Firstly I'd like to say to MM that I think this Political Com section is a great idea. I'm fascnated by European politics and am interested in hearing opinions from members. With that in mind I'm hoping to get feedback on the following.

The PSOE has been reported as being more pro french-german than Aznar, who was perveived as being pro UK-US. Assuming we accept this as true, would anyone agree that the election of the PSOE has now upset the political balance of Europe detrimentally, and that we are now moving to a more federal undemocratic europe than we have.

Secondly, who would agree that the Euro has achieved nothing other than create inflation (which is hidden by official figures) and wasted billions ?

Jamongris,

As a participant in the monetary union of Europe, provided that Spain cannot implement capital controls much different from those in the rest of the monetary union, Spain has given up complete control of its monetary policy to the ECB and the political body that controls it.

What this means is that when the ECB decides to set its policy (usually some combination of stabilizing inflation, a measure of output, interest rate volatility, and perhaps some long term estimate of where the Euro should be trading) it will do so according to--now get this-- what is "best" for the union. Well, this is very clearly understood, esp. in the past two years, that what is "best" for the union is essentially what is best for France and Germany. MOst recently we saw this when France and Germnay broke the EMU accords to allow them to run larger fiscal deficits that was agreed.

(An interesting side note, they are running fiscal deficits just a bit smaller than those in the US, yet no US media made any big deal about it while of course clamoring on about the US fiscal deficits leading the world to an economic disaster. One day, these psuedo journalists will actually take and pass Econ 1)

SO if Spain's economy happens to be constructed in a manner similar to France and Germany....AND, and this is key, both countries have the same set of preferences and are faced by the same shocks, then monetary union will be a net benefit. WHy? Transaction cost savings will dominate.

However, and this is the part that is fun, if Spain is hit by shocks (drought, disaster, terrorism, etc.) that are different than those faced by France, then Spain will not be able to address these shocks unless they have the political muscle to control the ECB and set policy contrary to what would be beneficial to France and Germany. What are the odds of that??You tell me. History says close to zero...

Sweden, run by some of the best monetary economists in the world and the UK, long seen as having the best economists in Europe, both opted to stay out of Monetary Union. Why? They preferred the degree of freedom of being able to conduct monetary policy with independence.

What what prospects for Spain? Simple, Spanish monetary policy is now dependent on the "good will" of the ECB, which is of course controlled by France and Germany. Spain is part of the new periphery, along with all the new members and France and Germany is at the core. Ask yourself, would France subjugate their optimal monetary policy to that of the Czech Republic or Poland? If your answer is "no," then trust me Spain is only slight more of a priority.

SO that you know, the analysis above is without political bias whatsoever. Instead, it is reality. Whether Spain realises that the arrangement is as such and whether it is "good" for Spain, that is up to you to decide as business owners and workers.

Thanks Almohada,

I have to say that you have more or less stated what I think on the subject. What also worries me is the distortion of the facts for the benefit of the Euro. Everyone in Madrid knows that inflation is higher than the official rate. Look at the increase in flat prices, vegetables, even the metro has gone up by 15% in 2 years, yet, as you point out, the government does not have the abililty to put up the bank interest rate so it has to deny the situation exists.

Furthermore the escape that you mention of France and Germany from censorship, a motion which strangely was supported by the UK's Mr Brown, has set a trend so worrying that with the PSOE promising to ally Spain more closer with France and Germany, the UK and Sweden will simply not have any say other than the ability to veto items they really don't like.

I would welcome, however, a contrary opinion if anyone has one.

Jamongris writes: You switch from political party to person. Why didn't you write 'PP' rather than 'Aznar?' You may find some who agree with your conclusion (based on what I consider faulty logic); I disagree with your use of the adverb: 'detrimentally!'

If your statement were true, it would provide grounds for the ultra-conservative, Christian-fundamentalist George W. Bush Administration to take action to overthrow the Rodriguez-Zapatero Administration and restore Jose Maria Aznar to power. George W. Bush would have loved el Caudillo Francisco Franco - they're two of a kind!

billions of what?? Again, I disagree!

Eddie -

PLEASE tell me - honestly - that you know the difference between a true facist - and Bush. No one has accused the PSOE of being "Stalanistic" - and it is grossly unfair for the opposite corelation.

Fup

For more on economics and Europe, I yield the floor to Stephen Roach, A political economist. He does a decent job at Morgan Stanley of running the Global Economic Forum, where he is Chief Economist and Director of Global Economic Analysis. Below I have included his latest thought piece.

