Suddenly, Euro isn't looking so good
By Mark Landler The New York Times
TUESDAY, MAY 31, 2005
FRANKFURT While France's rejection of the proposed European Union
constitution was a stinging rebuke to its own leaders, it could have
even more painful consequences for Europe's economic integration and
for the most tangible symbol of that unity: the euro.
By throwing Europe's political future into disarray, analysts said,
the vote could undermine the currency's stability - not this week or
next, but down the road, as it seeks to expand to more countries.
The euro wobbled in trading on Monday, hitting a seven-month low of
$1.246 to the dollar, before closing at $1.247. It has fallen steadily
against the dollar in recent weeks, as traders expected a negative
vote in France, and steeled themselves for another rejection in the
Netherlands on Wednesday.
Few experts are predicting a full-blown crisis for the euro, which is
safeguarded by the politically independent European Central Bank.
France's refusal to ratify the constitution will have little impact on
the day-to-day running of the monetary union, or on the maze of
regulations that govern the world's largest trading bloc.
Still, as Paul De Grauwe, a Belgian expert on the currency, put it:
"Something psychological has changed."
Like many economists, he believes that the long-term viability of the
euro hinges on the gradual political integration of the countries that
use it - a prospect that, for now at least, is dashed. "Can the euro
survive without a political union?" De Grauwe said. "I have my
doubts."
The French "non" also has troubling implications for Europe's economic
future.
The vote, analysts said, was essentially a protest against President
Jacques Chirac and his government for not doing enough to protect the
French people from the crosscurrents of the global economy.
With politicians in Germany and Italy under attack for similar
reasons, they said, there is a risk that the Continent's largest
economies could veer off into protectionism and state interventionism,
which could deepen their budget deficits and hinder their efforts to
revive stagnating output.
"There is a real fear of the world outside Europe, of globalization,"
said Aurore Wanlin, a fellow at the Center for European Reform, a
research institute in London. "And there is a strong rejection in
France and Germany of the need for economic reform. People just don't
get it."
Spooked by a sullen, rebellious electorate, European leaders may give
up trying to force sweeping changes in their social welfare systems.
Publicly, at least, they are likely to talk down Anglo-Saxon-style
economic policy, with its emphasis on competition and untrammeled
markets.
"There has been a parallel debate in Germany and France about
neo-liberalism versus the social market economy," said Allan
Saunderson, chairman of EuroZone Advisors, a consulting firm in
Frankfurt. "That debate is going to become a lot sharper over the next
few months."
At its heart, he said, the question is whether these countries can
still afford to prop up costly welfare states in a global economy. In
Germany, the debate has mutated into an occasionally vitriolic attack
by the governing Social Democratic Party on big companies and foreign
investors.
As politicians try to win back the affection of voters, some
economists fear that they will cater to narrow domestic interests
rather than to broader European principles, like those enshrined in
the constitution. That trend is already visible in the European
Commission's inability to enforce fiscal discipline among the 12
countries that use the euro.
Analysts say the French vote will further vitiate the Stability and
Growth Pact, the agreement that limits deficits within the euro zone.
"I could very well see the next French prime minister saying the
Stability Pact is a European law, and European laws no longer have
legitimacy with the French people," said Daniel Gros, the director of
the Center for European Policy Studies, a research group in Brussels.
France, Germany, Italy, and Portugal are all in violation of the
deficit limits.
Italy, with its mushrooming public debt, recession, and declining
competitive position, is of particular concern to economists. Gros
said that if the Italian government did not arrest the slide, it could
lose a decade's worth of work in preparing itself to adopt the euro.
Among other casualties of France's rejection may be the further
expansion of the European Union - a process that economists often
advocate as a way to spur European growth and competitiveness.
Some Western European leaders are likely to resist the entry of Turkey
into the union because it would stir voters' fears of an influx of
low-cost foreign workers. Fear of such cheap labor helped fuel the
anti-Europe camp in France.
In Germany as in France, voters used a vote - in this case a state
election in North Rhine-Westphalia on May 22 - to send a message to
Chancellor Gerhard Schröder that his reform policies were not working.
Germany's jobless rate, at 11.8 percent, is a record in the post-World
War II period.
Schröder responded to his party's trouncing by moving up Germany's
federal elections by a year, to September.
Angela Merkel, the conservative leader who was confirmed Monday as the
opposition's candidate for chancellor, took pains to play down her
reputation as a radical reformer. Merkel said that her policies would
be focused on finding "ways of creating work for people in Germany."
