Jacques Chirac and Gerhard Schröder

As French President Jacques Chirac and UK Prime Minister Tony Blair sparred over the EU Budget at the Brussels summit, the Taoiseach Bertie Aherne insisted that the EU constitution can still be saved, saying he believes France and the Netherlands could vote again after most of the other 25 member states have ratified. Aherne said that he hoped the French and the Dutch would "speak again" on the constitution as analysis has shown that the referendums didn't fail because of issues to deal with the constitution.

Public disenchantment with the EU may not be directly linked with particular clauses of the constitution, however, it's ridiculous to compartmentalise them. Despite the wishful thinking, it's also very patronising to Dutch voters when its own government says that another referendum will not be held as the first one reflected deep concerns about the EU project. Besides, Aherne has good reason to talk up the prospects of reviving the chances of the constitution being ratified, instead of addressing the issue of fundamental reform of European Union policies, iincluding economic policies in eurozone countries, which is essential for the future success of the euro. 

The six EU countries — Germany, UK, France, the Netherlands, Sweden and Austria fund 75 percent of the EU Budget and as Figure 4 below shows that Ireland heads the ranking of per capita receipts from the Common Agricultural Policy, Ireland has no pressing reason to change the allocation of 40 percent of the EU budget from agriculture which only accounts for 4 percent of EU GDP.

Source: Future Financing of the European Union report, UK House of Lords European Union Committee

It is good news that the summit failed to agree on the EU budget for 2007-2013 and broke up without agreement. 

Luxembourg prime minister, Jean-Claude Juncker fought valiantly to produce a traditional fudge and showed his frustration when he said that he would refrain from giving Britain any advice on how to handle its presidency of the EU, which starts in three weeks, since it had shown itself unwilling to heed any counsel.

The European Parliament Building, Strasbourg, Farnce. The building is used on average four days each month. Another building for the Parliament is being completed in Brussels at a cost of almost €1 billion

The budget is just one of many issues that need addressing. It accounts for 2 to 2 ½ per cent at most of EU25 GDP while average public expenditure across the EU was 48.5 per cent of Member State GDP in 2003 (see Figure 1). However, when a building for the European Parliament (EP) in Brussels costs almost €1 billion when there is another very costly building in Strasbourg, that is used for four days each month, EU citizens have a reason to question priorities. Moreover, it is clear that direct elections to the EP haven't resolved the so-called "democratic deficit" and the institution is an irrelevance for EU citizens. Even if it acquired additional powers under the EU constitution, the question that should be asked is would its abolition be missed in a Europe where more day-to-issues were left to Member States rather than centralised in Brussels? 

Source: Future Financing of the European Union report, UK House of Lords European Union Committee

A 2003 report to the European Commission by a group of experts led by André Sapir, a Belgian economist, argued that the only justification for EU level spending is genuine and demonstrable added value. Therefore the Budget should focus on those areas where it is best able to make a contribution to growth and solidarity in Europe. The report proposed a budget based on three funds which would each contribute to growth: 

• a fund for economic growth, divided into Research & Development, education and infrastructure;
• a convergence fund to help the new Member States achieve a greater level of affluence, divided into investments in institution building and human and physical capital;
• a restructuring fund aimed at facilitating the resource allocation necessary due to deeper and wider economic integration, which would provide aid to the agricultural sector and aid to displaced workers in general. Agricultural spending would be cut to 15 per cent of the total budget.

Professor Sapir told the UK House of Lords European Union Committee that the current structure of budgetary allocation defeated the purpose of a Community budget: 

"At the moment, in many areas this EU budget is not properly an EU budget; it is simply a way to transfer money from citizens…to other citizens…I do not think that is the purpose of an EU budget."

He concluded that from an economist’s perspective the current budget structure was "a mismatch between the objectives that have been put forward and the instruments". Professor Helen Wallace, a member of the Group of Advisors chaired by Professor Sapir, made the case for the budget to be spent on policies which were recognised as "collective" goods, in the common interest of all members of the European Union. This is where the current budgetary allocation to the Common Agricultural Policy was regarded as deficient, since "expenditure on French agriculture is not widely understood outside France as a collective good." 

Source: Future Financing of the European Union report, UK House of Lords European Union Committee

The ceiling for direct subsidies under the Common Agricultural Policy (CAP) has been fixed until 2013, following a decision by the European Council in 2002. This decision means that the budgetary allocation for support payments, which make up the bulk of agricultural spending, is a no-go area according to President Chirac. 

Source: Future Financing of the European Union report, UK House of Lords European Union Committee

Source: Future Financing of the European Union report, UK House of Lords European Union Committee

A necessary reform agenda

In recent months, the EU has been beset with a surge in textiles and shoes from China. Last Wednesday as Italian shoe workers protested in Brussels, EU Trade Commissioner Peter Mandelson said that the European Union and China will face continuing tensions over trade unless European businesses respond rapidly to China's growing manufacturing clout. While stressing that he could not “ignore politically” the distress signals from European manufacturers, Mandelson said he was ready to challenge politicians who suggest that “we can pull the economic blanket over our head and somehow the economic hurricane will pass.”

