Why Politicians Are Harmless.(economic cycles and politics)(Brief Article)

The United States and the EU may have growing differences on everything from Mideast policy to the environment, but the past two weeks have proved that their markets, at least, remain as interdependent as ever. With fears of further terror strikes and more corporate-accounting debacles in the air, markets on both sides of the Atlantic have been hovering around five-year lows. The situation wasn't helped by the demise in early July of yet another corporate titan, Vivendi CEO Jean- Marie Messier, who had infamously enraged his countrymen by proclaiming the French cultural exception "dead." His ouster was supported by a coalition of disgruntled shareholders and board members, and may have been hastened by disapproval from French President Jacques Chirac, who declared such views on French culture to be a "deep mental aberration that nothing can justify."

So maybe the post-September 11, post-Enron buzz was right: from now on, national politics will indeed begin to exert more influence over markets. But take a closer look at Vivendi. Most analysts agree that the company's troubles have had more to do with fears about its high debt and the possibility of dubious accounting than any concern with Messier's cultural affinities. And in Europe as a whole, it's fair to say that national politics are becoming less and less linked to sustained market movements. National elections may still produce market blips. But these reactions are usually short-lived. Increasingly, only regional and global politics are strong enough to move European markets.

Consider the events that have had the most sustained effect on European markets over the past several years. These include German reunification, Britain's 1992 decision to step back from euro membership and 1995 fears that France would not go through with the budget cuts and other reforms leading up to the new currency. All these alarms threatened European integration and globalization--and those same two great trends are making it harder for individual governments to control the business environment. In a borderless Europe with a single currency, national leaders no longer have the power to control monetary policy or capital flows. Even tax policy is slowly slipping out of their hands: the EU already has an agreed minimum VAT rate of 15 percent, and the EC is trying to harmonize taxes on corporate income, energy and digital products.

Where national governments do still hold the power to tax, the effect on corporations will be dampened by their mobility. Over the past two decades, it has become ...