The European Commission takes a lot of flak for being full of highly paid, unaccountable elitists brimming with a Euro-zeal that finds no match in the European population at large. So it is a pleasure to say that the Commission’s report on 10 years of European monetary union is a model of incisive analysis and sensible recommendations.

For sure, as Jean Pisani-Ferry and André Sapir wrote in the FT, the report has its fair share of “hype”, trumpeting the euro as a “resounding success”, etc, etc. But why not? Part of the Commission’s role is to be a cheerleader.

Sometimes this relentlessly upbeat tone leads to unfortunate results. The Commission’s regular economic forecasts, for example, are invariably too optimistic and produced a bit later than those of other reputable forecasters. In 10 years of following the eurozone economy, I have yet to meet one private sector economist who awaits the Commission’s predictions with bated breath.

But the report on monetary union is a different matter. It is pretty blunt about the problem of divergence - in terms of productivity and competitiveness - between the best-performing and worst-performing eurozone economies. It recognises that some countries have had a free ride inside the eurozone, avoiding painful reforms because they have the shelter of a fixed exchange rate and common monetary policy.

It doesn’t name these countries, of course - the Commission is too polite for that. But we all know who they’re talking about - Greece and Italy, principally, with a dash of Portugal, Slovenia and Spain thrown in.

It is not the Commission’s role to speculate in public about whether the reluctance of the eurozone’s laggards to reform themselves will one day lead to the disintegration of the euro area as we know it. But one friend of mine at the Commission told me the other day that the laggards “have about 10 to 15 years” before the price for their lack of reforms becomes too expensive to pay.

In other words, one or two countries might just drop out of the eurozone.

I’m not so sure about that. It strikes me that the political commitment of the eurozone countries to stick together is extremely strong. Would Germany and the Netherlands really throw Italy and Greece to the wolves (the cost of abandoning the eurozone would be astronomically high)?

Yes, you do hear a few Germans and Dutch fume privately about Mediterranean economic incompetence, recklessness and corruption. But in the end the northerners are pussycats.

More likely, a deal will be struck under which the strong and less strong find some middle position that will keep the eurozone intact but make it less internationally competitive. That should please the rest of the world, if no one else.

Remember the European Union’s “Lisbon Agenda“? Adopted by EU leaders almost exactly eight years ago, it was a programme that promised to turn the 27-nation bloc into “the most competitive and dynamic knowledge-based economy in the world” by 2010. 

Such was the lack of progress towards this laudable goal that by November 2004 an expert group led by former Dutch premier Wim Kok concluded that the Lisbon Agenda risked becoming “a synonym for missed objectives and failed promises”.

Today, the picture looks a whole lot rosier - at least if you believe the latest analysis prepared for the Lisbon Council think-tank by Michael Heise, chief economist of the Allianz Dresdner group in Germany. ”Despite the decade-long defeatism of the cynics, Lisbon is working,” says his report. (more…)

When I lived in Vienna in 1983, my apartment was next to a gay bar with scrubbed-out windows and an English-language name: Why Not.

I find myself asking the same question as the 10th anniversary of the euro approaches and a cosy atmosphere of self-congratulation in Brussels warms up. Why not? Why shouldn’t the European Union pat itself on the back?

After all, the euro is at present the strongest of the world’s major currencies. It underpins steady economic growth and a very high average standard of living for 318m people in 15 countries.

And if you live in Spain, I hear those purple 500-euro banknotes come in very handy.

But a new report by the Bruegel think-tank, a Brussels-based institute that specialises in economic issues, dispels any complacency about the longer-term future of Europe’s monetary union.

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European policymakers never admit to the slightest doubt about the prospects for the long-term unity of the eurozone. But they do occasionally make comments that allow a mere blogger to ask the fatal question.

Such a comment came on Monday, at a meeting of eurozone finance ministers, from the lips of Jean-Claude Trichet, the European Central Bank president. He made the observation that, if Europe’s monetary and economic union were to be designed all over again, it might make sense to have a "stability pact for unit labour costs".

Politically feasible or not, this is an intriguing idea. It hints at the long-term problem faced by a single-currency area in which some members keep down their labour costs, others don’t, and the competitiveness gap gets wider and wider. Can such a union stay together?

This may not be just idle speculation. Policymakers clearly feel some unease at the fact that, since the euro’s birth in 1999, Germany has raced ahead of other countries - above all, those in southern Europe - in containing labour costs. Between 1999 and 2006, Germany’s competitive advantage has gone up by 20 to 25 per cent compared with, say, Italy.

All this was disguised in the early years of Europe’s monetary union by Germany’s relative economic weakness, caused by the cost of reunification and the replacement of the D-Mark by the euro at a relatively high exchange rate. But now Germany has more than recaptured its competitiveness. It is beginning to do exactly what some forecasters in the early 1990s said it would. It is starting to dominate the European economy by means of monetary union.

