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| Worthy Notions: From the Editor |
Fresh Out of Cheeks
Dwight Cass
08/01/2005
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What will become of Europe? When the French and Dutch rejected the new EU
constitution, they broke 50 years of momentum that had built toward the goal of
a United Europe, an economic and political juggernaut born, modestly enough, as
a postwar program to jointly manage Europe’s commodities of war—its coal and
steel. Perhaps the designs simply became too grand. “The French slapped the left
cheek of Europe, the Dutch have now slapped the right,” as EU parliamentarian
Graham Watson said after the Dutch vote on June 1. As Worth went to press soon
after, the euro was sinking, political and economic pundits were pontificating
and those whose fortunes were in some way exposed to the destiny of the
25-nation bloc were worrying.
 Most of Worth’s readers use the dollar as their
primary currency, but many are also touched by the EU crisis through their
business operations, homes and portfolio investments, and involvement in
cultural activities and institutions there. For these individuals, Old Europe
has been a terrible disappointment in recent years. The economies of the
once-mighty engines of Europe—Germany and France—have stumbled under the
encumbrance of rigid labor markets and stifling regulations. (Italy performs
worse than either, but it benefits from lower expectations.) Popular resentment
in those countries over the transfer of rule-making authority to Brussels, the
lack of flexibility in the pan-European monetary regime (Germans are expressing
a growing nostalgia for the good old Deutschemark) and persistently high
unemployment and slow growth have extinguished enthusiasm for further
integration. Adding anger over the incompetence of President Chirac’s economic
team to the mix ensured a resounding non.
New Europe—the dynamic Eastern
European countries that joined the union last year—has, by contrast,
outperformed. U.S. private investors and entrepreneurs have flocked to Poland,
the Czech Republic and the Baltic states (although the latter continue to suffer
somewhat from their ties to Russia’s still-dysfunctional economy). These states
benefit from having access to the EU’s huge capital market and demand for the
types of manufactured products they churn out cheaply. While Old Europe mutters
about the problems with the euro, members of New Europe have tied their
currencies to it and are working hard to meet the criteria for joining the
eurozone.
A Gauling Outcome
In the immediate aftermath of the French vote, U.S.
investors and market analysts focused on the decline in the euro versus the
dollar and the opportunities (and risks) that provided. However, there is only a
slim chance the euro will fall sharply, or for the long-term. After all, the
EU’s economic, monetary and political underpinnings all remain in place (as do
the savings and budgetary imbalances that plague the dollar). The now-defunct
constitution would have expanded upon the existing treaties, but the functioning
of those treaties is not contingent on its passage. A few rumors after the Dutch
vote—one claiming the German central bank and finance ministry were discussing
the possibility of a eurozone breakup—were quickly denied. The euro will no
doubt suffer from the increase in uncertainty, and those Asian central banks
that were planning to diversify their reserves out of dollars and into euros may
reconsider doing so, but in the end, economic fundamentals will continue to
determine the single-currency’s value. Indeed, some analysts viewed the 10
percent decline in the euro versus the dollar as a buying opportunity.
For
private investors and business owners in the U.S., long dissuaded from investing
in Europe by its sclerotic economic performance, the non/nee votes may set in
motion changes that will once again make the continent an interesting place to
do business. The UK assumes the rotating EU presidency this summer, and Tony
Blair has said his priority is to liberalize regulations and not strengthen (nor
ossify) the EU’s institutions. He may see some success, in that Chirac, his
nemesis and no fan of “Anglo-Saxon economic policies,” is now largely bereft of
political capital.
If the French do dig in their heels and oppose reforms, it
will surely not help clear Old Europe’s commercial arteries, and it could
further fray support for the single currency—certainly it would strengthen the
hand of those who believe the UK should stay outside the eurozone. In that
unfortunate case, U.S. investors and entrepreneurs would do well to remain
focused on opportunities further to the east.
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