And she reiterated her opposition to Turkey's entry into the EU.
Some economists argue that Germany has progressed further in its
overhaul than either France or Italy. By keeping a lid on wage
increases, German companies have managed to regain their
competitiveness. German exports continue to thrive, even as the
domestic economy falters.
"Germany is about to diverge," he said. "If they elect a new
government, they can say, 'We're the solid anchor of Europe."'
Some argue that Europe's anchor is no longer any one country, but its
single currency. Saunderson described the euro as a "port in the
political storm," noting that the European Central Bank has so far
been immune from pressures to lower interest rates to prop up
faltering economies.
The euro's recent decline versus the dollar, he added, was not a bad
thing since it would help European exporters regain their edge in
foreign markets. Shares of exporters like Porsche of Germany and
Philips Electronics of the Netherlands, rallied on Monday.
Still, currency analysts took a more jaundiced view, saying that the
euro's fall could quicken if the Netherlands followed France in its
rejection of the constitution. Carsten Fritsch, an analyst at
Commerzbank, said that the political upheaval could even unnerve some
foreign central banks, which have been converting a portion of their
reserves from dollars into euros.
FRANKFURT While France's rejection of the proposed European Union
constitution was a stinging rebuke to its own leaders, it could have
even more painful consequences for Europe's economic integration and
for the most tangible symbol of that unity: the euro.
By throwing Europe's political future into disarray, analysts said,
the vote could undermine the currency's stability - not this week or
next, but down the road, as it seeks to expand to more countries.
The euro wobbled in trading on Monday, hitting a seven-month low of
$1.246 to the dollar, before closing at $1.247. It has fallen steadily
against the dollar in recent weeks, as traders expected a negative
vote in France, and steeled themselves for another rejection in the
Netherlands on Wednesday.
Few experts are predicting a full-blown crisis for the euro, which is
safeguarded by the politically independent European Central Bank.
France's refusal to ratify the constitution will have little impact on
the day-to-day running of the monetary union, or on the maze of
regulations that govern the world's largest trading bloc.
Still, as Paul De Grauwe, a Belgian expert on the currency, put it:
"Something psychological has changed."
Like many economists, he believes that the long-term viability of the
euro hinges on the gradual political integration of the countries that
use it - a prospect that, for now at least, is dashed. "Can the euro
survive without a political union?" De Grauwe said. "I have my
doubts."
The French "non" also has troubling implications for Europe's economic
future.
The vote, analysts said, was essentially a protest against President
Jacques Chirac and his government for not doing enough to protect the
French people from the crosscurrents of the global economy.
With politicians in Germany and Italy under attack for similar
reasons, they said, there is a risk that the Continent's largest
economies could veer off into protectionism and state interventionism,
which could deepen their budget deficits and hinder their efforts to
revive stagnating output.
"There is a real fear of the world outside Europe, of globalization,"
said Aurore Wanlin, a fellow at the Center for European Reform, a
research institute in London. "And there is a strong rejection in
France and Germany of the need for economic reform. People just don't
get it."
Spooked by a sullen, rebellious electorate, European leaders may give
up trying to force sweeping changes in their social welfare systems.
Publicly, at least, they are likely to talk down Anglo-Saxon-style
economic policy, with its emphasis on competition and untrammeled
markets.
"There has been a parallel debate in Germany and France about
neo-liberalism versus the social market economy," said Allan
Saunderson, chairman of EuroZone Advisors, a consulting firm in
Frankfurt. "That debate is going to become a lot sharper over the next
few months."
At its heart, he said, the question is whether these countries can
still afford to prop up costly welfare states in a global economy. In
Germany, the debate has mutated into an occasionally vitriolic attack
by the governing Social Democratic Party on big companies and foreign
investors.
As politicians try to win back the affection of voters, some
economists fear that they will cater to narrow domestic interests
rather than to broader European principles, like those enshrined in
the constitution. That trend is already visible in the European
Commission's inability to enforce fiscal discipline among the 12
countries that use the euro.
Analysts say the French vote will further vitiate the Stability and
Growth Pact, the agreement that limits deficits within the euro zone.
"I could very well see the next French prime minister saying the
Stability Pact is a European law, and European laws no longer have
legitimacy with the French people," said Daniel Gros, the director of
the Center for European Policy Studies, a research group in Brussels.
France, Germany, Italy, and Portugal are all in violation of the
deficit limits.
