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European Monetary Union and Its Systemic and Fiscal Consequences

English Pages, 30. 9. 1996

European Monetary Union - as a distinct political, and therefore not only purely economic project - has at present become one of the dominant political goals of the European integration process and will, undoubtedly, remain in this position for a long time. It is more a political goal of politicians rather than a goal of citizens of European countries, but because we live in the era of indirect, representative democracy, the difference is - from the view of decision-making processes - not so important. In any case we can say that the decision to create the European Monetary Union is the most important one taken since the end of World War II. Despite this fact, I cannot resist the impression that the problems regarding the European Monetary Union - because of the fact that it is predominantly a political endeavor - are being trivialized, that we overestimate its - however indisputable - advantages, and, on the contrary, that we ignore or fully omit its disadvantages.

It is quite clear that the main advantage is - but I wish to mention that it is only for the ones who are moving, not the ones who do not move or do not move enough - the possibility to move within one monetary area, without having to exchange the money every hundred kilometres, without being victims of unexpected devaluations or revaluations and so on. But nothing is free and our main task is to find out whether the benefits of the monetary integration will prevail over the costs and whether its costs and benefits will coincide in time.

These are not minor considerations. These are not the concerns of a „Euro-pessimist“. These are the issues voiced by a responsible politician, and, I would add, a politician who has spent the majority of his life in a communist regime, where the basic structural characteristics were not central planning, state ownership, not even the dominant role of the Communist Party, but the priority of politics over economics, or the idea that it is possible that politics dictate economics.

These are the issues of a politician who knows that the European integration is our common future, of a politician who tries to make sure that the result is the best one possible to achieve. Additionally, these are the issues of a politician who expects that his country will become a full member of the European Union in the near future, and that it will not wish to play an outsider’s role there.

From the theoretical point of view, it is important to ask whether today’s Europe is an „optimal currency area“ (according to a definition by Mundell from 1961), and if it is not, whether the ex-ante organized monetary unification will help to create such an area and at what costs.

There is no doubt that the European Union is still characterized by a very heterogenous structure of its member countries, and that today’s 15-member European Union is not an optimal currency area. This heterogenity is not an obstacle to lower forms of economic integration (such as the common market or customs union) but it is an obstacle to the emergence and smooth functioning of a monetary union - as we could learn from the collapse of the Czechoslovak monetary union, and from the politically motivated quick monetary unification of Germany. (If we go further to the history, we could speculate if the monetary union of Italy in 1861 was not the case which helped to „freeze“ the then-existent economic imbalance between the Italian north and south. In this respect, I am inspired by a recently published hypothesis on whether or not the former Socialist Germany could become a new Mezzogiorno). At the same time, we must consider that there is a certain homogenization process thanks to intended political-economic measures. The original European „6“ is definitely more homogenous than today’s „15“ or the future’s „20“ or „27“.

What are the reasons of the present structural heterogenity among European states? What will be its consequences for the future monetary union and what could minimize its negative impacts?

1. There are several reasons for heterogenity of the economic structure of today’s Europe.

First, there are natural differencies in the endowment of the individual countries with factors of production, including such variables as the weather, natural resources, access to the sea etc. Because of that, the impacts of the exogenous changes (= external shocks) are different in various economies. The existing differences, which I do not wish (and cannot) analyze here, cannot be underestimated. Its existence is documented daily by the non-negligible tensions inside some countries of the European Union (for example in the earlier-mentioned north and south of Italy). And this happens despite the fact that there is an undoubtedly stronger feeling of solidarity in these countries than there will be among countries in the future monetary union. I wish to add that this problem does not have the slightest connection with accomplishing the so-called Maastricht criteria.

Second, in Europe there are very different „national propensities“, traditions and habits that can be hardly changed considering their long-term historical anchoring, or - to put it differently - their change in short or middle-term is not possible (the other question is if it is desirable). We could name a large number of examples of such national pecularities and the existing differences between countries will naturally be a source of future problems. Therefore, it can be predicted that the conflict concerning the extent and duration of transfers from rich to poor countries and from rapidly developing to stagnating ones, will be a permanent characteristics of the monetary union.

