EUROPEAN UNION (Mini-articles) Index

Two-thirds of Europe's smaller companies are worried that higher social costs imposed by governments resulting from the Social Chapter of the Maastricht Treaty will make them less competitive, according to a new survey.

Small businessmen across Europe have deep-seated concerns about a continuing loss of competitiveness, claims the survey carried out by the European enterprise Centre, a research body founded by British venture capital group 3i. Neil Cross, international director of 3i, said: "The concern over competitive threats shown among European entrepreneurs highlights the need for labour costs to be kept under control if the european Union is to remain competitive in world markets."

Severe competition is cited as the major problem facing small and medium-sized businesses--those with fewer than 500 employees--by almost 700 companies in Britain, Germany, France, Italy and Spain that responded to a questionnaire. While 64 per cent of the total highlight social costs as a worry, 73 per cent of German firms were most concerned about this issue but only 52 per cent of British companies, no doubt because the British Government have opted out of the obligations of the Social Chapter.

As to competition from abroad, the British are less worried by the rest of Europe, but more worried about threats from the Pacific Rim than the French or the Germans.

From an article in the Daily Telegraph 5 June, 1995

What has happened to poor Mexico is a reminder of what could happen in Europe, including even Britain if we stayed silly. I witnessed this impending tragedy early because I was invited to a conference in Mexico City. The topic was how to run the approaching NAFTA. I was thrown in as the sole European, because I had written some articles arguing how badly we had mishandled a free-trade area here in Europe. To my delight, the united advice from all was: 'Have a NAFTA, but don't create any monstrous organisations to misorganise it. Let it be run wholly by the market, never by vast Bumbledoms like the Brussels Commission or the corrupt Europarliament. Don't add any pretended fixing of exchange rates like Europe's ERM'. Although in that early 1992, the ERM had not exploded, nearly everybody there saw it would soon.

But, alas, Mexico was inveigled into a 'crawling peg' half-fixed exchange rate between the peso and the dollar because of Clinton's Congress. When Mexico's trade deficit increased due to increased trade, they should have floated the peso lower. Instead, Mexico's Central Bank spent all its foreign exchange reserves in supporting the peso. The result was a crash. George Soros and other speculators won spectacular profits. They always do because they know that when there are fixed or semi-fixed exchange rates, the central banks will for a few hours kindly go on buying the currency at a higher price than their own borrowing power means it must that evening be worth.

From an article in the Sunday Times, 29 January 1995

Europe's top industrialists yesterday called for a new benchmarking system to measure competitiveness against the US and japan. In an effort ot break the cycle of growing unemployment, the European Round Table, comprising 47 top industrialists from such companies such as Bayer, BP, Fiat, ICI, Philips, Siemens and Unilever, proposes the EU sets a target of creating 10 million jobs in the porivate sector. It also want increases in gross national savings and an improved European share in world exports of manufactured products. The other two targets are better return on capital and improved earnings from intellectual property.

The proposal shows the EU compares badly with Japan and the US in various indicators chosen. The targets are set to ensure the EU will be ahead or near the performances of the US and Japan by the year 2000. The ERT envisages a target for gross national savings of 25 per cent of GDP, against the EU's present 20 per cent. This compares with 14.9 per cent in the US and 33.6 per cent in Japan between 1992 and 1994.

The EU also needed to reverse the trend in job creation in the private sector where it had shrunk by 3 per cent in the past two years while remaining stable in Japan and rising by 5.6 per cent in the US. Some deregulation and lower salary tax cuts were necessary.

From the Financial Times, 21 June 1995

In the debate over European Monetary Union (EMU), it is often alleged by proponents of a single currency that trade in the single market will be encouraged and facilitated by it. The other benefit put forward is that the costs of doing business will fall because currency exchange is reduced. This last "transaction cost" gain has been estimated by the European Commission, using surveys of financial businesses, at 0.4% of gross domestic product, but for a country with an advanced banking system at only a fraction of this, for the obvious reason that so much currency exchange is done by the stroke of a pen.

So disappointingly small is this benefit that attention has naturally refocussed on the gains to trade, and businessmen are often pressed into service to emphasise this. Yet the verdict of a huge number of academic studies is unanimous that exchange rate variability has at most a tiny negative effect on trade and may have none at all.

