If Sarkozy gets his way it will Speed Up the Demise of the Eurozone

Posted by PITHOCRATES - December 11th, 2011

Week in Review

You knew it couldn’t last.  The peace between archenemies France and Great Britain.  It’s just too hard to forget a century or so of history I guess (see EU Treaty: Nicolas Sarkozy’s push for power poses ‘biggest threat to EU unity’ by Bruno Waterfield posted 12/9/2011 on The Telegraph).

France has long pushed for an “intergovernmental” organisation that could reshape Europe around the kind of protectionist model that has traditionally been opposed by Britain and a coalition of free-trade nations.

“The fear is not the possibility of an intergovernmental treaty between 26 EU countries. We have to remember and beware Sarkozy and his speeches calling for a smaller union,” said Mr Verhofstadt. “Everyone knows that is the big risk now.”

In speech in Marseilles yesterday, Mr Sarkozy called for a “real European industrial policy”, a revision of the EU’s single market competition policy and the imposition of trade barriers on Asian countries, such as China, with lower social standards. “I would like to see Europe stop allowing products to enter its territory that respect none of the rules we impose on our producers, our farmers and our stockbreeders,” he said.

First France wanted the European Central Bank to start printing money to solve the Eurozone’s debt woes.  Germany not being too keen on inflation was not too keen on that idea.  They’d rather see countries enact austerity.  And live within their means.  Like the Germans are doing better than most in the Eurozone.  Of course that’s the last thing these countries want to do.  Cut back on their welfare states.  For it’s what makes them European.  Well, that and very high taxes.

Not only does France NOT want to enact any austerity measures, they want to let the good times keep rolling.  By finding other sources of revenue to pay for them.  Such as import tariffs on goods coming into the European Union.  Especially those goods from Asia that their domestic industries can’t compete against because of those high taxes to support those generous welfare states.

But this isn’t a solution.  Which is why Great Britain is against it.  As well as that coalition of free-trade nations.  Import tariffs are just taxes paid by the consumers.  They increase domestic prices.  Pulling more money out of consumers’ pockets.  Which reduces economic activity.  It also invites retaliatory tariffs.  Which increases the price of exports.  Which means people in those export markets buy less.  Because they have less money in their pockets.  Which also reduces economic activity.

Import tariffs won’t be the panacea Sarkozy thinks they’ll be.  Because economic activity is dynamic.  It isn’t static.  Yes, at first tariffs will increase tax revenue.  But they also will be a drag on the economy.  And less economic activity means less tax revenue.  Just like every nation that tried to tax away their debt problems learned.  One tax rate increase was never enough.  For every time they raised the tax rate there was a corresponding reduction in economic activity.  Which only made the original problem worse.

If Sarkozy gets his way it will speed up the demise of the Eurozone.  Which is inevitable.  For they have shown unity in currency will not work without political unity.  And there will never be political unity.  At least you’re not going to get political unity when you’re talking about the benefits of a smaller union.  Because you can’t reach a political consensus in the full union.

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