Bill,
"I wonder what problems the Euro will bring as the low wage countries in the ECM proceed to take jobs from the high wage economies?
Places like France and Germany can expect problems down the road due to their relative labor inflexibility since there is no longer an exchange rate mechanism to compensate."
In the past, the "low wage countries" in the EC used to compensate their lower industry productivity by setting a lower exchange rate from time to time. It was, among others, Germany that was continuously faced with the problem of an increasingly strong currency vis-a-vis certain other EC member States. Therefore, Germany had a vital interest in fixed exchange rates.
But today, the exchange rates between most EC member States have been fixed for several years now. So all countries belonging to the Monetary Union know very well what it means to have no exchange rate mechanism at hand to compensate any lower industry productivity.
The Euro is indeed a great chance for Europe, but I also see some potential problems:
Just because the exchange rate mechanism to compensate lower productivity does not exist any more, there are growing tendencies to regulate more and more policies on the European level - policies which have an effect on the productivity of the economy. Presently, there are strong discussions on European "harmonization" for example of the social systems and the tax systems in the EU member States. Besides, according to the "politically correct" people, the employment policy and *many* other areas should be dealt with by the EU.
I clearly see a tendency there of introducing a high level of centralization in Europe, which will naturally limit any healthy competition.
Besides, transferring more and more powers from the member States to the European level is going to have as a side effect the creation of a more or less socialist society system (or "European society model", as the European Commission calls it). This tendency is well supported or at least tolerated by many left-wing governments in the member States.
These developments are going to hurt the Euro, IMHO. That is the reason why I put all my money into the dollar.
Other risks for the Euro:
- Germany, which used to be the flagship in Europe, is increasingly lagging behind. Presently, it has the *lowest" industry growth rate of all EU member States. Ironically, it is now Germany which drags the Euro down.
- The forthcoming enlargement of the EU towards Central and Eastern Europe is certainly a big chance and a political and historical necessity for Europe, but also a risk. The financial costs of the enlargement are not yet sufficiently taken into consideration. The most likely scenario is a "big bang" in 2004 with 10 States entering the EU at the same time (followed by Bulgaria and Rumania in 2006). So far, the financial plannings only cover the timeframe until 2006. Until 2006, the forthcoming member States will be excluded from the largest EU funds. But what will happen after 2006 is totally unclear so far. The new member States will certainly claim equal rights, then. And no one knows who will have to pay the bill. - The EU has to make substantial reforms in the fields of structural funds and the Common Agricultural Policy. But in the past, this has proven to be extremely difficult (just see the disappointing results of the so-called "Agenda 2000"). Therefore I fear a severe crises in the EU around 2006. That could damage the Euro even further.
Peter |
