The Euro: A Year of Problems
Hylarides, Peter, Contemporary Review
THE 'ever closer union' seems to get closer and closer. On 1 January 2002, 300 million citizens said goodbye to their historic old currencies, replacing them with one, the euro. Romano Prodi, the European Commission President, predicted that the new currency would be a major step which would lead to greater convergence of economic rules. He also emphasized that the common currency is a pure political project; and it is, of course a political project.
To be honest, it was clear from the beginning that cooperation in Europe was going to be more than just creating a free trade area. After the initial steps were set that put the European Coal and Steel Community (ECSC) and Euratom into action, the Treaty of Rome which established the European Economic Community (EEC) in 1957 laid the foundations 'of an ever closer union among the peoples of Europe'. This emphasized the resolve of the Six 'to ensure the economic and social progress of their countries by common action to eliminate the barriers which divide Europe'. Gradually the powers of individual states were to be further reduced by 'harmonisation'. In the last few years the pronouncements of European leaders certainly went in that direction. Dr Johannes Rau, the President of the Federal Republic of Germany, said in April 2001 that the EU is on the road to a federation of nation-states. 'If we transform the EU into a federation of nation-states, we will enhance the democratic legitimacy ... I believe that th e Parliament and the Council of Ministers should be developed into a genuine bicameral parliament'. A year before, the German foreign minister, Joschka Fischer, had even concluded that a United States of Europe was not far off: 'We already have a federation. The ... 12 member states adopting the euro have already given up part of their sovereignty, monetary sovereignty, and formed a monetary union, and that is the first step toward a federation'. Those who idealise this political concept of Europe indicate that we have lived without military conflicts for 46 years, mainly due to European integration. They conveniently forget that the Cold War, and especially NATO, played an essential part in maintaining peace.
Currently a constitutional convention on the future of Europe is being held with subjects such as taxation, foreign policy and direct election of a European president on the agenda. Federalists form the majority of the delegates who will eventually decide on this future European constitution. The European summit in Laeken, Belgium, approved the structure for the convention and brings the possibility of a European superstate one step closer to reality. Was it not Margaret Thatcher, who warned us in her famous (or infamous if you like) Bruges speech in 1988 not to become an inward looking dirigiste Europe? Now Jack Straw, the current British Foreign Secretary, has endorsed the idea of a written constitution for the EU.
The general public does not seem to mind. In all twelve countries who have adopted the euro, people were celebrating the coming of the new dawn. Europe's 'national' anthem, Beethoven's Symphony No. 9 was played with the crowd joining in the final chorus from Schiller's 'Ode to Joy'. The transition went smoothly, apart from a few minor glitches. But will all men indeed become brothers?
It was only one and a half years ago, though, when the Danish people said no to the euro. With a decisive 53.1 per cent vote the Danes indirectly also rejected the Franco-German calls for a federal European government and parliament, as was suggested earlier by Germany's foreign minister Joschka Fischer. The reaction from Brussels was stoical: Romano Prodi announced that the Danish rejection would have no influence on further political and economic integration, while European Central Bank President Wim Duisenberg emphasized that as far as the euro was concerned it was 'business as usual'. So much for modesty and brotherhood.
Sweden's official reaction to the Danish no-vote was surprisingly in line with the bureaucrats in Brussels. It would have a neligible effect on Sweden according to Prime Minister Goran Persson, but he indicated that a referendum on the euro, planned for 2002, could be delayed until 2004. Only 31 per cent of the Swedes said yes to the euro in a poll held just after the Danish vote, while most Swedes prefer to leave the European Union altogether.
The normally pro-European Irish dealt another blow to the EU in June last year. In a referendum on the Nice Treaty, which is supposed to make enlargement of the EU easier, 53.87 per cent said no. The turnout was admittedly low, with only one-third of the electorate bothering to vote, but for a country that has benefited greatly from EU membership it is, to put it mildly, odd that only a minority seemed to be interested in this issue. The Irish government blamed the defeat on a lack of information, which will be made good with a heavy public relations offensive to try to convince the Irish. With the referendum due to be held this month, they will have another opportunity to vote on EU enlargement. (See above article by Brendan A. Rapple on 'The Modernization of Ireland'.)
