Monthly Archives: June 2010

Turkey’s bid to join the European Union is expected to make a little progress today.  I stress “a little”.  In most respects, the cause of Turkish membership of the EU is in worse shape than at any time since EU governments recognised Turkey as an official candidate in 2004.

The progress, minimal though it is, takes the form of an agreement by the EU and Turkey to open formal talks on food security. This is one of the 35 chapters, or policy areas, that a country must complete before it can join the EU.  It means that Turkey will have opened 13 chapters in total.  Of these, however, only one chapter has been closed.  If this is progress, the snail is king of the race track. 

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. 

After spending three days in Reykjavik and the northern town of Akureyri, just below the Arctic Circle, I am starting to get the feeling that Iceland’s entry into the European Union is anything but guaranteed.  I have met government ministers and officials who are eager to steer their country into the EU.  But I have met a fairly wide range of private sector businessmen, teachers, students and other Icelanders who are either flatly opposed or at best non-committed.

The most passionate opposition I’ve encountered has come from representatives of the powerful fisheries industry and the less powerful but politically influential agricultural lobby.  Here’s what the manager of the national dairy farmers’ association said: “If we entered the EU, our tariffs would have to go.  Our home market share would drop by 25 to 50 per cent.  The number of farmers would drop by 60 to 70 per cent.  EU membership would deal us a tremendous blow, there’s no doubt about it.” 

Will Iceland really join the European Union?  I have come to Reykjavik in search of answers.  In one sense, it’s the right time to be here: the skies are white for almost 24 hours a day at this time of year, appearing to throw light on everything.  But in another sense this promises to be a frustrating trip - Iceland itself doesn’t seem to know if it wants to be in the EU or not.

The opinion polls are not good.  After a long period in which a solid majority of about 60 per cent of Icelanders supported EU membership, things have turned upside down in recent months.  Support for EU entry was estimated to be as low as 28 per cent in one recent survey, whilst opposition now runs at about 60 per cent.  If Iceland is serious about joining the EU, it will have to hold a referendum, so these numbers matter.  Right now, however, we are a long way from a referendum – at least two years, and perhaps longer.  Much can change.

Enthusiasm for the EU was high when Iceland’s banking system and currency collapsed in 2008, prompting the introduction of a drastic austerity programme conducted under the beady eye of the International Monetary Fund.  But Iceland’s dispute with the UK and the Netherlands over how to repay British and Dutch savers who lost their money in Icesave, the failed online Icelandic bank, has changed public opinion. 

There is a gulf separating Germany from France on how to cure the eurozone’s ills, and it does not bode well.

Germany identifies the eurozone’s chief problems as excessive budget deficits, weak fiscal rules and a general culture of over-spending in the region’s weaker countries.  The remedy, say the Germans, lies in austerity measures, tougher punishments for rule-breakers and better housekeeping.  Germany is so sure that it has got the answer right that it is introducing a €80bn programme of tax increases and spending cuts – not because the German economy desperately needs such measures, but because the government in Berlin wants to set an example to other eurozone states.

France knows the eurozone has a fiscal problem, but it disagrees with the German view that immediate and drastic austerity measures are essential.  The French contend that, if budget hawks win the day, Europe’s fragile economic recovery will fade away and there may even be another recession (as Paul Krugman notes, an example often cited in support of this argument is the “Roosevelt recession” of 1937, when President Franklin D. Roosevelt, having just about dragged the US economy out of the Great Depression, inadvertently caused another economic downturn with a premature attempt to balance the budget). 

It was buried amid the excitement of the European Union’s summit in Brussels, but I’d like to draw your attention to a revealing report published on Thursday on the subject of European access to strategic raw materials.  Prepared under the supervision of the European Commission, the report names 14 critical materials that Europe risks not having enough of in the future – with potentially far-reaching implications for Europe’s economic development, not to mention its defence and security. 

The European Union is nothing if not addicted to targets.  Promises to achieve particular goals by specific dates are part and parcel of the EU’s daily business.  Sometimes the objectives are met, sometimes they are not met, and sometimes it’s hard to tell either way.  European monetary union, for example, was launched in 1999, but only after a two-year delay because a majority of member-states didn’t meet the criteria earlier in the decade (did Greece ever meet them?). 

Rumours are flying thick and fast that the troubles of Spain’s banking sector will require emergency attention at Thursday’s summit of European Union leaders in Brussels.  But it appears highly improbable that Spain will ask for help from the emergency financial stabilisation fund that EU finance ministers agreed to set up last month.  For one thing, the fund is not yet fully up and running.  For another, the Spanish government is emphatically not shut out of credit markets – a point underlined this morning by the successful issuance of €5bn worth of short-term government bills.

Spain’s economic vulnerabilities are obvious, and the implications of a Spanish crisis for the rest of the eurozone are no less clear.  French and German banks alone are exposed to some $450bn of Spanish debt, according to a report just published by the Bank for International Settlements.

But it is worth repeating that Spain is not Greece.  The Greek crisis originated in decades of mismanagement of the public finances, plus an unhealthy culture of corruption and use of the state for political patronage.  Although such practices are not unknown in Spain – and not unknown in the US, China and numerous other countries, for that matter – they have never attained Greek levels. 

As the EU prepares for its summit at the end of the week, the FT’s senior foreign affairs columnist Gideon Rachman chairs a debate with Mats Persson of Open Europe and Charles Grant of the Centre for European Economic Reform. They discuss the tensions between France and Germany over the southern European members’ debt crisis, and the call for greater budget scrutiny, which the UK is questioning.

Strong euro hid crisis, says EU chief (Tony Barber, FT)

Merkel pleads for calm amid coalition disputes (James Wilson, FT)