The third specifics is something what would be possible to change, but what is in every moment „given“ - like the weather or the supply of gas. I speak of the prevailing ideology and resulting economic policies, I speak of a choice between the conflicting goals and of a choice of the instrumentarium of economic policy. Neither in this respect is Europe homogenous, there has not been any „end of ideology“, predicted by F. Fukuyama. There are countries with right-of-center or left-of-center governments, political fights inside any country are irreconcilable as always in the past and will always be. The dreams of some European politicians that these problems will die off and that some non-politic or above-politic rationality will prevail, are an example of one, very concrete and very well-known ideology. An ideology which I do not share. Priorities and preferences of various countries differ today and will differ in the future.

2. These are - very simply formulated - starting preconditions for any serious discussion about the European Monetary Union. Introducing a single currency or transfering one economic parameter from the category of variables to the category of constants will mean:

- inequal impacts of the world trade and its fluctations (but also of other exogennous influences) on various countries without the chance of short-term and middle-term adjustments in nominal variables. As we all know very well, Maastricht convergent criteria do not include the economic growth or the dynamics of output, wages and employment. These variables will grow in various countries quite differentially. The important thing is that this different development will not lead to changes in the exchange rate as till now;

- the political unacceptability of growing differences in the economic level among countries will bring about the increase of transfer payments among countries and the centralization of budgets into the center of the European Union. The solidaristic character of the Union will grow, the autonomy of fiscal policies and of decision-making authority will go down. It is legitimate that some of us may want this, some not. It would be illegitimate to pretend that such a problem does not exist;

- the shift in decision-making structures will bring about a shift in the structure of basic political and constitutional institutions and it will mean a visible ideological change from traditional liberal (contractural) society to a more constructivist (and political) system. It is being discussed in Europe these days under the heading „democratic deficit“.

3. Minimizing the negative impacts of the introduction of monetary union to a non-homogenous area depends on the following two issues:

- on the flexibility level of the factors of production and their prices;

and

- on the degree of autentic European solidarity.

The monetary union will be easier to form if the mobility degree of the basic factors of production (labor and capital) is higher (even though there is no symmetry: „greater labour mobility is a cementing force of the union, while greater capital mobility is not“, P. Bolton and others, Economic Theories of the Break - Up and Integration of Nations, Brussels, ECARE, September 1995). The mobility of labor is - in Europe - (compared to America) - on much lower level and if I am not mistaken, noone in Europe is interested in its growth at present, speaking of the mobility among countries. I believe that none of us wish that there is „voting by feet“ which means that a less-successful country would be getting depopulated and vice-versa. If such a process is not to take place, there must be either an idylic epoch of an absolutely balanced, harmonic economic growth or an artificial coverage of differencies by financial transfers from more towards less successful countries.

Growing mobility of capital causes that this problem is becoming more serious because capital follows success, not vice-versa.

The same is true about price flexibility. The monetary union will be more difficult to organize, the more rigid prices of factors of production will be. The price of labor is traditionally very rigid and I do not see any real chances to weaken the existing downward wage rigidity. Again, because I do not expect that, significant fiscal transfers will have to follow.

And that is how we come to my last idea. Again and again there is a question of fiscal transfers and European solidarity. The so-called „cohesion-fund“ founded by Maastricht treaty, represents an elementary form of the future European fiscal mechanism - with the only difference that it will be more costly. Every politician knows that a 1% increase or reduction of the share of state budget on GDP inside a country leads to occasional fall of Government or to a change in election results. The idea that European taxes and European transfer payments will be excluded and put „in front of the brackets“, that they will not be politically disputed, that they will stay away from standard political fightings, seems to me quite unrealistic and dangerous at the same time. The relationship between the individual and state, and any above-individual structure is a basis of political discussions in every democratic society and must not be changed in the future Europe. As a politician, I wish that I can decide on something „in front of the brackets“, as a citizen I wish to minimize such decisions.

I began my speech with saying that I consider the European Monetary Union the biggest post-War change, including the collapse of communism in Eastern part of Europe. We have to seriously discuss this issue. Not only the final solution, but also the problems regarding the transition from one system to another. I hope that the debate about this will continue.

Václav Klaus, New Atlantic Initiative Luncheon, Washington, D.C., 30 September 1996