Italy, with its mushrooming public debt, recession, and declining
competitive position, is of particular concern to economists. Gros
said that if the Italian government did not arrest the slide, it could
lose a decade's worth of work in preparing itself to adopt the euro.
Among other casualties of France's rejection may be the further
expansion of the European Union - a process that economists often
advocate as a way to spur European growth and competitiveness.
Some Western European leaders are likely to resist the entry of Turkey
into the union because it would stir voters' fears of an influx of
low-cost foreign workers. Fear of such cheap labor helped fuel the
anti-Europe camp in France.
In Germany as in France, voters used a vote - in this case a state
election in North Rhine-Westphalia on May 22 - to send a message to
Chancellor Gerhard Schröder that his reform policies were not working.
Germany's jobless rate, at 11.8 percent, is a record in the post-World
War II period.
Schröder responded to his party's trouncing by moving up Germany's
federal elections by a year, to September.
Angela Merkel, the conservative leader who was confirmed Monday as the
opposition's candidate for chancellor, took pains to play down her
reputation as a radical reformer. Merkel said that her policies would
be focused on finding "ways of creating work for people in Germany."
And she reiterated her opposition to Turkey's entry into the EU.
Some economists argue that Germany has progressed further in its
overhaul than either France or Italy. By keeping a lid on wage
increases, German companies have managed to regain their
competitiveness. German exports continue to thrive, even as the
domestic economy falters.
"Germany is about to diverge," he said. "If they elect a new
government, they can say, 'We're the solid anchor of Europe."'
Some argue that Europe's anchor is no longer any one country, but its
single currency. Saunderson described the euro as a "port in the
political storm," noting that the European Central Bank has so far
been immune from pressures to lower interest rates to prop up
faltering economies.
The euro's recent decline versus the dollar, he added, was not a bad
thing since it would help European exporters regain their edge in
foreign markets. Shares of exporters like Porsche of Germany and
Philips Electronics of the Netherlands, rallied on Monday.
Still, currency analysts took a more jaundiced view, saying that the
euro's fall could quicken if the Netherlands followed France in its
rejection of the constitution. Carsten Fritsch, an analyst at
Commerzbank, said that the political upheaval could even unnerve some
foreign central banks, which have been converting a portion of their
reserves from dollars into euros.
FRANKFURT While France's rejection of the proposed European Union
constitution was a stinging rebuke to its own leaders, it could have
even more painful consequences for Europe's economic integration and
for the most tangible symbol of that unity: the euro.
By throwing Europe's political future into disarray, analysts said,
the vote could undermine the currency's stability - not this week or
next, but down the road, as it seeks to expand to more countries.
The euro wobbled in trading on Monday, hitting a seven-month low of
$1.246 to the dollar, before closing at $1.247. It has fallen steadily
against the dollar in recent weeks, as traders expected a negative
vote in France, and steeled themselves for another rejection in the
Netherlands on Wednesday.
Few experts are predicting a full-blown crisis for the euro, which is
safeguarded by the politically independent European Central Bank.
France's refusal to ratify the constitution will have little impact on
the day-to-day running of the monetary union, or on the maze of
regulations that govern the world's largest trading bloc.
Still, as Paul De Grauwe, a Belgian expert on the currency, put it:
"Something psychological has changed."
Like many economists, he believes that the long-term viability of the
euro hinges on the gradual political integration of the countries that
use it - a prospect that, for now at least, is dashed. "Can the euro
survive without a political union?" De Grauwe said. "I have my
doubts."
The French "non" also has troubling implications for Europe's economic
future.
The vote, analysts said, was essentially a protest against President
Jacques Chirac and his government for not doing enough to protect the
French people from the crosscurrents of the global economy.
With politicians in Germany and Italy under attack for similar
reasons, they said, there is a risk that the Continent's largest
economies could veer off into protectionism and state interventionism,
which could deepen their budget deficits and hinder their efforts to
revive stagnating output.
"There is a real fear of the world outside Europe, of globalization,"
said Aurore Wanlin, a fellow at the Center for European Reform, a
research institute in London. "And there is a strong rejection in
France and Germany of the need for economic reform. People just don't
get it."
Spooked by a sullen, rebellious electorate, European leaders may give
up trying to force sweeping changes in their social welfare systems.
Publicly, at least, they are likely to talk down Anglo-Saxon-style
economic policy, with its emphasis on competition and untrammeled
markets.
