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Europe’s Economy

February 26, 2004

Europe's Economy

Britain continues to move away from the notion of European integration
The reports coming out of the World Economic Forum in the swish Swiss ski resort of Davos this year once again showed how this nation is becoming ever less financially and politically aligned with Europe.
The euro continues to…

Europe's Economy

Britain continues to move away from the notion of European integration

The reports coming out of the World Economic Forum in the swish Swiss ski resort of Davos this year once again showed how this nation is becoming ever less financially and politically aligned with Europe.

The euro continues to rise against the dollar, yen and pound but the European Central Bank (ECB) happily trundles along keeping its interest rates high. In Davos it was expected that there would be much discussion about economic stagnation, over-regulation and diminishing productivity across the European mainland. What it got was an attack on American profligacy with the massive US budget deficit growing in part due to the hugely expensive war but also to President Bush’s programme of domestic economic expansion.

It is certain that President Bush is not going to do anything in US Election year to put the brakes on the US economy so it seems to me that Europe has got to adjust its finances with that reality in mind. The signs are that most of our European partners show few signs of doing this. In Davos the one report that I read on the subject which did made sense was from Jean-Phillippe Coty, the chief economist of the OECD, who argued that any further rise in the euro must force serious changes in national policies. From the ECB and European politicians in Davos the only action being proposed was for the US to rein in its spending. At no time was it suggested that European economies have to put their house in order.

Their reading of the world’s future economy is fundamentally different from mine. The global economic situation remains unbalanced. Japan is still suffering deflation which Japanese economists know will only be resolved if America’s economy roars. China’s economy runs the risk of overheating with its currency rate held artificially low, whilst China is becoming more and more like the manufacturing powerhouse of the world. Even with a growth rate of 9.1% last year China seems unlikely to stop making hay with its cheap currency for quite a while.

Similarly the Indian economy goes from strength to strength and it is these two Asian economic powers with which our own Chancellor, Gordon Brown, should compare the UK’s economic performance, not the somewhat sorry French and German economies.

So where does that leave us here in Britain? It is clear that the Chancellor has chosen to pump so much money recently into public finances that economic tightening beckons sooner rather than later. Most commentators expect to see our interest rates rise this year. Few expect the same decision to be made in America. There is no room in Japan to reduce its rates and China is playing hardball with its currency rate against American demands.

Highly paid economists regularly get their forecasts wrong so, as a rather less well paid politician, I shall certainly stay away from that prediction trap for the year ahead. However, Davos proved that in 2004 national considerations still dominate economic thinking, as was again emphasised by the recent G7 conference, which brings us back to the recognition of how Britain’s economy sits beside those of our European neighbours.

No one would deny that corporatism remains alive and well in Germany. It continues to hold that country in a vice that it built for itself with unification more than a decade ago and the German economy remains underpowered under its leader Chancellor Schroeder. During my visit there last year it was clear to me that many local politicians and business leaders in the former East Germany were deeply sceptical about the prospect of EU enlargement and the economic effect this will have in eastern Germany.

The European political class, safe in its Brussels and Strasbourg ivory towers, fails to understand the two nations which remain in Germany to this day and the failure of many eastern Germans to adapt to capitalism. The sheer mentality and psyche of many ? even the young ? who live in this part of Germany has changed little since reunification. Meanwhile the EU is on the verge of further enlargement to the East with other former communist states. Make no mistake, this is an enormous undertaking and brings with it major political risks. There are signs that Chancellor Schroeder is putting some radical policies in place for the future but I suggest that he may not find it easy to take his electorate with him.

In a similar way the French, and especially its all powerful farming lobby, remain worried about the effect of the ten new nations coming into the European Union in May and protectionism is a constant in French economic matters under President Chirac.

Britain’s much-vaunted, but increasingly frayed, enterprise culture is ill at ease with much of Europe’s financial practices. However much Tony Blair and Gordon Brown want us to embrace and cuddle together with Europe’s big two the truth is that we are politically and financially growing further away from each other. Our nation has made its choice by breeding stronger free market principles and choosing to outsource to and buy from countries such as India and China to our mutual benefit.

The reports that I saw from Davos just consolidated my view that economically and diplomatically the leading nations in mainland Europe are putting their heads in the sand and simply hoping things will improve. The important thing is that we do not choose to join them.