New entrants join cracking EU

As the European Union prepares to open its new extension it might care to look at the cracks in the front wall.

Countries across the eurozone are struggling with their public finances, high unemployment and voters who are unwilling to accept painful structural reforms of their social welfare networks and labour markets designed to make their economies more flexible.

Take France. Last month, President Jacques Chirac was forced to reshuffle his Cabinet after voters gave his party a bloody nose at the polls because they disliked the Prime Minister Jean-Pierre Raffarin’s government’s reform programme.
The outcome of the vote was summed up by business newspaper Les Echos the morning after the elections: “Here we have a situation of a country that must reform and a public opinion which refuses to do so.’‘

Chirac’s decision to keep Raffarin as prime minister and bring in Nicolas Sakorsy as his finance minister seems to have more to do with politics than with getting the reform programme on track. Raffarin will serve as a lightning conductor for further unpopularity while Sakorsy, the most dangerous challenger to Chirac on the right, has been given the job most likely to dent his electoral appeal.

The position is little better across the Rhine, although the chancellor, Gerhard Schröder, managed to get a watered-down version of his Agenda 2010 reform programme on the statute books last year.

But as Deutsche Bank economists Norbert Walter and Ulrich Schröder noted in a paper for the American Institute for Contemporary German Studies in the late autumn: “In view of the deep-seated weakness in growth, the Agenda falls short of the mark ...

“Agenda 2010 will not bring the hoped-for and urgently needed boost to domestic growth along with a strong revival of the economy by 2004. For the time being, Germany will continue to trail in the wake of the world economy.’‘

Add the fact that Schröder had to threaten to resign to get his programme through and it is clear there is unlikely to be much appetite for further reform.

This shortfall could have serious consequences. France and Germany have been busting the rules of the stability and growth pact. Critics, some not a million miles from the European Central Bank in Frankfurt, have argued that deficit busting — and lower interest rates — is no substitute for the sort of serious structural economic reform that voters find so unpalatable.

The new Spanish government may be causing flutterings in both Frankfurt and Brussels, even though Pedro Solbes, the European Community’s monetary affairs commissioner and a respected former Spanish finance minister, is to return to his old job in Madrid.

Just after the election, a senior Socialist Party official indicated that the budget discipline projected by the departing Popular Party might be heading for the wastebin under the new regime.

Instead of a balanced budget this year and small surpluses in the following two, as Spain should be creating under the terms of the stability and growth pact, the Socialist Party hinted that in the first couple of years the Socialists would be prepared to see Spain’s finances go back into the red.

If that were not bad enough, Dutch Finance Minister Gerrit Zalm — who has been one of the strongest critics of those countries that have failed to keep their deficits below the 3% laid down by the pact — had to admit that Holland, too, had fallen victim to budget busting. Although Holland is promising to be good this year, its moral authority in urging others to set their fiscal houses in order has been undermined.

Then there is Greece, where the budget-spending gap is set to soar — officially to 2,9% — this year. That is within the pact rules, but in a year when it is spending money on the preparations for the Olympic Games there are concerns it will not be able to stay below 3%.

Italy has hit the mark in recent times, but only through a series of one-off actions, which has drawn the displeasure of Brussels.

The officials may be dusting off the welcome mat to greet next month’s entrants to the EU — but in reality it is time to call in the structural engineers to inspect the foundations. — Â

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