"There has been a parallel debate in Germany and France about
neo-liberalism versus the social market economy," said Allan
Saunderson, chairman of EuroZone Advisors, a consulting firm in
Frankfurt. "That debate is going to become a lot sharper over the next
few months."
At its heart, he said, the question is whether these countries can
still afford to prop up costly welfare states in a global economy. In
Germany, the debate has mutated into an occasionally vitriolic attack
by the governing Social Democratic Party on big companies and foreign
investors.
As politicians try to win back the affection of voters, some
economists fear that they will cater to narrow domestic interests
rather than to broader European principles, like those enshrined in
the constitution. That trend is already visible in the European
Commission's inability to enforce fiscal discipline among the 12
countries that use the euro.
Analysts say the French vote will further vitiate the Stability and
Growth Pact, the agreement that limits deficits within the euro zone.
"I could very well see the next French prime minister saying the
Stability Pact is a European law, and European laws no longer have
legitimacy with the French people," said Daniel Gros, the director of
the Center for European Policy Studies, a research group in Brussels.
France, Germany, Italy, and Portugal are all in violation of the
deficit limits.
Italy, with its mushrooming public debt, recession, and declining
competitive position, is of particular concern to economists. Gros
said that if the Italian government did not arrest the slide, it could
lose a decade's worth of work in preparing itself to adopt the euro.
Among other casualties of France's rejection may be the further
expansion of the European Union - a process that economists often
advocate as a way to spur European growth and competitiveness.
Some Western European leaders are likely to resist the entry of Turkey
into the union because it would stir voters' fears of an influx of
low-cost foreign workers. Fear of such cheap labor helped fuel the
anti-Europe camp in France.
In Germany as in France, voters used a vote - in this case a state
election in North Rhine-Westphalia on May 22 - to send a message to
Chancellor Gerhard Schröder that his reform policies were not working.
Germany's jobless rate, at 11.8 percent, is a record in the post-World
War II period.
Schröder responded to his party's trouncing by moving up Germany's
federal elections by a year, to September.
Angela Merkel, the conservative leader who was confirmed Monday as the
opposition's candidate for chancellor, took pains to play down her
reputation as a radical reformer. Merkel said that her policies would
be focused on finding "ways of creating work for people in Germany."
And she reiterated her opposition to Turkey's entry into the EU.
Some economists argue that Germany has progressed further in its
overhaul than either France or Italy. By keeping a lid on wage
increases, German companies have managed to regain their
competitiveness. German exports continue to thrive, even as the
domestic economy falters.
"Germany is about to diverge," he said. "If they elect a new
government, they can say, 'We're the solid anchor of Europe."'
Some argue that Europe's anchor is no longer any one country, but its
single currency. Saunderson described the euro as a "port in the
political storm," noting that the European Central Bank has so far
been immune from pressures to lower interest rates to prop up
faltering economies.
The euro's recent decline versus the dollar, he added, was not a bad
thing since it would help European exporters regain their edge in
foreign markets. Shares of exporters like Porsche of Germany and
Philips Electronics of the Netherlands, rallied on Monday.
Still, currency analysts took a more jaundiced view, saying that the
euro's fall could quicken if the Netherlands followed France in its
rejection of the constitution. Carsten Fritsch, an analyst at
Commerzbank, said that the political upheaval could even unnerve some
foreign central banks, which have been converting a portion of their
reserves from dollars into euros.
FRANKFURT While France's rejection of the proposed European Union
constitution was a stinging rebuke to its own leaders, it could have
even more painful consequences for Europe's economic integration and
for the most tangible symbol of that unity: the euro.
By throwing Europe's political future into disarray, analysts said,
the vote could undermine the currency's stability - not this week or
next, but down the road, as it seeks to expand to more countries.
The euro wobbled in trading on Monday, hitting a seven-month low of
$1.246 to the dollar, before closing at $1.247. It has fallen steadily
against the dollar in recent weeks, as traders expected a negative
vote in France, and steeled themselves for another rejection in the
Netherlands on Wednesday.
Few experts are predicting a full-blown crisis for the euro, which is
safeguarded by the politically independent European Central Bank.
France's refusal to ratify the constitution will have little impact on
the day-to-day running of the monetary union, or on the maze of
regulations that govern the world's largest trading bloc.
Still, as Paul De Grauwe, a Belgian expert on the currency, put it:
"Something psychological has changed."