Again for my Spanish friends, I am sure your feelings for Aznar and the PP are painted with many hues, but treating the past as a sunk cost and looking forward, are you sure you want to hitch your wagon to a crumbling and obsolete enterprise?? Not to mention, turn your back on the US and beg France and Germany to let you pback into the fold??? Note these are countries have have SIGNIFICANT followings for the Nazi type elements (and please refrain from nonsensible assertions that Bush is a Nazi. Le Pen and company are closer to the real things).

Here you go, Dr. Stephen Roach,...

"En route back to China, I can't get Europe out of my mind. Most of my international travel in early 2004 has been spent hopping back and forth across The Pond to the UK and the Continent. In a series of four such visits in the first ten weeks of this year, I have met with a broad cross-section of European investors, corporate executives, and government officials. I've never seen Europe in such bad shape.

The angst of Europe hardly comes as a surprise. It is deeply rooted in economics, demography, politics, and sentiment. The dream that was EMU is now turning into a long nightmare. A confluence of three developments has hit Europe especially hard in early 2004 - a currency shock, the lack of fiscal discipline, and now, tragically, terrorism. Europe is falling behind in a fast-changing world, and the hopes for a catch-up are fading rapidly. Europeans are increasingly caught up in a deep sense of resignation when pondering the future.

The latest economic trends speak for themselves. The global economy appears to have sprung back to life in the second half of 2003. By our reckoning, world GDP growth hit 5-5.5% in the final two quarters of last year - double the anemic trends of 2001-02 and probably the fastest run rate for the global economy since 1984. Putting aside the key issue of sustainability, there can be no mistaking what has just transpired: The world has been firing on most of its cylinders. Gains averaged 6% in the US, 4.5% in Japan, and over 9.5% in China. Europe was the exception to this otherwise synchronous outbreak of resurgent global growth, with real GDP growth falling slightly short of 1.5% in the second half of 2003. And that was before the full force of the lagged impacts of the strengthening euro kicked in.

Europe's failure to participate in the latest global upswing only adds insult to injury. Something is seriously wrong in Europe, and the Europeans know it. At our recently concluded European Credit Summit in Florence - an annual gathering of fixed income investors and corporate issuers - we held a breakout session on "The Future of EMU." As the paid provocateur, I stressed the European speed dilemma: Yes, Europe is definitely changing, I noted. But the pace of change is far too slow in this increasingly fast-moving, IT-enabled world. As a result, I argued that Europe was falling further behind on a relative basis.

Eric Chaney, co-head of our European economics team, took the other side of this debate. His basic point is that Europe will have no choice other than to respond to pressure - pressure that is now building on several fronts, especially the currency, imminent EU enlargement, and the special weakness now evident in Germany. Eric drew comfort from the new mind-set of a younger generation of European leaders, the likely demise of the region's deeply entrenched social contract, and the efficiencies of a common defense policy.

But we kept coming back to the issue of speed. On this point, the reaction of the Europeans says it all. Certainly, change is not easy to come by in a long rigid society. Yet Europe believes it is not being given any credit for its steadfast commitment to reform, however excruciating the progress may be. This is increasingly frustrating for Europeans. As one client put it to me when he cornered me after the breakout session, "You Americans don't get it. We are changing." As an editorial aside, I would add that there was great emphasis on the word "are."

My point on speed is largely one of context. In an increasingly integrated global economy, it is critical to assess speed in relative rather than absolute terms. And in today's world, the parameters of such relative speed are very largely determined by an economy's IT-enabled growth characteristics. And there can be no mistaking Europe's lagging performance on that count. Eric Chaney was quick to concede that IT production of hardware and software combined currently accounts for only about 3% of Euroland GDP - less than one-third the roughly 10% share in the US. He also notes that Europe is behind the US in IT usage, with the IT portion of the EU's capital stock (23%) still lagging that of a post-bubble US (where the IT share of the capital stock has now been reduced to about 25%). Nor is there any encouragement on the productivity front: Labor productivity in Europe went from 2% in the 1980s to 1% since the mid-1990s - precisely the opposite of the stunning acceleration in US productivity over the same period.

Notwithstanding my own critique of America's IT excesses, I would be the first to concede that the adaptability to new technologies is the essence of economic flexibility. The US might have gone too far down this road in the bubbly late 1990s, but IT-enabled transformation has now become a way of life in America. This also shows up in global offshoring trends. Our Indian economist, Chetan Ahya, points out that India's IT-enabled export services industry has an astonishing US-centric tilt, with 69% of the business going to the US versus 22% to Europe and only 5% to Japan. Sure, there's a language bias that ties English-speaking America and India together. But the bulk of the first wave of offshoring has been more on the data processing front, where language is not really an issue. Yet that's not all. Recently, Mary Meeker showed me a tabulation of traffic rankings of the world's most popular global websites; according to the so-called Alexa tally, 11 of the top 25 were based in the US, 7 in China, 6 in Korea, and 1 in Japan. Europe didn't even make the cut.

