A Political Euro Is a Sound Euro; the Debate about a Hard and Soft European Currency Misses the Point That All Central Banks Must Fit into Political Systems

By Middlemas, Keith | New Statesman (1996), June 13, 1997 | Go to article overview

A Political Euro Is a Sound Euro; the Debate about a Hard and Soft European Currency Misses the Point That All Central Banks Must Fit into Political Systems


Middlemas, Keith, New Statesman (1996)


It may not suit British taste to acknowledge the point, but there is no chance of European Monetary Union being abandoned, and probably no more than a 25 per cent chance of delay. Fortunately, there is also every chance that the political turbulence surrounding the new currency's birth will ensure it is well-designed and likely to succeed. EMU is clearly the child of a dysfunctional two-parent family: the question is how to reconcile the demands of the two parents, economic logic and political reality.

For all the difficulties of Chancellor Kohl's Rheingold reverse and Lionel Jospin's electoral success, EMU is too central to the long thrust of German policy since the early 1980s for this reconciliation not to be achieved. Equally, it is inconceivable that Jospin will repudiate both Mitterrand's long-standing policy of attempting to corral Germany or the immense economic and social sacrifices made by the French public to prepare for EMU. Neither can the French elites risk repeating rejection of their creation, the European Defence Community in 1954, and for a second time in 45 years force Germany out of the "integration circle" towards the Anglo Saxon/American alignment, for which many German industrial and financial players yearn.

The project's essence is its sustainability. Its long-term discipline will, in theory, be more enduring than the 19th-century Gold Standard: once inside the EMU salon, guests will find there are no handles on the doors to exit.

The immediate question, however, is the rigour of EMU entry, rather than the 1996 stability pact, which will guide the European Central Bank. Jospin, whose campaign focused on les exclus sociales, says France cannot stand a permanently deflationary monetary order. In this, he has allies, Robin Cook among them. Even Kenneth Clarke has noted what the rules' strict interpretation would mean for a country whose cycle did not match that of the majority, as Britain's has not in four of the past ten years.

Full-scale renegotiation of the stability pact would risk blowing EMU apart, as Jospin must know. But he also senses that there is scope for informal flexibility about the pact's legal strictures; and that acknowledgement of these might ease the French public's fears, without upsetting already edgy public opinion in Germany. The trick is to demonstrate that the single currency project is responsive to popular anxiety, but still based upon a regime sufficiently robust to ensure the euro's soundness over the long term.

So, fines for those who flagrantly break EMU's rules will remain: no one in Brussels is likely to forget which member states have had the greatest number of judgments against them already for often-deliberate defaults in other spheres. But as economies converge over the next ten to 20 years, such occasions, already becoming rarer, will probably almost disappear. Of far more concern to management of EMU over the long term, once the canons of practice have been established in the first two to three years, will be how to deal with countries genuinely suffering exceptional hardship; here, as in the past, after much bargaining (as for example in the case of Spain, over cohesion funding in 1989-91) help rather than punishment is likely to be offered.

It is the early years that present the problem, especially if countries such as Italy, Belgium, Spain and perhaps Ireland, whose political systems are least fitted to sustain economic isolation, suffer a crisis caused by eccentric cycles of recession, and are then required to deflate without option, as Britain had to after rejoining the Gold Standard in 1925. A modest affirmation that the pact's language would be interpreted according to political reality, but only on the basis of precedent, as if the Central Bank were the European Court of Justice, would make EMU's first years more stable.

But surely, protest the markets and some members of the Bundesbank, that means a soft euro. …

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