I had planned to write a short comment at this blog about this weekend’s fifty years celebration of European integration in Berlin (it is in Berlin because Germany following the routine changes of EU presidencies is currently in charge of the European Presidency) of the fifty years since the Roman Treaties that created the European Economic Community and then led to the European Union and the instalment of a common European currency, the euro. In my research I hit upon two articles by Martin Feldstein that I had read also back then when they were published in 1997 and 1999. At that time, like today, with the same utter astonishment, but this time, with the facts out, I could not hold to write a refutation and to add some implications why current US policy is so much out of sync with the current geopolitical realities.
In his article
http://www.time.com/time/printout/0,8816,990057,00.html
of the year 1999, Martin Feldstein, Harvard Professor and leading NBER member tries his talent as a forecaster and gets it all wrong. Let’s check:
First he says in his article that “officials in Washington are underestimating the risks to the US of the new European Economic and Monetary Union, and its new currency, the euro”. This is one of the few true statements in Feldstein’s article and it is as true today as it was then. However, this statement is not a forecast but an observation which was and still is perfectly correct. Yet when it comes to forecasts and deductions, Feldstein misses systematically the point. He writes that the European Monetary and Economic Union is “likely to weaken” the European economies with the expectation of “more trade tensions and economic isolation”. In the meantime, this statement is clearly refuted by the facts. Just consider the current trade figures, and check the current dollar/euro exchange rate. The contrary of Feldstein’s forecast has happened.
One is inclined to ask oneself, how an intelligent observer could have expected such an absurd prognosis in 1999 although Feldstein was not the only one among prominent US economists. But it gets worse.
He foresees higher inflation in Europe, when in fact, as of now, in the year 2007, inflation in Europe is lower than in the US.
In a profound misunderstanding of the character of the process of European unificaiton Feldstein stipulates: “With a single European Central Bank, Germany can no longer be the standard setter for Europe. The end of that leadership in monetary policy, and the associated rise of political influence over monetary affairs is a clear receipe for higher inflation.”
While I am not a fan of the ECB, Feldstein’s view shows a considerable degree of ignorance about how European institutions work. As of now, under a FRENCH president at the European Central Bank, one has to admit that the ECB is even more strictly oriented towards “price level stability” than the German Bundesbank ever was. However wrong this may be, see previous posts at this site, it is in contrary to Feldstein’s forecast.
Feldstein foresaw, incorrectly as before, “increased trade friction” due to European unemployment (obviously in ignorance how unemployment rates get calculated in Europe in contrast to the United States) and he writes that the “result will be increased trade friciton with the U.S. and other countries as Europe attempts to block ((sic)) American and other non-European products on the ground that they are made under ‘unfair conditions’, i.e. in countries with lower tax rate and more flexible labor markets.”
This statement is another of the more than absurd forecasts, and in the meantime has been completely rejected by the facts, just take into account the agreement of this week regarding the opening up of the air traffic between the U.S. and Europe. Currently, the EU is more deeply integrated into the world markets than the US and not only on the import side, but also with exports, as it should be.
But it gets worse when Feldstein becomes political.
He writes that the European Monetary Union will bring “new conflicts over the sharing of political power in Europe”. Then some rudimentary knowledge of European history comes into play, and it is of course, the French again: “The French ((note the “the”)) see political union as a way of limiting Germany’s economic power and extending the influence of French foreign policy.” While the “recently unified Germany, with its larger population, stronger economy and position in the center of an expanded Europe, sees itself as the Continent’s natural leader.”
This school book history logic has nothing to do with current European reality. And the facts since then have borne it out how wrong Feldstein’s prognosis was.
But Feldstein goes on and even foresees a clash ((whatever that means at least it is not beneficial - in 1997 he even wrote about a war)) between France and Germany: “The French ((here they show up again as if they were a peste)) desire of equality with Germany ((why doesn’t he say the ‘Germans’ here as the linguistic style would have suggested according to the beginning of his sentence?)) in economic policy and for leadership in foreign affairs is about to clash with Germany’s (((again not the ‘Germans’)) sense of its own importance.” And of course “the smaller countries” will be “frustrated” when ”they discover they have sacrificed their sovereignty over domestic economic and social policies and eventually over international policies ((what kind of sovereignty did these smaller nations have before? What kind of influence of international policies did Portugal or Greece or Ireland have before?)) without gaining any ((sic)) signficiant influence on the decisions that are made in Berlin and Paris.”
Note the absence of logic here: a few sentences before in Feldstein’s statements, Germany and France were close to war, now they together determine the fate of the “smaller nations” in Europe.
Well, just as a remark to get the facts straight as of the situation in 2007: the current head of the European Commission is a Portuguese. Ask him whether he feels that Portugal has lost “sovereingty” compared to before joining the European integration process.  And let us ask Professor Feldstein to visit Ireland, the former poor house of Europe, now, in the year 2007, and ask the Irish what has happened economically in the past 10 years. However, Feldstein may just more easily compare back home at Harvard the statistical figures how Ireland was in 1997 and how the situation is in 2007, but then he has to admit that his prognosis was total nonsense.
And finally, and worse of all, in a previous article (1997) in Foreign Affairs, which is the publication of the Council fo Foreign Relations and the institution of the prime instigator of US foreign policy, Feldstein even prognosticated a war in Europe because of the Euro. http://www.foreignaffairs.org/19971101faessay3405/martin-feldstein/emu-and-international-conflict.html
Given that persons like Martin Feldstein are the prime opinion makers and advisors for the power clique of current US international economic, political and military policy, it is no wonder how things stand as we have to observe them now.
posted by Antony Mueller, The Continental Economics Institute