I am struck by the irony of it all. In the end, the Internet is all about the open architecture of increasingly flexible production paradigms - platforms that not only provide new efficiency options but transparent and real-time linkages to the latest in technological breakthroughs. The fixed costs of IT-enabled connectivity are not cheap, but the marginal costs are close to zero. Economies that lag in IT acceptance could lose the competitive battle of our generation. That's a growing risk in Europe, a region that still clings to what is almost a cultural resistance to IT-enabled change. That's my basic point on speed: I agree with our client who insisted that Europe is changing. But the heavy lifting of absolute change is simply not enough for Europe - it is rapidly falling behind on a relative-change basis in this IT-enabled world. Sadly, most Europeans don't get that.

There's an even darker side to this tale - a resentment building between Europe and America. It started out in the trade arena, where frictions have been building steadily over the past several years. It broke out into the open a year ago over the war in Iraq. Sadly, there has been no healing in the postwar climate. At least that's the verdict of the recently completed update of the nonpartisan poll of the Pew Research Center, which found that European distrust of America has increased markedly since the official end of the hostilities in Iraq (see http://people-press.org/). In a survey conducted before the Madrid bombings from late February to early March 2004, US "favorability ratings" fell to 38% in Germany (from 45% after the Iraq War in May 2003), to 37% in France (from 43%), and even to 58% in the United Kingdom (from 70%). And then there is the ghastly carnage of the latest outbreak of terrorism and the equally stunning aftershocks in the Spanish political arena. I was in Europe when 9-11 hit and also there during 3-11. For a fleeting moment two and a half years ago, Europe opened up its heart to a wounded America. That moment has passed. Europe feels very much alone these days. Its economic malaise is being compounded by mounting geopolitical instability. The risk is that old wounds are re-opened in a Europe that knows all too well the tragedy and suffering of war.

The optimist draws comfort from a Europe that responds constructively to such pressures. The pessimist worries more about a Europe that turns inward and the isolationism that spawns. The realist stresses that the current state of affairs is simply not sustainable. And that leads to the biggest question of all for a beleaguered Europe: What gives?"

Wow Almohada, I bet that took some typing ! It was very interesting and thanks for the article. More worryingly it's probably a very accurate assessment.

Eddie I accept I should stick to either parties or leaders. Lets clarify what I'm asking by sticking to the parties ie PSOE and PP. However I'd think that your second point is fussy. It doesn't really matter whether we are talking US Dollars, Sterling, or Euros with regards to the question. Furthermore how can your disagree with a question while requesting its clarification ? Anyway, let's say Euros for the sake of this debate.

I also think calling Bush a nazi is bordering on name calling which is not allowed on this web site under MM rules.

Jamongris writes: Please point out to me (in pertinent part) exactly where I called anyone a nazi! I disagree with your statement whether it refers to Euros or U.S. Dollars or Pounds Sterling or KrugerRands or whatever. You're the one who wrote 'billions' without specifying 'billions of what?' Now you go on to say: Touché!

OK Eddy I don't get you. I'd be very interested in your views as to why you think the Euro is not a waste of billions, but you seem more interested in discussing the wording of questions and replies than content.

I accept you didn't call Bush a nazi directly, but you said he was the same as Franco and once we go down that road (which was not the intention of my post) we could arrive at that conclusion. Anyway I withdraw that remark, perhaps you'd start a new topic if you want to discuss it further though.

Almohoda,
Dayum...never thought I would encounter someone who was as long winded as I. We need to get together and collaborate on the next "Tale of two cities".

BTW, Thx for your postings. The EU is not something we get LOTS of info around here about, thx to your posts I know quite a bit more about the economic situation of Europe than I did. I have always had an undefiable feelng from what I had heard that something was wrong with the whole thing, but could never put my finger on it. I have had a growing feeling for years that the ones who lost WWII were achieving economically what they tried militarily. I personally include France in that group, as I have never felt the Frenchies were as much the victims as they like to claim. Sure there were some French who opposed the nazis... there are always some who disagree with the path their country takes... but I have a hard time overlooking that many more Frenchies died fighting the allied invasions than supporting it (though proper respect is due to many who DID fight in the Resistance). I also have difficulty overlooking the French Fleet firing upon our invasion force in North Africa, or the willingness of France to round up some 35,000 jews to send to the camps without even waiting to be asked by the nazis. It seems for the most part, that throughtout the war, from the time of the German invasion of Austria onward, that the French paid mostly lip service to opposing the Nazis. Anyway, the Germans and their puppets in France are now apparently going to dominate Europe in a different way.