Portuguese Workers Are Not Happy

Portugal was brought to a virtual standstill by a general strike yesterday as unions challenged reforms introduced by the centre-right government in its effort to cope with the eurozone's spending and borrowing rules and the impact of European Union enlargement. The 24-hour stoppage, Portugal's first general strike in a decade, mainly involved public sector workers who say they are bearing the brunt of the austerity measures which are designed to bring the budget deficit back within the limit set under the eurozone's growth and stability pact. Whatever the complexity of the problems lying behind Japan's deflation problem, it is not too hard to look into the proverbial crystal ball and see how the future is likely to pan-out for some Euro-zone members. Faced with an inflation dynamic which makes them increasingly less competitive they are finding growth hard. At the same time an ageing population and escalating future pension liabilities mean they have a debt trap - they cannot try to stimulate growth by getting into debt because the future growth expectations, which would enable them to pay-off the debt, just are not there. Hence deflation is an ever present danger.

"Portugal is in danger of losing an important dimension of social solidarity and stability if the government goes ahead with these reforms," said Manuel Carvalho da Silva, general-secretary of the CGTP-Intersindical trade union federation, which called the strike. But António Bagao Félix, labour and social security minister, said the reforms were vital if Portugal was to compete successfully for export contracts and inward investment with the east European countries due to join the EU in 2004. The strike, which disrupted hospitals, schools and courts and brought public transport to a standstill, was mainly targeted at government proposals to replace about 80 labour laws with a single new code designed to increase efficiency.
Source: Financial Times
LINK

EU Expansion Agreement Proving Difficult

With a summit aimed at admitting 10 more countries to the European Union only two days away, the candidate governments are still bargaining hard for better financial terms of membership, and the member governments are still trying to decide how much to offer. According to the experts, with so much unresolved, the summit that opens Thursday in Copenhagen could well extend beyond its scheduled two days. In fact European officials are saying that the most difficult issues will not be resolved until government leaders sit down behind closed doors for last-minute deal-making. Of course, the main sticking point in the negotiations between the 15 EU countries and the candidates is money. The countries joining the union will get direct cash payments in the form of development aid and support for farmers, far beyond the amounts they will have to pay into the EU. But they are joining at a time of economic constraints in Europe generally. In return for the aid the new countries would have to accept a series of strict agricultural production quotas. Poland, which has more farmers than Germany and France combined, has been particularly vocal in crticising the proposed terms, pressing for more farm aid and higher production quotas in areas such as milk. The nub of this problem is that all this comes at a time when the leading EU countries are experiencing far more economic difficulties than were expected at the time of proposing entry. Germany in particular is having to propose a very difficult package to its own citizens this winter to maintain its commitment to the stability pact, while having higher than desireable interest rates due to Euro membership. This means that it is in no position to be especially generous. Hence we have an 'expectations gap', the new, poorer, countries being in a worse position that the existing members imagine, while the existing members are unable to meet the generosity expectations of the newcomers. All-in-all it is difficult to see how this can work well long-term.

"This has to be in the hands of the heads of state and government," said Romano Prodi, president of the European Commission, the EU's appointed executive body. "The decision is too important a decision to be taken beforehand." He added, "Miracles are always possible." Prodi said he did not expect the haggling to derail plans to formally issue membership invitations to the 10 countries -- Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Malta, Cyprus, Latvia, Lithuania and Estonia. "The deep sentiment of all the heads of state and government -- I repeat, all -- is in favor of enlargement," Prodi said. "The enlargement is seen as an historic goal. It is not a decision of 'if,' it is a decision of 'how.' "
Source: Washington Post
LINK

Is the ECB Rate Drop a Good Decision? It Depends Where You live

As I have been flagging in this column for some weeks now, interest rate policy for the Euro zone is a mess. The most obvious way of indicating this is to say the Duisenberg has no good decision strategy available. Not because he is a good, or bad, banker, but because undecideability is structurally in-built into the problem. The decision is rather whose interests do you favour, the low-inflation or the high-inflation countries. Even if this decision could be seen as mildly helpful from a German, or French point of view, from 'down South' in Portugal, Greece and Spain it looks decidedly risky. For Germany it seems to be a question of far too little, far too late, well behind the curve as they say. Of course, one day the inflation down South will stop. It has to, since they now have no independent currency to devalue in order to recover competitiveness, and, of course, unlike the US they do not have a central bank of their own to start the printing presses rolling. So one day the inflation will turn into deflation as their economies cease to be able to oxygenate and they start to suffer an absence-of-liquidity induced asphyxiation. Meantime we are in a kind of time-void between a decision whose chronicle was already foretold two to three weeks ago (thus there is no real market-shock as it is already priced-in), but whose consequences won't be noticed in any significant sense for six to nine months at least. Bottom line: whatever the long hard winter was which lay in front of Germany as of last Wednesday, well, it still does.

On another front, back in the UK, the consequences for Euro membership of the current interest rate divergence are starting to sink in:

After walking side by side for a while, the European Central Bank and the Bank of England have come to a parting of the ways. It may now be a long time before their paths bring them so close to each other again.In recent years, the gap between the main interest rates of the Bank of England and the ECB has been falling steadily. Last year it closed to just three quarters of a percentage point.Thursday's decisions by the two banks, however, suggested that the impression of convergence between Britain and the eurozone has been illusory......

"The ECB's next move is more likely to be down than up, while the Bank of England's next move is more likely to be up than down," said Robert Barrie of Credit Suisse First Boston. "Inflation is below target in the UK, but potentially going above it, while it is above target in the eurozone but probably going below it." Although both investment and exports have been weaker in Britain than in the eurozone, consumer demand is very much stronger. According to the Organisation for Economic Co-operation and Development, consumption is expected to have risen by 3.6 per cent in Britain this year, supported by a boom in house prices and household borrowing, compared with a mere 0.6 per cent in the eurozone.

The first four years of monetary union have shown that convergence inside it is a slow process. The dispersion of core inflation rates in the eurozone is actually greater now than it was at the euro's birth at the beginning of 1999.For some countries such as Spain and Portugal, real interest rates allowing for inflation are negative. Hence this week's complaint from Rodrigo Rato, Spain's finance minister, that "an interest rate cut is not so great from the inflation point of view". But for Germany, where inflation is low, real rates are still positive although the economy is close to a standstill. "Monetary policy is extremely expansionary in Spain, and extremely restrictive in Germany. It is amplifying the differences between unemployment and growth rates across the eurozone," said Patrick Artus of CDC Ixis in Paris. "If you have a single monetary policy with no significant migration or fiscal transfers, you're in trouble." Whatever the benefits of joining the euro for trade and investment, the risks involved in submitting to the eurozone's single interest rate will make the British government think very hard indeed before joining.
Source: Financial Times
LINK