By Stark, Jurgen
The International Economy , Vol. 15, No. 6
The establishment of the European Central Bank (ECB) in June 1998 and entry into stage three of European economic and monetary union (EMU) completed the latest step in a development towards a political union in Europe that has stretched over more than four decades. The introduction of euro banknotes and coins in 2002 will make this process obvious to every member of the general public in the euro area.
Neither the majority of Europeans nor critical outside observers appear to be fully aware of the historical, political and economic dimensions of the euro project. The realization of a single European currency is the most significant monetary event to have taken place since the creation of the Bretton Woods system in 1944. It is, at the same time, the most significant innovation in the monetary history of the European continent. Monetary union is a unique project for which there were no blueprints to fall back on. Given the history and the many different features the countries of Europe have in common, it is a logical step to take. What also has to be borne in mind is the fact that the underlying economic conditions have changed rapidly since the early 1980's, owing to the increasing economic interdependence of the industrial countries and the globalization of competition and markets. There is no doubt that these developments too--along with the radical political changes in Eastern Europe--have been a driving force behind the decision to implement economic and monetary union.
In order to put EMU into perspective for a proper assessment and to make an adequate appraisal of the euro's long-term prospects, it is also necessary to look back at recent economic and monetary history in Europe. Economic and monetary union has already changed Europe and will lead to a further radical transformation. The impact of these changes will only be perceptible over the medium to long term.
The strengthened process of convergence in the early and mid-1990's produced a paradigm shift in economic and fiscal policy:
1. The stability orientation--or stability culture--that applied earlier only to some EU member countries now applies to the entire euro area. This is evident in the essential features which were the precondition for the counter-inflationary success of the D-Mark: price stability as the primary objective, guaranteed by a central bank that is independent of political influence with a policy that is geared to the medium term.
2. The soundness of general government budgets, which is to be ensured by simple, transparent budgetary policy rules likewise geared to the medium term as part of the Stability and Growth Pact.
As part of the convergence process, there was a significant reduction in inflation rates, interest rates, and fiscal deficits, especially in participating countries with traditionally more unstable conditions. The medium-term orientation of policies and the commitment to a rules-based approach both in Eurosystem monetary policy and in the budgetary policies of the member states are a major achievement for Europe. This policy approach is, at the same time, an important precondition for the long-term and sustained success of the euro. The performance of the relevant responsibilities in monetary and budgetary policy and compliance with the established rules lead automatically, as it were, to an optimum policy mix.
In Europe, this paradigm shift in economic and fiscal policy linked to the euro implies an attempted departure from "primitive Keynesianism" and from a destabilizing short-term "stop-and-go" policy in Europe. The aim is to set reliable underlying macroeconomic conditions, to sustainable non-inflationary economic growth and to avoid significant cyclical fluctuations. This policy stance--implemented in a credible manner in the medium term--will result in a strengthening of the economic fundamentals in the euro area and thus also strengthen the single currency. …