Chapter 6

Opinion polls periodically conducted by GfK Hungaria, a market research group owned by GfK Germany, paint a more mixed picture. On the one hand, even in countries with a devout following of EU accession, such as Romania, support for integration has declined this year. Support in Hungary and Poland, on the other hand, picked up.

Yet, the EU can't seem to get its act together. According to the Danish paper, Berlingske Tidende, Danish prime minister, Anders Fogh Rasmussen, rules out a "take it or leave it" ultimatum to the candidates. There will be "real negotiations", he insisted. Not so, says Anders Fogh Rasmussen, the Danish president of the EU until Dec 31: "The room for maneuver in negotiations will be very limited ... We have a certain framework, and we stick to it."

Yet, disenchantment should not be exaggerated. Naturally, flood-affected farmers throughout the region - from the Czech Republic to Poland - are vigorously protesting their unequal treatment and the compromises their governments are arm-twisted into making. Still, according to a survey released last December by the European Commission, 60 percent of the denizens of the accession countries support it.

As the endgame nears, the parties to the negotiations are posturing, though. EU enlargement commissioner, Gunter Verheugen, argued a fortnight ago against equalizing support for Poland's 6 million farmers with the subsidies given to the EU's 8 million smallholders. In a typical feat of incongruity he said it will prevent them from modernizing and alienate other professions.

Franz Fischler, the Austrian EU's agriculture commissioner, hinted that miserly production quotas for cereals, meat and dairy products, offered by the EU to the seething applicants, can be augmented. The EU presently provides the candidate countries with funding, within the Special Accession Programme for Agriculture and Rural Development (SAPARD) to support farm investments, to boost processing and marketing of farm and fishery products and to bankroll infrastructure improvements. Hungarian farmers, for instance, are entitled to up to $38 million of SAPARD money annually.

In a thinly veiled threat, Fischler included this in a speech he made in a recent official visit to Estonia:

"The EU enlargement countries should be pleased with the 25 per cent agriculture subsidies, as the member states have not agreed even on that yet, therefore this should be the first goal and only after that can further subsidies be discussed ... It would not be very wise to tell the EU member states that accession countries are not pleased, that would not be positive for the whole process."

Small wonder he was whistled down by irate Polish parliamentarians in an address to a joint session of the parliamentary committees for agriculture and European integration in the Sejm. Poland's fractured farm sector is notoriously inefficient. With one quarter of the labor force it produces less than 4 percent of GDP. But the peasants are well represented in the legislature and soaring unemployment - almost one fifth of all adults - makes every workplace count.

In the meantime, the ten would-be new members of the EU have teamed up to present their case in Brussels. Their ministers of finance, foreign affairs and of agriculture, parliamentary deputies in their finance and farm committees - all issued and issue common statements, position papers, briefings and memoranda of understanding. But no one is inclined to take such ad-hoc alliances among the candidate countries seriously. The disparity between their farm sectors is such that it rules out a single voice.

Moreover, the EU is strained to the limit of its habitual consensus-driven decision making. The breakdown of the European mechanism of deliberation was brought into sharp relief by the way in which the future of the CAP was decided in a series of chats between the leaders of France and Germany in a hotel in Brussels. Their deal was later rubber stamped, unaltered, in a summit of all EU members last month.

The Union is in constitutional and institutional flux. Small and even medium sized members - such as the United Kingdom - are marginalized. As the EU grows to 25 countries, a core of leadership will emerge. It will involve Germany, France and, potentially the UK and Italy.

These will hand down blueprints to be fleshed out by the less significant states and by an increasingly sidelined European Commission and a make-believe European Parliament.

The countries of central and eastern Europe are and will, for a long time, be second class citizens, tolerated merely because they provide cheap, youthful, labor, raw materials and close-by markets for finished goods. The candidates are strategically located between the old continent and booming Asia.

EU enlargement is a thinly disguised exercise in mercantilism tinged with the maudlin ideology of embracing revenant brothers long lost to communism. But beneath the veneer of civility and kultur lurk the cold calculations of realpolitik. The applicant countries - the EU's hinterland - would do well to remember this.

Winning the European CAP

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

According to Herve Gaymard, the French resistance is alive and kicking - at least with regards to the European Commission's proposed reforms of the European Union's Common Agricultural Policy (CAP). The French Minister for Agriculture, Food, Fisheries and Rural Affairs, in a speech to the misnamed "Real Solutions for the Future" Oxford Farming Conference last week, drew the battle lines.

France - and six other EU countries - intend to stick religiously to a deal struck, tˆte- -tˆte, between the French president and the German chancellor last year. The CAP - which now consumes close to half of the EU's budget - will not be revamped until 2013 at the earliest, though outlays will be frozen in real terms and, starting in 2006, gradually diverted from subsidizing production to environmental and other good causes ("decoupling" and "modulation" in EU jargon).