The equally pro-European Italians caused some amazement in Brussels. Firstly they announced that they did not want to participate in the Airbus A400M project, the development of a military heavy-lift aircraft. Then they snubbed the plans for an EU arrest warrant which will enable the immediate transfer of a suspected criminal from one member state to the other. Lastly, in an unexpected statement in January three cabinet ministers expressed doubts about the chances of success for the euro, with Umberto Bossi saying that he didn't 'give a damn about the euro'. The result was the resignation of foreign minister Renato Ruggieri and a cool reaction from the European Commission, with the notable exception of Mario Monti, the European Internal Market Commissioner, who reproached the Italian government for 'adolescent behaviour'. Prime Minister Berlusconi meanwhile reassured the European Commission that Italy will remain committed to the EU. It will not be the last time, though, that Italy will defend its national in terests.
A rather surprising 'incident' also happened early this year. Germany's economy is not running well. In 2001 the GDP grew by 0.6 per cent, which is very low compared to a 3 per cent growth in 2000. Its budget deficit is now 2.7 per cent of GDP, only 0.3 per cent below the agreed percentage in the EU's stability and growth pact. The European Commission threatened with an early warning, which, if it would have been accepted by the EU finance ministers, could have been the first step towards a massive fine. The German government, with an election in sight, promised to stay below 3 per cent. Et voila: it was unanimously decided that an early warning was not needed. Strangely enough it was the German government, obsessed with monetary and fiscal rigour, which, in December 1996 insisted on a stability and growth pact that included fines. According to this pact, a government can only plead exemption in the case of a severe economic downturn inflicted by national disaster or external shocks. Apparently rules are made to be broken!
And what about the value of the euro, that ultimate symbol of European integration? Since its debut in January 1999 it hasn't exactly had an easy ride. Until January this year, when the euro became legal tender, it had lost about a quarter of its value against the dollar. The European Central Bank's hopes that the euro would rival the dollar as a reserve currency are thus far from fulfilled. It is, of course, far from clear at the moment what the future will bring for the new currency but critics have pointed out that the ECB has been too reluctant to cut interest rates in 2001, thereby pushing the euro area into a possible recession. There are no signs that this policy will change this year. Another form of trouble could come from asymmetric shocks: if an economic crisis breaks out in one region it could affect other regions as well. With a single interest rate in the euro area there are no possibilities left for national economic management, i.e. the power to de- or revalue the currency and to change intere st rates. Unlike the United States though, there is less regional specialisation in Europe, making the possibility of asymmetric shocks seem more remote. With enlargement on the agenda this situation could well change. Living standards in Central and Eastern European countries are much lower than anywhere in the EU. According to The Economist, admitting candidates from these countries would cause the average GDP in the EU to fall by 16 per cent in purchasing-power terms. As they will not have the opt-out possibility from the single currency, they will loose the exchange rate as an efficient weapon against deficit and inflation.
Although the celebrations on January 1 showed otherwise, the general public had so far not been impressed with the euro. Just a few weeks before the physical introduction of the new currency, the results of a poll were published in The Wall Street Journal. More than half of the European population wanted to keep their national currencies. Sentiments were strong in France and Germany where, respectively, 62 and 57 per cent would have preferred to keep their francs and marks. A poll held in August in the Netherlands showed that 81 per cent of the Dutch miss the guilder. Meanwhile, consumer organisations expressed their concerns about rising prices in the euro area but the European Commission denied this vehemently. In August the most prestigious consumer organisation in France estimated that the euro had increased prices in the shops by about ten per cent. In Greece consumer organisations called for a one-day shopping boycott that drew massive support from the population. It is clear that the euro is still far from being an accepted currency on the continent.
The case of British relations with the European Union is different altogether. After years of opposition against further integration under Conservative governments, Tony Blair wanted to put Britain 'at the heart of Europe'. After Labour won a huge majority in 1997, Chancellor Gordon Brown devised five vague economic tests for possible membership of the single currency. Four years later, with Labour winning again, the tests have not been met but Mr Blair seems keen to step into the project. Until recently, he was clearly at odds with the population at large. At the end of last year, around 70 per cent of Britons were against joining the euro for various reasons. In the eyes of eurosceptic politicians the matter of handing over another vital area of sovereignty plays an important role, but for the average British voter the replacement of a national symbol, the pound, appears to be the 'final straw'. Over the years a lot of changes have been introduced, from new passports to the prohibition of the use of Imperia l weights and measures, which caused many Britons to think that the country was rapidly losing its national identity, replacing it with a European identikit that reeks too much of Franco-German influence. The fighting 'metric martyrs', a small group of market vendors who want to retain the right to use Imperial weights and measures, recently lost their case in court. They are but a small example of what people are disquiet about.