Econometric studies must, of course, be treated with caution; but economic theory, in line with common observation, supports the idea that companies can operate in different markets with separate currencies, while hedging themselves against exchange rate variations affecting overall profits. When a single currency is likely to reduce massively the nation's power to stabilise its economy, it is only right to keep the claims of its enthusiasts in cool perspective.

Letter to the Financial Times by Patrick Minford, 28 Feb 1995

There is an exclusive male club in Europe which some think is more powerful than the European Commission. COREPER, as it is known by its French acronym, is made up of the ambassadors of the 15 member states to the European Union. Few of these attending the weekly meeting in the Charlemagne building in Brussels would stand out in a crowd. To observe how Coreper operates is to understand how the European Union works. It is club with an accent on classical diplomacy and intimate deal-making, usually over lunch. One of the best-kept secrets in Brussels is that 90 per cent of EU decisions are resolved informally in Coreper before they even reach ministers.

The European Union is a community of sovereign states with elements of supranational powers vested in the European Commission, the EU's executive arm. The European Parliament, although slowly accruing power, remains a largely consultative body with powers to block rather than to initiate legislation. Coreper's position inside this power nexus is unique: it has legislative and decision-making powers. Its permanent presence in Brussels, alongisde the Commission, gives it an extra edge. As Europe's business shifts inexorably to Brussels, Corepor's role as a bridge to national capitals will grow in importance, so too its function as a clearing house for the Council Ministers, the official forum for EU decision-making.

"If you want smooth decision-making in Europe," concludes a Coreper veteran, "you must keep it away from the politicians."

From an article in the Financial Times, 11 Mar 1995

Pessimists still mutter that Britain's exclusion from any single European currency might wreck the City of London as an international financial centre. Last year they wailed that the siting in Frankfurt, not London, of the embryo European central bank, the European Monetary Institute (EMI), would start the rot. Instead, Germany's biggest bank, the Deutsche, has moved its main international business from Frankfurt to London! Its other big banks will follow.

A mildly amusing chaos now spreads in poor Frankfurt as the EMI tries to become the second great central bank in that city, beside the Bundesbank. If the fledgling EMI improbably swells to run a single currency and have real power, the two banks will hate each other more with every step along the road. The German central bank, Bundesbank, had hoped that that any single European currency would emerge through other European Community members accepting Germany's money discipline.

Understandably, many are becoming very cautious about the possibility of a European currency, particularly as the present European currency unit (ECU)--the vague unit of account dreamed up in 1974--should be increasingly used for financial transactions within Europe. As the ECU has fallen from DM3.08 to DM1.90 in its first 20 years, a devaluation of some 40%, "it goes without saying", snorts Hans Tietmeyer, Director of the German Bundesbank, "that the basket ECU is not attractive . . . in the eyes of the strong-currency countries."

From an article in the Sunday Times, 12 February 1995

Yesterday, the former UK Chancellor of the Exchequer, Lord Lawson said that if the monetary union is to be workable at all, it requires the full political union of member countries. This was the very same Lord Lawson who strove to put the pound into the exchange rate of the European Monetary System! He now argues that:

(a) the "no bail-out rule" -- that the European Central Bank would not finance an insolvent government -- cannot be an adequate discipline on national fiscal policies; (b) an independent Central Bank, "without full-bloodied political union", would "be constitutionally and democratically unacceptable"; (c) "no serious economist, without a European axe to grind . . . believes there is any great economic benefit to be secured from Emu";

(d) "the assertion that the single market . . . requires a single currency is manifestly nonsense"; (e) the contention "that Emu is required if Europe is to compete against the great economic powers of America and Japan" is "equally absurd"; (f) national monetary autonomy is no delusion;

(g) "the larger the union and the more disparate its membership, the greater the likelihood that the monetary policy will from time to time be seriously inappropriate for some parts of the union" (h) "the inevitable practical consequence would be irresistible political pressure to provide transfers of public funds to those members of the monetary union that had been damaged"; And, above all, (i) if political union is both a necessary consequence and, for many advocates, also the raison d'etre of Emu, it is also the case that "the successful creation of a multinational, multilingual, federal nation is particularly uncertain."

As for the UK, Lord Lawson's conclusion is that it can and must stand aside. This would neither entail, nor imply, leaving the EU. On the contrary, the UK should remain an enthusiastic participant, particularly over efforts to enlarge the EU to include countries of central and eastern Europe.

From the Financial Times, 4 July 1995