This upset the EU's ten new members, slated to join as early as May 2004. With spending capped, they are unlikely to enjoy the same pecuniary support bestowed on the veterans, even after 2013. As it is, their agricultural benefits are phased over ten years and face an uncertain future when the CAP is, inevitably and finally, scrapped.

Moreover, France's recalcitrance imperils the crucial Doha round of trade talks. Both the EU and the USA are supposed to reveal their hands by March. The developing countries are already up in arms over promises made by the richer polities in the protracted Uruguay round and then promptly ignored by them.

Agriculture is arguably the poorer members' highest priority. They demand the opening of the rich world's markets, whittling down export and production subsidies and the abrogation of non-tariff trade barriers and practices, such as the profuse application of anti-dumping quotas and duties.

Gaymard proffered the usual woolly mantras of "farm products are more than marketable goods", "France, and Europe in general, need security of food supply", "food cannot be left to the mercy of market forces". Farmers, unlike industrialists - insisted the Minister counterfactually - cannot simply relocate and agrarian pursuits are a pillar of the nation's culture and its attachment to the land.

Yet, it cannot be denied that Gaymard advanced in his speech a few thought-provoking and oft-overlooked points.

He convincingly argued that farm products covered by EU subsidies are rarely in direct competition with the crops of the poor in Africa and Asia. The cotton, rice and groundnut oil subventions generously doled out to growers in the United States - the EU's most vocal critic - harm the third world smallholders and sharecroppers it purports to defend.

The IMF - perceived in Europe as the long and heartless arm of the Americans - has dismantled the coffee regime and marketing structures causing irreparable damage to its indigent growers, Gaymard said.

The CAP, insists Gaymard, does not encourage environmental ills. The policy does not subsidize the husbandry of disease-prone poultry and pigs, nor does it support genetically modified crops. The CAP is also way cheaper than portrayed by its detractors. Food constitutes only 16 percent of the family budget - one third of its share when the CAP was instituted, four decades ago. The CAP amounts to a mere 1 percent of the combined public spending of all EU members. The comparable figure in America is 1.5 percent.

This last argument is, of course, spurious. It ignores the distorting effects of the CAP: exorbitant food prices in the EU, double payments by EU denizens, once as taxpayers and then as consumers, mountains of butter and rivers of milk produced solely for the sake of finagling subsidies out of an inert and bloated bureaucracy and deteriorating relationships with irate trade partners.

Gaymard is no less parsimonious with the full truth elsewhere in his counterattack.

He claims that the EU provides tariff-free and quota-free access to farm products from the world's 49 Highly Indebted Poor Countries (HIPCs). This is partly untrue and partly misleading. Important commodities - such as sugar, rice and bananas - are virtually excluded by long phase-in periods.

Non-tariff and non-quota barriers abound. Macedonian lamb is regularly barred on sanitary grounds, for instance. Health, sanitary, standards-related and quality regulations render a lot of the supposed access theoretical.

Still, it is true that the EU's larger economies are more open to international trade than the United States. Gaymard flaunted a telling statistic: the EU absorbs well over two fifths of Brazil's farm exports. The USA - in geographical proximity to Brazil and a self-described ardent champion of free trade - takes in less than 15 percent.

The problem with farming in the developing world is its concentration on cash crops, whose prices are volatile. This subverts traditional agriculture. Gaymard implied that the destitute would do well to introduce a CAP all their own and thus underwrite a thriving indigenous sector for internal consumption and more stable export revenues.

They can expect no help from the industrialized nations, he made crystal clear:

"(The rich countries) are not ready to eliminate their support for agriculture. They have not committed themselves to doing so in international forums and do not believe that, as far as they Are concerned, it would be to the developing countries' advantage. Therefore," - he concluded soberly - "let us stop dreaming." This was received with a standing ovation of the 500 conference delegates.

The conspiracy minded stipulate that France was actually merely seeking to strengthen its bargaining chips. Finally, they go, it will accept decoupling and modulation. But recent policy initiatives do not point this way. France all but renationalized its beef markets, proposed to continue dairy quotas till 2013, sought to index milk prices and defended the much-reviled current sugar regime

These are bad news, indeed. Agriculture is a thorny issue within the EU no less than outside it. A recessionary Germany has been bankrolling sated and affluent French farmers for decades now. This has got to stop and will - whether amicably, or acrimoniously.

The new members - most of them from heavily agrarian central and east Europe - will demand equality sooner, or later. Poor nations will give up on the entire trade architecture so laboriously erected in the last 20 years - if they become convinced, as they should, that it is all prestidigitation and a rich boys' club. It is a precipice and France has just taken us all one step forward.

