Friday, June 17, 2005

Welfare Europe

I received this as part of a daily investment newsletter I get. While I don't agree with all his views, especially on gold, it did make for an interesting read! I especially liked the one paragraph on Third World aid, which I have added emphasis to below.

Dear Friend,

It must pain my Berlin-born colleague to be on the sidelines during a big week for dynamic markets. From Brussels to Beijing, free markets are routing central planners and French socialists. But who will win the war over Europe's economic future, the planners or the Anglo-Saxon market dynamists?

It's great to be in London as the British and the French square off for another round in their centuries-long hate affair. The political match of the day is in Europe. But it wouldn't surprise me to see similar tensions in China by the end of the year. More on that later.

Here in Europe, French President Jacques Chirac is trying to distract the French people from his political failures by doing what any good Frenchman would do - blaming the British.

The whole argument revolves around the complex, arcane, and essentially socialist nature of the EU. France gets big farm subsidies from the EU. Chirac wants Britain to pay French farmers so that all of Europe might continue to enjoy inflated food prices. As an American who does not pay taxes to the EU and enjoys French food, my stomach tells me to side with France.

But as an advocate of free markets, less regulation and lower taxes, my head tells me to side with Britain. The French never expected to be having a debate over the future of Europe. The constitution was supposed to silently impose a massive bureaucratic super-state across the Continent, to be meekly ratified in those countries where citizens were actually trusted with a voice and a vote.

Now that the document is dead, Britain, which takes over the rotating presidency of Europe on July 1, can ask a much more fundamental question about "ever closer union" in Europe. Will Europe be a political union with a common foreign policy, common defense and a common, reflexively anti-American position? Or will it be a federal Europe that ensures national sovereignty in politics and foreign affairs but embraces freer trade and open markets?

The debate is going to be a doozy, mostly because leftist governments all over the continent have a lot to lose. The EU and the euro have not delivered the promised goods of integration, namely jobs and incomes. How could they, when labor laws and restrictions on competition in services remain in place?

Europe isn't growing economically because its political elites refuse to give up the dream of a socialist super-state. Whether their citizens agree with them is another matter. But the clash between the French and British over the European budget is surely just the opening skirmish in a summer-long battle over Europe's future course.

Specifically, Chirac wants the British to give back all or part of its $3.1 billion "rebate" from the European Union. Britain is a net contributor to the EU's budget, the second largest, in fact. But Chirac has shifted the debate to whether or not Britain ought to get a rebate. Blair has linked this with a renegotiation of Europe's common agricultural policy (CAP), which so generously benefits the French.

The entire affair comes as EU leaders meet in Brussels on Thursday to pass a seven-year budget. The EU wants to spend over 871 billion euros over the next seven years. Yet 42% of the annual budget currently goes to agricultural subsidies. That's right: 42% of the EU's budget goes to 5% of Europe�s population, one fifth of whom happen to be French farmers.

If that seems inequitable, that's because it is. France is certainly one of the breadbaskets of Europe. But how do massive agricultural subsidies in Europe, for example, relieve poverty in the Third World? Instead of debt relief, couldn't Europe and the United States do a lot more for the developing world by not subsidizing domestic agriculture? This would allow developing countries to compete and profit from agriculture, and it would lower global food prices.

Of course that would be pragmatic and effective. Much of what passes for policy in Europe is posturing and moralizing, which requires less real effort. Yes, politics is politics, whether it's Washington or Paris. Expect to hear a lot more heated rhetoric this summer. EU Trade Commissioner Peter Mandelson is already calling the British "neo-Thatcherites", as if that were something to be ashamed of.

Will the whole European project unravel? Well, the individual national economies are certainly not going to disappear overnight. But the political bonds could. The real question is, what will happen to the euro?

Dollar bear that I am, I take two observations away from the euro�s recent plunge. First, the dollar is still the world�s reserve currency. It is far more likely that the euro will collapse in the next year than the dollar.

Second, currencies put forth by debt-loaded governments are bad investments, period. The euro's prospective doom is an object lesson for dollar bulls. Debt-backed paper currencies are not long for this earth.

Christoph might not agree with me on this one. But I don't think he'd grudge me saying that the best advice you can take from Europe�s trouble and the euro�s sad state is simple: buy gold.

Dan Denning

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