European Monetary Union in a Globalized World Economy: The Beginning of End for Europe

By Anderson, Donald | Business Economics, January 1998 | Go to article overview

European Monetary Union in a Globalized World Economy: The Beginning of End for Europe


Anderson, Donald, Business Economics


The establishment of a European Monetary Union by 1999 now seems likely. Problems with meeting the criteria for membership are being overcome, sometimes creatively, and initial participation should cover eleven countries. A further four could join by 2003. EMU has very strong political momentum behind it and is seen as a culmination of the postwar development of Europe. But the political dimension is masking the real economic problems that EMU will introduce. Differences between the structure, culture and economies of the participating member states, together with a lack of labor mobility between them and inflexible national labor markets, will create substantial stresses. These will be intensified by competition from the globalized economy and by the future enlargement of the European Union. The resulting tension could be sufficient to fragment not just EMU but the European Union itself.

In less than twelve months time, the majority of the major economies in Western Europe propose to embark on an ambitious program to weld their currencies together into a single monetary union. To anyone familiar with European history and particularly with the history of this century, it is a very laudable aim. Its roots go back to the ending of the World War II, and its main proponents are understandably France and Germany. It is a move with great political momentum behind it. It is, however, primarily a political move, and it raises serious economic concerns. The attention that has been paid to these concerns recently has concentrated on the short term, i.e., the difficulties of creating the European Monetary Union and of establishing it satisfactorily within the next three years. Much less attention has been given to the longer term and the more fundamental issues surrounding EMU, principally as they are likely to develop within Europe but also in the context of the wider and rapidly changing environment of the world economy.

Yet if EMU is to succeed - and the price of failure could be unpleasantly high - it must be based on sound economic principles and practice. At present, there must be more than a little doubt as to whether this is so. The roots of this curious and somewhat worrying situation lie in the history of the European Union's evolution, and in the considerable changes that have occurred in the past fifty years in the world trading and investment environment.

HISTORIC BACKGROUND

The proposals for EMU are the product of a continuous period of development going back to 1947, when an Economic Council for Europe was established. The following year the Organization for European Economic Co-operation, the forerunner of OECD, was founded. The NATO Treaty was signed in 1949 and the European Coal & Steel Community, the forerunner of the Common Market, began in 195 1.

Negotiations for the European Economic Community (the Common Market) itself began in 1955 and were concluded with the Treaty of Rome in 1957. There were six members: France, Germany, Belgium, Netherlands, Luxembourg and Italy. They had hoped that the United Kingdom (UK) would also join, but the UK decided against it. By 1961, the UK Government concluded that this had been a mistake and formally applied. The application was rejected by France in 1963 on the grounds that the UK was too different from continental Europe and too closely oriented towards the wider - and particularly English speaking - world to integrate successfully. In the following years, the countries that had formed the Common Market developed rapidly, recording relatively high growth rates. In retrospect this can be seen as a postwar phenomenon, but at the time it was very impressive. During the next decade the Community grew. The UK, along with Ireland and Denmark, were allowed to join in 1973, and in 1981 Greece was added to the members. Applications were also received from Portugal and Spain, and these were admitted to membership in 1986.

By this stage, however, it was clear that all was not well inside the Common Market.

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