Deja V-Euro

The History of Previous Currency Unions

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

I. The History of Monetary Unions

"Before long, all Europe, save England, will have one money". This was written by William Bagehot, the Editor of "The Economist", the renowned British magazine, 120 years ago when Britain, even then, was heatedly debating whether to adopt a single European Currency or not.

A century later, the euro is finally here (though without British participation). Having braved numerous doomsayers and Cassandras, the currency - though much depreciated against the dollar and reviled in certain quarters (especially in Britain) - is now in use in both the eurozone and in eastern and southeastern Europe (the Balkan). In most countries in transition, it has already replaced its much sought-after predecessor, the Deutschmark. The euro still feels like a novelty - but it is not. It was preceded by quite a few monetary unions in both Europe and outside it.

What lessons does history teach us? What pitfalls should we avoid and what features should we embrace?

People felt the need to create a uniform medium of exchange as early as in Ancient Greece and Medieval Europe. Those proto-unions did not have a central monetary authority or monetary policy, yet they functioned surprisingly well in the uncomplicated economies of the time.

The first truly modern example would be the monetary union of Colonial New England.

The four kinds of paper money printed by the New England colonies (Connecticut, Massachusetts Bay, New Hampshire and Rhode Island) were legal tender in all four until 1750. The governments of the colonies even accepted them for tax payments. Massachusetts - by far the dominant economy of the quartet - sustained this arrangement for almost a century. The other colonies became so envious that they began to print additional notes outside the union. Massachusetts - facing a threat of devaluation and inflation - redeemed for silver its share of the paper money in 1751. It then retired from the union, instituted its own, silver-standard (mono-metallic), currency and never looked back.

A far more important attempt was the Latin Monetary Union (LMU). It was dreamt up by the French, obsessed, as usual, by their declining geopolitical fortunes and monetary prowess. Belgium already adopted the French franc when it became independent in 1830. The LMU was a natural extension of this franc zone and, as the two teamed up with Switzerland in 1848, they encouraged others to join them. Italy followed suit in 1861. When Greece and Bulgaria acceded in 1867, the members established a currency union based on a bimetallic (silver and gold) standard.

The LMU was considered sufficiently serious to be able to flirt with Austria and Spain when its Foundation Treaty was officially signed in 1865 in Paris. This despite the fact that its French-inspired rules seemed often to sacrifice the economic to the politically expedient, or to the grandiose.

The LMU was an official subset of an unofficial "franc area" (monetary union based on the French franc). This is similar to the use of the US dollar or the euro in many countries today. At its peak, eighteen countries adopted the Gold franc as their legal tender (or peg). Four of them (the founding members of the LMU: France, Belgium, Italy and Switzerland) agreed on a gold to silver conversion rate and minted gold and silver coins which were legal tender in all of them. They voluntarily limited their money supply by adopting a rule which forbade them to print more than 6 franc coins per capita .

Europe (especially Germany and the United Kingdom) was gradually switching at the time to the gold standard. But the members of the Latin Monetary Union paid no attention to its emergence. They printed ever increasing quantities of gold and silver coins, which constituted legal tender across the Union. Smaller denomination (token) silver coins, minted in limited quantity, were legal tender only in the issuing country (because they had a lower silver content than the Union coins).

The LMU had no single currency (akin to the euro). The national currencies of its member countries were at parity with each other. The cost of conversion was limited to an exchange commission of 1.25%.

Government offices and municipalities were obliged to accept up to 100 Francs of non-convertible and low intrinsic value tokens per transaction. People lined to convert low metal content silver coins (100 Francs per transaction each time) to buy higher metal content ones.

With the exception of the above-mentioned per capita coinage restriction, the LMU had no uniform money supply policies or management. The amount of money in circulation was determined by the markets. The central banks of the member countries pledged to freely convert gold and silver to coins and, thus, were forced to maintain a fixed exchange rate between the two metals (15 to 1) ignoring fluctuating market prices.

Even at its apex, the LMU was unable to move the world prices of these metals. When silver became overvalued, it was exported (at times smuggled) within the Union, in violation of its rules. The Union had to suspend silver convertibility and thus accept a humiliating de facto gold standard. Silver coins and tokens remained legal tender, though. The unprecedented financing needs of the Union members - a result of the First World War - delivered the coup de grace. The LMU was officially dismantled in 1926 - but expired long before that.

The LMU had a common currency but this did not guarantee its survival. It lacked a common monetary policy monitored and enforced by a common Central Bank - and these deficiencies proved fatal.

In 1867, twenty countries debated the introduction of a global currency in the International Monetary Conference. They decided to adopt the gold standard (already used by Britain and the USA) following a period of transition. They came up with an ingenious scheme. They selected three "hard" currencies, with equal gold content so as to render them interchangeable, as their legal tender. Regrettably for students of the dismal science, the plan came to naught.