No one should begrudge Germany its new-found success. The real question is what the eurozone laggards, especially Greece, Italy and Portugal, are going to do about their own performances. Corporate restructuring, more labour market flexibility, wage moderation, pensions and healthcare reform and cost-cutting all round are the usual answers. 

But are their societies ready to accept such measures, which would have to last many years to have a real impact? Perhaps the only way to ensure the survival of the eurozone in its present form would be to insist on enforceable cost-cutting rules, precisely as Trichet suggests.

Because one thing is sure. Neither the German government, nor German companies, nor the international shareholders of German companies are going to accept any relaxation in the drive for ever greater German competitiveness, merely to save the day for a few friends in the Mediterranean.

Central bankers never criticise each other in public. It’s an iron rule of global finance. And so it proved last weekend when EU finance ministers and central bankers gathered in the sunny Portuguese city of Porto.

Jean-Claude Trichet, the European Central Bank president, was offered the chance at a news conference to have a dig at Mervyn King, his Bank of England counterpart. The UK central bank had just agreed to provide emergency funds to Northern Rock, the beleaguered bank and mortgage lender. Only a few days earlier, King had made a hard-hitting speech that ruled out special assistance to institutions and investors that might be nursing losses because of risky activities.

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Brussels famously shuts down completely in August. There are no Commission meetings, no Parliament sessions and no backroom dealings between national diplomats in the Council. There are no press conferences, no announcements and even the ranks of Brussels’ 15,000 lobbyists appear to have thinned out. In other words, it is the perfect time to either take a holiday or spend an hour or two leafing through the latest International Monetary Fund report on the Eurozone. I chose the latter option, and having waded through almost 70 pages of colourful little graphs and bone-dry economical analysis I thought I might as well share some of the highlights.

Perhaps the most interesting issue raised by the Washington-based institution concerns the threat to financial stability in the Eurozone. The IMF’s experts point out that the Eurozone (the same might just as well be said about the EU as a whole) is prone to a very peculiar risk deriving from the gap between market integration on the one hand and the lack of supervisory integration on the other hand.

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The European Commission has been keen to play down the significance of Wednesday’s court ruling in the Schneider/Legrand case. In a precedent-setting decision, the European Court of First Instance ordered Brussels to pay damages to Schneider for wrongly blocking a merger with its French rival six years ago.

The antitrust watchdog stressed that it was held liable only for a fraction of the €1.66bn in damages claimed by Schneider. It also pointed out that the number of potential claimants was small - a view shared by most competition lawyers and antitrust experts. Indeed, at first glance it would appear the ruling only applies to the four companies that saw their mergers blocked by Brussels, but later managed to get the ruling overturned in court.

For the sake of European taxpayers, one can only hope that is true. But there are two other potential claimants that could inflict real financial pain on the EU regulator.

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Nicolas Sarkozy used the French election campaign to resurrect the old whine about "fiscal and social dumping": the idea that impoverished eastern European countries are undercutting companies in the west through lower tax rates and poor working conditions.

There are at least three good reasons why the French president should stop stoking those fears. First, there is scant evidence that jobs are really being "delocalised" to low-cost destinations in the east in large numbers. Such cases that exist are usually well publicised precisely because they are so rare.

Second, Mr Sarkozy is not going to get anywhere in his campaign to force eastern countries to put up their tax rates (like Slovakia’s 19 per cent flat tax). These countries do not have France’s excellent public services or transport systems and have to compete somehow. Tax is a national issue, not a matter for the EU or Paris.

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Jean-Claude Trichet, European Central Bank chief, won some grudging admiration from trade union bosses in Seville after giving a typically urbane explanation of why workers had to keep their pay claims down for the sake of the economy.

Mr Trichet argued at the European Trade Union Confederation’s four-yearly congress that low pay rises equalled low inflation, equalled stability, equalled more opportunities for the comrades’ unemployed brethren. "He was pretty good," admitted one veteran union baron.

If he had not been plausible he might have been given a much tougher time during a panel debate with senior union leaders I happened to be chairing. Because workers feel it is time they got their share of what has so far been almost a "payless recovery".

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Germany has urged the European Commission to relax its strict rules on state aid in cases where EU governments compete with non-EU countries for investment. Berlin wants to introduce a "matching" clause that would essentially nullify the Union’s ban on subsidies and allow governments to offer the same aid package as countries outside the union.

Germany’s proposal would mean that if, for example, a US federal state tried to attract investment from a South Korean chipmaker with the help of massive financial incentives, Germany or France could offer the same level of subsidies.

The plan will be discussed at an informal meeting of EU industry ministers starting today, and no doubt it will be wildly popular in other European capitals.

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