacrificing their lives for.

With over 4,000 troops currently stationed in Afghanistan, Germany is the third largest contributor to ISAF in terms of numbers. Germany leads the Regional Command North which oversees the provinces of Badakhshan, Baghlan, Kunduz and Takhar.

Greece Continues to Divide Europe

German chancellor Angela Merkel met head on with the European Commission on the Greece question over the weekend. Chairman José Barroso is pushing European governments to commit to a Greek bailout this Thursday when member states convene in Brussels. Merkel is having none of it.

The chancellor declared on German radio on Sunday that no bailout is being considered. The Greeks themselves, after all, haven’t asked for help, she said. Barroso responded in today’s Handelsblatt, urging European states to find a solution, regardless of their internal politics. Read more “Greece Continues to Divide Europe”

Euro Resentment Demands New Rules

Euroskepticism is abound anew. Where previously economist Paul Krugman argued that Greece could have weathered its fiscal crisis if it had retained its own currency, Judy Dempsey reports that Germans are increasingly nostalgic for their Deutsche Mark.

“For Germans,” writes Dempsey, “the mark was more than just currency.” It represented the country’s postwar recovery, the Wirtschaftswunder that made Germany within mere decades the strongest economy of Europe.

Should they be forced to bail out an ailing eurozone neighbor as Greece, Spain, maybe Portugal, “resentment against Europe and the common currency” would certainly intensify among most Germans.

Chancellor Angela Merkel is in a tough spot. “She knows that the euro has been good for Germany, despite the resentment.” Stable exchange rates have encouraged trade and growth. “But bailing out Greece would be terribly unpopular.” Read more “Euro Resentment Demands New Rules”

Europe’s Egg Shortage

It’s difficult to get about some eggs in the eastern parts of the Netherlands these days. Supermarkets are experiencing serious shortages there because large supplies of eggs have been bought up by German wholesalers. The Netherlands has always been one of the world’s greatest exportors of eggs but usually not at a disadvantage to the country’s own market. So many more eggs are finding their way to Germany now because that country is set to ban battery hen cages next January 1 which has severaly damaged its own production already.

The European Parliament voted to ban battery cages in 1999 when so much as 93 percent of eggs in what was then the European Community came from battery hens. By 2012 all member states must have the battery system abolished but Germany has chosen to take the lead by outlawing the practice in 2010 already.

Of course, when parliament forced farmers to turn back the clock half a century it provided adequate protection against the import of cheap eggs from abroad by imposing extensive border and subsidy measures. To control imports and boost exports, the European Union uses sluice-gate prices, basic and variable import levies and export refunds on all shell eggs and products.

The sluice-gate price is a theoretical, calculated price at which poultry imports to Europe should be priced given world grain costs. The import levy is fixed at a level to protect European egg producers against imports from countries that benefit from market cereal prices considerably below the European average. The simple purpose of the measure is to prevent the import of eggs that are priced lower than their European counterparts.

A safeguard clause allows Brussels to suspend imports if the European market is threatened with serious disturbances such as a flood of low priced imports. Refunds are paid to European exporters from the Common Agricultural Policy budget to help them compete outside Europe where producer costs can be lower due to lower feed grain prices, for example.

Understandably, this is upsetting developing countries which are currently stalling negotiations within the World Trade Organization for one thing, precisely because the West, the European Union in particular, is increasingly protecting its own market, making it near impossible for Third World farmer to compete. Yet, with subsidies, European producers are able to penetrate their markets. (So next time you hear someone denounce “free trade” for destroying Third World agriculture, you know better than to nod in approval.)

The only ones not complaining right now are Dutch poultry farmers who are able to sell their eggs in Germany at prices unprecedented in recent history. Within the next two years however, they too will be forced to give up their battery cages. Inevitably, the supply of eggs will shrink throughout Europe, driving prices up only further.

Europe’s Uneven Recovery

Europe’s massive deficit spending is finally catching up with it. As Stefan Theil writes for Newsweek, markets reacted sharply this week “after rating agencies downgraded the public debt of Greece and warned about the outlook for several others.” With a deficit running at over 12 percent of GDP, Greece runs a serious risk of becoming the first developed country since the end of World War II to default on its debt.

Another South European country, Spain, is not much better off. We previously warned that its stubborn socialist policies are in fact hampering all of Europe; last week, Standard and Poor’s slapped a negative outlook on the country. Read more “Europe’s Uneven Recovery”

Merkel Government Under Pressure

Pressure is building on German chancellor Angela Merkel and her defense minister, Karl-Theodor zu Guttenberg, to account for the German-ordered NATO attack in Afghanistan last September that killed 142 people, many of them civilians.

Guttenberg, formerly minister for economics, took charge of the Defense Department last October as member of Chancellor Merkel’s second cabinet. The rising star of the German conservative party, Guttenberg outranked Merkel as the country’s most popular politician but he has come under siege from the Social Democrats, the former coalition partners, for changing his position on the Afghanistan attack.

Initially, Guttenberg called the bombings “appropriate” but three weeks ago, he claimed the opposite after assessing the incident in greater detail.

Germany’s previous defense minister already resigned over the affair and Guttenberg himself has discharged a top defense official and a state secretary for supposedly withholding information. Now, a parliamentary inquiry has been produced to study the bombings all the more thoroughly.

Although all but one of Germany’s political parties support the Afghan mission, there exists something of an obsession to wage a “clean” war there regardless of the changed circumstances. While the Taliban has gained ground, parliament’s mandate remains unchanged: German soldiers are to aid in the reconstruction of Afghanistan, not to be involved in any fighting.

The Social Democrats are leading the charge that seems specifically aimed at Karl-Theodor zu Guttenberg. He and the chancellor are to appear before committee next January. Yet the Social Democrats were the ones in power when the country decided to contribute to ISAF and they were still in power when the bombings occurred. Holding the man who has been defense minister for barely two months responsible seems utterly hypocritical and largely a political move before anything else.