In a MORI poll in September 2000 voters were asked if Britain should stay in the EU. 43 per cent voted to remain, but a staggering 46 per cent said Britain should leave the EU while only 11 per cent was still undecided. In February this year 29 per cent strongly opposed British participation in the euro, with 24 per cent being generally opposed. This is still a majority but the latter could be persuaded to change their mind, if the government presents a favourable picture for joining. Alas, opinion polls are as unpredictable as the weather.
The British government has another problem. It not only wants to be 'at the heart of Europe', but also wishes to retain its position as the United States' staunchest ally in Europe. After September 11 all EU-leaders had rallied behind the United States, with Britain at the forefront, declaring their solidarity with the struggle against terrorism. A major rift, however, appeared after George W. Bush's state-of-the-union speech on January 29. His portrayal of Iran, Iraq and North Korea as an 'axis of evil' provoked a negative reaction in Europe. European leaders are worried that the Bush Administration will act unilaterally against any one of these states. (See also Allan Ramsay: 'The Problem of Iraq' on page 193.) Tony Blair is right in the middle of this row. The 'special relationship' between the United States and Britain causes tensions with his partners on the continent. Even the British European Commissioner for External Relations, Chris Patten, called the 'axis of evil' phrase 'simplistic' and 'unhelpful '. There might come a time when Blair will be forced to choose between his American and European friends. This may be sooner than we think as it is not only the direction of foreign policy that worries the EU. The recent quarrels over the now aborted merger between General Electric and Honeywell have shown that Europeans and Americans think differently when it comes to antitrust legislation. Whereas European rules are more concerned with unfair competition that would harm smaller companies, the U.S. Department of Justice puts the interests of consumers first. Sooner or later this divergence can lead to more serious problems, which might even result in regular trade wars. On whose side will Britain be then? Brussels' or Washington's?
This brings us to the future of Europe. What kind of further integration do we want? Is it necessary to go further along the path of federalisation? These are very difficult questions to answer. Standard bearers of the EU, like France and Germany, seem to be in agreement with regard to the general idea of further harmonisation. Smaller countries like Belgium and the Netherlands are both keen federalists as their political standing can only increase in a United States of Europe. The convention now held in Brussels will prove to be a litmus test for how far the politicians of the 15 EU members will want to go. Recent developments in Europe have shown that the nation-state is not dead yet. A huge task awaits Valery Giscard d'Estaing, who chairs the convention. He wants the citizens of member states to be more involved in the European unification process, 'to dream about Europe' as he puts it. For now it would be enough to try to interest them at all in the European cause. The 1999 election results for the Europe an Parliament were not encouraging as far as that is concerned: it was the lowest turn-out since the first elections in 1979. Only 49.9 per cent voted compared to 63 per cent in 1979. Presenting the people of Europe with a constitution could prove to be too much to chew.
Let us not forget: the blueprint for the EU was made after the Second World War when the idea of the sovereign nation-state was discredited. It came into being at a time when the Cold War was at its height, but the basic principles imbedded in the Treaty of Rome remained unchanged after the Cold War had ended. We have seen that national interests are still predominant, despite public acclamations of esprit communautaire. It is understandable and only natural that individual member states react the way they do. The EU members have a common heritage in many areas, but are also distinctly different. We should continue learning from each other and we should also maintain our drive towards global free trade and political cooperation. But the buck stops here. To turn back the clock is virtually impossible, but a radical rethink of strategies for the future of Europe is advisable. A central authority in Brussels presiding over a United States of Europe is not the solution. It will only create fertile soil for a form of zealous nationalism we don't ever want to see again on European territory.
Peter C. Hylarides studied history and law at the University of Leiden, the Netherlands and graduated in 1992 with an MA degree in Contemporary History. He currently works for KLM and is a freelance journalist.…
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Publication information: Article title: The Euro: A Year of Problems. Contributors: Hylarides, Peter - Author. Magazine title: Contemporary Review. Volume: 281. Issue: 1641 Publication date: October 2002. Page number: 227+. © 1999 Contemporary Review Company Ltd. COPYRIGHT 2002 Gale Group.