The Political Consequences of Monetary Union

Article excerpt

Our second paper this month on EMU is based on a speech by the President of the Deutches Bundesbank, Dr Hans Tietmeyer given in Brussels at the end of February.

He emphasised that the Euro is not a formula for deliverance from all economic and political ills in Europe and that a stable single currency needs not only a sound economic but also a sound political foundation

Some current contributions to the subject of the Euro from time to time remind me of St Matthew's words Beware of false prophets". Some tend to paint a picture of catastrophe, while others herald the way to paradise. I consider both to be wrong.

Certainly the Euro as the future Community currency is not without its risks. But to equate risks with inevitable catastrophe from the outset has little to do with realistic analysis.

However this lack of realism also applies to those who announce that the Euro is a kind of formula for deliverance from all the economic and political ills in Europe. The Euro neither can nor will offer such deliverance. No currency could do so. On the contrary a common currency in fact brings with it new challenges.

Without doubt the Euro will offer fresh economic and political opportunities. And the responsible authorities have by intelligent and proper decisions seen to it that these potential opportunities actually become concrete advantages.

But monetary union will not solve the European problems by itself. Neither will its introduction alone eliminate the high level of unemployment, the structural problems in government finances and welfare system, or the poverty of those on the fringes of society. Nor will monetary union replace the continuing lack of political common ground in Europe as to how integration should move forward. And of course monetary union contains risks. Namely if its foundations should not prove lastingly stable; and if some participating countries should persist in not accepting the political and economic consequences and the rules of the common currency.

For this reason it is vital that all countries recognise the far-reaching consequences before entry into monetary union and that they also accept them permanently. For membership for the monetary union means an extensive economic and political commitment that will last forever.

Membership of the monetary union is indeed rather different from an exchange rate relationship such as many countries have already. It involves much more obligation and is more far-reaching.

A fixed but adjustable exchange rate in the current EMS remains a commitment subject to time, subject to cancellation, to say nothing of the present wide fluctuation margins about the central rate. On the other hand membership of the monetary union fixes the exchange rate forever, indeed it eliminates it.

Monetary union is a one-way-street. No subsequent revision or withdrawal of any kind is either legally or politically provided for. It would also cause considerable economic costs and above all great political damage.

It is not just the exchange rate that will be fixed. The entire monetary policy will be standardised and decided centrally for all participating countries. There will be a common central bank system unconnected with the various traditions and structures that have developed in the individual countries.

The monetary union is therefore a monetary community of destiny for better or worse.

The journey to monetary union in today's conditions is undoubtedly an event of unique significance, indeed in a double sense:

>unique because hardly comparable with current or previous monetary arrangements,

>but also unique in the sense that Europe will have just one attempt in the foreseeable future.

Therefore it must succeed. And above all it must become a lasting economic and political success for the integration of Europe.

The economic foundation

For one thing a stable and as far as possible conflictfree currency zone needs a sound economic foundation. …