Labour market - employment - employment rates by age group
Employment rates for age group 55-64		(OECD)
Persons in employment as a percentage of population in that age group
	1990	1991	2001	2002	2003
Australia	41.8	39.3	46.3	48.2	50.1
Austria	..	..	28.2	27.6	30.1
Belgium	21.4	21.6	25.2	25.8	28.1
Canada	46.3	44.5	48.3	50.4	53.0
Czech Republic	..	..	37.1	40.8	42.3
Denmark	53.6	51.7	56.5	57.3	60.7
Finland	42.8	40.6	45.9	47.8	49.9
France	35.6	34.8	36.5	39.3	36.8
Germany	36.8	35.9	37.9	38.6	39.0
Greece	40.8	39.0	38.0	39.2	41.9
Hungary	..	..	23.5	25.6	29.0
Iceland	..	85.4	85.6	87.2	..
Ireland	38.6	38.9	46.6	48.0	49.3
Italy	32.6	32.1	28.0	28.9	30.3
Japan	62.9	64.4	62.0	61.6	62.1
Korea	61.9	61.2	58.3	59.5	57.8
Luxembourg	28.2	23.2	24.8	27.9	..
Mexico	..	54.1	52.1	53.1	53.8
Netherlands	29.7	28.0	38.8	41.8	43.5
New Zealand	41.8	41.6	60.7	63.4	64.4
Norway	61.5	61.2	67.4	68.4	68.8
Poland	..	..	29.0	27.9	28.6
Portugal	47.0	49.3	50.0	50.9	51.1
Slovak Republic	..	..	22.3	22.9	24.6
Spain	36.9	36.4	39.2	39.7	40.8
Sweden	69.4	69.3	67.0	68.3	69.0
Switzerland	..	63.1	67.1	64.8	65.6
Turkey	42.7	43.4	35.9	35.3	32.7
United Kingdom	49.2	49.0	52.2	53.3	55.5
United States	54.0	53.2	58.6	59.5	59.9
EU15	38.5	37.8	39.3	40.6	41.5
OECD total	48.0	47.8	48.5	49.4	50.1

In the recent French referendum, the UK's Anglo-Saxon model of economic reform was disparaged. However, since 1997, the benefits of economic reform have been spent on massive increases in health, education and family income support spending. In France, unemployment is 10 percent and only 37 percent of adults in the 55-64 age range work compared with 55 percent in the UK and 59 percent in the US. Unemployment in the UK is below 5 percent and 4.2 percent in Ireland.

Social Insurance Costs as % of Wages 

Country	Percent
U.S.	20.6
Australia	18.9
Hong Kong SAR	8.2
Japan	16.0
Korea	29.6
New Zealand	6.0
Singapore	13.5
Taiwan	9.1
Austria	27.4
Denmark	8.0
France	31.3
Germany	24.2
Ireland	14.5
Italy	28.7
Netherlands	24.0
Norway	17.3
Portugal	23.4
Spain	25.1
Sweden	28.0
U.K.	15.5

Note: Hong Kong SAR stands for Hong Kong Special Administrative Region of China. 2000 for Portugal.

Source: US Bureau of Labor Statistics.

Last April, the six leading German economic institutes said that Germany's economy, the biggest in Europe, will grow 0.7 percent in 2005. The institutes say that in the years 2001–2004, average growth of the German economy has been a mere 0.6 %. In the public debate this is often regarded as the result of a particularly weak cyclical development calling for economic policy measures that stimulate demand in the short term. However they argue that international comparison reveals that the growth performance has been relatively poor not only in recent years, after the turn of the century, but over a period of some 15 years.

The problem of weak growth in Germany can be solved, even in a relatively short period of time, if a redirection of economic policies is successful. This is exemplified by the experience in a number of countries, such as Ireland, Finland or Great Britain, which have implemented a policy turn in the past.

The institutes found that the German trend growth rate has declined consistently to 1.1 % since the early 1990s, while at the same time trend growth in the eurozone (ex Germany) and in the US has remained largely stable over the past 30 years at rates of slightly above 2 % and 3 %, respectively. Hence, the international comparison reveals that the growth performance has been relatively poor not only in recent years, after the turn of the century, but over a period of some 15 years.

Chancellor Gerhard Schröder's government has introduced some changes to the German social support system, know as the Hartz reforms.

The Frankfurter Allgemeine Zeitung says: 

The political fate of Schröder's government shows just how willing the country is to carry out reforms. Are the streets now packed with anti-Hartz protesters? By no means. Looking back, the demonstrations organized last summer appear to be a light breeze that has died down since the laws took effect in January. Of course, a group is forming on the left edge of the political spectrum in hopes of campaigning on a simple platform plank aimed at overturning the Hartz laws. In case this collection of political losers and deserters should survive, it could gain perhaps six or seven percent of the vote. But to whom is the vast majority of voters turning? To the party constellation that it trusts - rightly or wrongly - to cleanly put together the reforms and to guide them through with the necessary political support of their own members.

Most likely, Schröder will step before voters on Sept. 18 and ask: Do you want my reforms and do you want me? The answer will be: We want your reforms, and therefore we are voting you out of office.

Conclusion

The rise of economic powerhouses like China and India never mind other countries that are changing the world's economic landscape, requires changes in Europe. France may wish to keep its social insurance costs at 31 percent of hourly pay, but there is a cost in a globalised world where big changes are inevitable in the many areas of manufacturing. The Irish Government may regard it as positive that farmers are on public welfare to the tune of two-thirds of their income, paid for by other EU citizens. Nevertheless, realities will have to be confronted sooner or later. Ireland has a direct stake in the success of the eurozone and its own economic fortunes are subject to risks. With 12 percent of Irish employment in residential construction, how well are we prepared for economic shocks? 

Related:

1. EU: Ireland has the best of both worlds - the Anglo-Saxon and Social Models

2. OECD says agriculture export competition will intensify, with rising share of trade by developing countries as it reports that farm subsidies rose 12% in 2004