Like many economists, he believes that the long-term viability of the
euro hinges on the gradual political integration of the countries that
use it - a prospect that, for now at least, is dashed. "Can the euro
survive without a political union?" De Grauwe said. "I have my
doubts."
The French "non" also has troubling implications for Europe's economic
future.
The vote, analysts said, was essentially a protest against President
Jacques Chirac and his government for not doing enough to protect the
French people from the crosscurrents of the global economy.
With politicians in Germany and Italy under attack for similar
reasons, they said, there is a risk that the Continent's largest
economies could veer off into protectionism and state interventionism,
which could deepen their budget deficits and hinder their efforts to
revive stagnating output.
"There is a real fear of the world outside Europe, of globalization,"
said Aurore Wanlin, a fellow at the Center for European Reform, a
research institute in London. "And there is a strong rejection in
France and Germany of the need for economic reform. People just don't
get it."
Spooked by a sullen, rebellious electorate, European leaders may give
up trying to force sweeping changes in their social welfare systems.
Publicly, at least, they are likely to talk down Anglo-Saxon-style
economic policy, with its emphasis on competition and untrammeled
markets.
"There has been a parallel debate in Germany and France about
neo-liberalism versus the social market economy," said Allan
Saunderson, chairman of EuroZone Advisors, a consulting firm in
Frankfurt. "That debate is going to become a lot sharper over the next
few months."
At its heart, he said, the question is whether these countries can
still afford to prop up costly welfare states in a global economy. In
Germany, the debate has mutated into an occasionally vitriolic attack
by the governing Social Democratic Party on big companies and foreign
investors.
As politicians try to win back the affection of voters, some
economists fear that they will cater to narrow domestic interests
rather than to broader European principles, like those enshrined in
the constitution. That trend is already visible in the European
Commission's inability to enforce fiscal discipline among the 12
countries that use the euro.
Analysts say the French vote will further vitiate the Stability and
Growth Pact, the agreement that limits deficits within the euro zone.
"I could very well see the next French prime minister saying the
Stability Pact is a European law, and European laws no longer have
legitimacy with the French people," said Daniel Gros, the director of
the Center for European Policy Studies, a research group in Brussels.
France, Germany, Italy, and Portugal are all in violation of the
deficit limits.
Italy, with its mushrooming public debt, recession, and declining
competitive position, is of particular concern to economists. Gros
said that if the Italian government did not arrest the slide, it could
lose a decade's worth of work in preparing itself to adopt the euro.
Among other casualties of France's rejection may be the further
expansion of the European Union - a process that economists often
advocate as a way to spur European growth and competitiveness.
Some Western European leaders are likely to resist the entry of Turkey
into the union because it would stir voters' fears of an influx of
low-cost foreign workers. Fear of such cheap labor helped fuel the
anti-Europe camp in France.
In Germany as in France, voters used a vote - in this case a state
election in North Rhine-Westphalia on May 22 - to send a message to
Chancellor Gerhard Schröder that his reform policies were not working.
Germany's jobless rate, at 11.8 percent, is a record in the post-World
War II period.
Schröder responded to his party's trouncing by moving up Germany's
federal elections by a year, to September.
Angela Merkel, the conservative leader who was confirmed Monday as the
opposition's candidate for chancellor, took pains to play down her
reputation as a radical reformer. Merkel said that her policies would
be focused on finding "ways of creating work for people in Germany."
And she reiterated her opposition to Turkey's entry into the EU.
Some economists argue that Germany has progressed further in its
overhaul than either France or Italy. By keeping a lid on wage
increases, German companies have managed to regain their
competitiveness. German exports continue to thrive, even as the
domestic economy falters.
"Germany is about to diverge," he said. "If they elect a new
government, they can say, 'We're the solid anchor of Europe."'
Some argue that Europe's anchor is no longer any one country, but its
single currency. Saunderson described the euro as a "port in the
political storm," noting that the European Central Bank has so far
been immune from pressures to lower interest rates to prop up
faltering economies.
The euro's recent decline versus the dollar, he added, was not a bad
thing since it would help European exporters regain their edge in
foreign markets. Shares of exporters like Porsche of Germany and
Philips Electronics of the Netherlands, rallied on Monday.
Still, currency analysts took a more jaundiced view, saying that the
euro's fall could quicken if the Netherlands followed France in its
rejection of the constitution. Carsten Fritsch, an analyst at
Commerzbank, said that the political upheaval could even unnerve some
foreign central banks, which have been converting a portion of their
reserves from dollars into euros.
.
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