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European Monetary Union: The Czech Perspective

English Pages, 26. 5. 1999

I am a very special person to talk here about Monetary Union, because I am well-known for dismantling one monetary union called Czechoslovakia. It gives me a very special perspective and a very special sensitivity to some of the issues discussed here and elsewhere.

As a politician and a former economist, I have a frustrating feeling that everything about EMU has already been said, that there is nothing to add, that there is definitely no lack of knowledge. The problem is whether we use sufficiently the existing knowledge. Famous economists repeatedly tried to explain basic, more or less textbook arguments about both optimum currency areas and monetary unions, but I am afraid the architects of EMU didn’t listen carefully or sufficiently.

The economists continued to remind us that the conditions for a successful monetary union are microeconomic, which means that they have directly nothing to do with the macroeconomic conditions specified at Maastricht.

It was repeatedly emphasised that the benefits of free-trade are connected with the European Economic Community (which means with a free-trade area and a customs union), and that they are independent of a monetary union.

It was argued that the appeal of getting something for nothing is wrong. It was stressed that it is not possible to convert a variable into a constant without paying an inevitable price, without initiating or provoking movements of some other variable or variables.

We could go on with similar arguments, but it seems to me that it’s not sufficient because nobody wants to listen. They want instead to talk about the benefits of a Monetary Union and not about its costs. Our task remains to analyse and forecast its consequences inside the European Union, outside the European Union, vis-a-vis the future member countries, vis-a-vis the United States, vis-a-vis Asian countries.

There will be undoubtedly costs and not just benefits. It seems to me that the architects of the euro must be - to use labels well-known in the economic profession –new classicals or at least elasticity optimists. They have to assume that prices and wages in Europe are so flexible that exchange rate adjustment is not, and will never be, needed. Additionally, they have to assume that labour mobility is very high. The empirical data do not, as I see them, support these assumptions. In such a situation, something else must become flexible and mobile. This variable, of course, exists and we call it fiscal transfers among individual member countries of the EMU. It is a mistake that their potential size and frequency have not been sufficiently or openly discussed. All of us know that the size of those fiscal transfers in a recently created Monetary Union called Germany was and is enormous. I am aware of the size and frequency of fiscal transfers in a Monetary Union which used to be called Czechoslovakia. I was its last Minister of Finance who was sending the fiscal transfers from one part of the Monetary Union to another and I know that it was impossible to continue.

The architects of EMU probably implicitly or subconsciously assumed that currency domain (monetary union) can be greater than fiscal domain (fiscal union). As far as I know, it has never been proved that this can lead to a viable institutional arrangement. I am convinced of the inevitability of the one-way street, of the inevitability of the path: monetary union – fiscal union – political union. Therefore, one of the consequences, and I include it on the side of costs, will be the emergence of a fiscal and political union. And the justified question is: Do we really want it? Do we really want a political union? It seems to me that we shouldn’t feel being guilty of a dreadful sin when we raise that question or even give a qualified answer to that.

The existence of a monetary union without political union means that states delegate monetary policy to a supranational agency. It could eventually be neutral in my understanding only on condition that there is a unified economic interest. It is, however, a very problematic assumption to expect anything like that when we look at the current European heterogeneity. I’m afraid, therefore, that the costs and benefits of European monetary union will not be equally distributed among its members which will put the newly created European Central Bank under tremendous pressure.

Recently, I had the opportunity to discuss the Euro with an influential European parliamentarian. After a while, he couldn’t find enough arguments in favour of EMU and the debate forced him to reveal his deeper thoughts. I understood that he didn’t care about the lack of arguments for EMU because he had a strong argument against something else. He explicitly stated that EMU is against something or someone. I feel that the danger is in an undeniable undertone of anti-Americanism and anti-Asiatism in his arguments. He hopes to check the assumed global dominance of the US and the assumed economic strength of Japan and other South-East Asian countries through the vehicle of a united Europe. It seems to me that he did not know that competitiveness has no connection with size. He forgot that the economic power of Singapore or Hong Kong is not based on a common currency or a political union. We should not underestimate such way of thinking. I am afraid that the echo of an old French adage „Le Défi Américain“ is with us again, and this is something that I do not like to hear.

This brings me to my last point. The Euro, it seems to me, is the most important change in the international monetary architecture since Bretton Woods in 1944 and the biggest voluntary giving-up of national sovereignty in human history - as an alternative to something else. Instead of redefining European integration along classical liberal ideas the idea of EMU was brought to the fore. I am convinced that Europe doesn’t need unification but a liberal order. The relevant question is whether EMU brings us closer to such a goal or keeps us preoccupied with an alternative endeavour. I hope that we will concentrate on the second task with the same determination as on the first one.

Václav Klaus, Notes for the Conference „Sortir de l´euro?“, University Paris IX - Dauphine, 26 May 1999.