With the rejection of the proposed EU Constitution by both the French and the Dutch recently, there’s been quite a bit written about the fate of the European Union but more specifically about the future of the Euro:
What happens now? Nobody is talking about an EU break-up, but there is plenty of speculation, touched on here last week, about the euro. A report last week that Germany’s finance minister and Bundesbank (central bank) president have discussed its demise was swiftly played down but that did not kill the idea of a break-up. Stern, the German magazine that reported the discussion, says the euro is making the Federal Republic’s economy “kaputt”; no translation needed.
Stuart Thomson, an economist with Charles Stanley Sutherlands, the stockbroker, says in a paper that the French referendum was the beginning of the end for the euro. The collapse of monetary union is inevitable by 2020, he writes, as the European economy comes under increasing pressure, not least from its ageing population. But he also sees a 50% probability of a partial break-up by 2008, with one or more member states withdrawing, partly as a consequence of the currency- market backlash as China and Japan abandon their policy of supporting the dollar through large-scale purchases of US government bonds.
For your edification and enlightenment this morning please take a look at a little data:
Country GDP Germany $2.632 Trillion United Kingdom $1.782 Trillion France $1.737 Trillion Italy $1.609 Trillion Spain $937.6 Billion Netherlands $481.1 Billion Poland $463.0 Billion Belgium $316.2 Billion Sweden $255.4 Billion Turkey $508.7 Billion
These are the largest economies in the European Union. I’ve tucked in Turkey, the largest non-member applicant for membership, for a little perspective. The economies of the remaining EU members and member applicants are all significantly smaller—in aggregate they’re probably less than the size of Italy alone.
Each of the current members had to satisfy strict requirements before their memberships were approved which included economic, government spending, human rights, environmental, civil, and other measures. During the early adoption phase of the European Union the core members prospered, their economies growing at 3% or more per year (faster than the United States during the same period). Since then the major economies of Germany, France, and Italy have lagged with growth of 2% or lower while the smaller, hungrier, less economically developed newer members have prospered.
France, Germany, and, I believe, Italy have failed to meet their budgetary targets for several years running—the same budgetary targets that prospective members must meet before they’re accepted into the Union. As the numbers in my table above clearly show, the economies of the core member nations of the EU are the stability of the Euro.
Let’s not put the cart before the horse: the French Non was just a signal. The real Non, Nein, or No is the failure to meet budgetary constraints that underpin currency stability and they’ve been pretty clear for some time.