Another failed experiment was the Scandinavian Monetary Union (SMU), formed by Sweden (1873), Denmark (1873) and Norway (1875). It was a by-now familiar scheme. All three recognized each others' gold coinage as well as token coins as legal tender. The daring innovation was to accept the members' banknotes (1900) as well.

As Scandinavian schemes go, this one worked too perfectly. No one wanted to convert one currency to another. Between 1905 and 1924, no exchange rates among the three currencies were available. When Norway became independent, the irate Swedes dismantled the moribund Union in an act of monetary tit-for-tat.

The SMU had an unofficial central bank with pooled reserves. It extended credit lines to each of the three member countries. As long as gold supply was limited, the Scandinavian Kronor held its ground. Then governments started to finance their deficits by dumping gold during World War I (and thus erode their debts by fostering inflation through a string of inane devaluations). In an unparalleled act of arbitrage, central banks then turned around and used the depreciated currencies to scoop up gold at official (cheap) rates.

When Sweden refused to continue to sell its gold at the officially fixed price - the other members declared effective economic war. They forced Sweden to purchase enormous quantities of their token coins. The proceeds were used to buy the much stronger Swedish currency at an ever cheaper price (as the price of gold collapsed). Sweden found itself subsidizing an arbitrage against its own economy. It inevitably reacted by ending the import of other members' tokens. The Union thus ended. The price of gold was no longer fixed and token coins were no more convertible.

The East African Currency Area is a fairly recent debacle. An equivalent experiment, involving the CFA franc, is still going on in the Francophile part of Africa.

The parts of East Africa ruled by the British (Kenya, Uganda and Tanganyika and, in 1936, Zanzibar) adopted in 1922 a single common currency, the East African shilling. The newly independent countries of East Africa remained part of the Sterling Area (i.e., the local currencies were fully and freely convertible into British Pounds). Misplaced imperial pride coupled with outmoded strategic thinking led the British to infuse these emerging economies with inordinate amounts of money. Despite all this, the resulting monetary union was surprisingly resilient. It easily absorbed the new currencies of Kenya, Uganda and Tanzania in 1966, making them legal tender in all three and convertible to Pounds.

Ironically, it was the Pound which gave way. Its relentless depreciation in the late 60s and early 70s, led to the disintegration of the Sterling Area in 1972.

The strict monetary discipline which characterized the union - evaporated. The currencies diverged - a result of a divergence of inflation targets and interest rates. The East African Currency Area was formally ended in 1977.

Not all monetary unions ended so tragically. Arguably, the most famous of the successful ones is the Zollverein (German Customs Union).

The nascent German Federation was composed, at the beginning of the 19th century, of 39 independent political units. They all busily minted coins (gold, silver) and had their own - distinct - standard weights and measures. The decisions of the much lauded Congress of Vienna (1815) did wonders for labour mobility in Europe but not so for trade. The baffling number of (mostly non-convertible) different currencies did not help.

The German principalities formed a customs union as early as 1818. The three regional groupings (the Northern, Central and Southern) were united in 1833. In 1828, Prussia harmonized its customs tariffs with the other members of the Federation, making it possible to pay duties in gold or silver. Some members hesitantly experimented with new fixed exchange rate convertible currencies. But, in practice, the union already had a single currency: the Vereinsmunze.

The Zollverein (Customs Union) was established in 1834 to facilitate trade by reducing its costs. This was done by compelling most of the members to choose between two monetary standards (the Thaler and the Gulden) in 1838.

Much as the Bundesbank was to Europe in the second half of the twentieth century, the Prussian central bank became the effective Central Bank of the Federation from 1847 on. Prussia was by far the dominant member of the union, as it comprised 70% of the population and land mass of the future Germany.

The North German Thaler was fixed at 1.75 to the South German Gulden and, in 1856 (when Austria became informally associated with the Union), at 1.5 Austrian Florins. This last collaboration was to be a short lived affair, Prussia and Austria having declared war on each other in 1866.

Bismarck (Prussia) united Germany (Bavarian objections notwithstanding) in 1871. He founded the Reichsbank in 1875 and charged it with issuing the crisp new Reichsmark. Bismarck forced the Germans to accept the new currency as the only legal tender throughout the first German Reich. Germany's new single currency was in effect a monetary union. It survived two World Wars, a devastating bout of inflation in 1923, and a monetary meltdown after the Second World War. The stolid and trustworthy Bundesbank succeeded the Reichsmark and the Union was finally vanquished only by the bureaucracy in Brussels and its euro.

This is the only case in history of a successful monetary union not preceded by a political one. But it is hardly representative. Prussia was the regional bully and never shied away from enforcing strict compliance on the other members of the Federation.

It understood the paramount importance of a stable currency and sought to preserve it by introducing various consistent metallic standards. Politically motivated inflation and devaluation were ruled out, for the first time. Modern monetary management was born.