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Toward a Broader Europe – Carefully

English Pages, 29. 6. 1998

Europe, and the European Union, is approaching a crucial new stage of its development. On the one hand, it is introducing a common currency, the single most important aspect of the deepening of European integration. On the other, it is opening to Central and Eastern Europe, in the broadening of European integration.

The enlargement of the EU to the East is an enormous – and unrepeatable – European opportunity and challenge that must be taken seriously. As the process unfolds, we in Central Europe should allow ourselves to fall into neither Euroskepticism nor Eurooptimism. We should be Eurorealists above all.

Without doubt, the most durable and indestructible goals for Europe and in Europe are the search for freedom, safety and prosperity. The more-or-less undisputed goals can be realized in various institutional settings and in different ways.

All too often, though, the crucial distinction between goals and instruments gets lost, especially in the rather fuzzy debate about Europe. European integration (and its potential variants) shouldn´t be a goal in itself or a substitute for other, implicit goals. Unfortunately, that is exactly how it has been dealt with in many European debates in the pre- and post-Maastricht period.

Separating the ends from the means matters vitally as Europe moves toward a broader union. Start with what is undoubtedly the boldest “deepening project”, with the possible exception of the common agricultural policy: European economic and monetary union.

I expect that EMU will happen, though I won´t try to guess how many countries will end up participating, or when. Nor will I speculate about how much the criteria will be loosened to let all those who want to enter do so. My arguments aim at something else: the possible consequences of monetary union.

Whereas the well-known Maastricht criteria are macroeconomic in nature, the economic theory of optimum currency areas is defined in microeconomic terms, which is something totally different. The size of budget deficits or of government debt monitored under the Maastricht treaty have no connection whatsoever with the degrees of wage rigidity or labor mobility.

There is, of course, a possible missing link between these two realms: fiscal policy. And I agree with those who argue that monetary union requires fiscal federalism to operate efficiently.

All human endeavors have costs and benefits. As we all know, the main cost of monetary union is connected with the giving up of monetary autonomy – the freedom to conduct an independent monetary policy, and to use the nominal exchange rate as a policy instrument. At the same time, there is a difference between the nominal and real exchange rate; the real rate is the crucial one. Because real exchange-rate behavior depends on price and wage flexibility, and on labor mobility, if labor market mechanisms don´t work sufficiently, the nominal exchange rate must change.

All this is elementary economics, and I suppose we all know it. But because monetary union eliminates nominal exchange-rates, we have to ask how happy we are with price and wage flexibility, and with labor mobility, in Europe. I do not believe either is sufficient at present to guarantee fast real exchange-rate realignments. And if that is true, fiscal policy needs to enter the picture.

But fiscal policy lies at the core of national sovereignty. That´s why I think that the debate about European monetary union should be accompanied by a debate about European fiscal union – and if I am not mistaken, such a debate hasn´t yet started, at least not in a serious way.

To put it simply, monetary union has deep fiscal consequences. My recent experiences in politics have only strengthened this conviction. Former Czechoslovakia was a monetary union, even if no one understood it that way. As we understood several years ago, it was already too large to be an optimum currency area.

As the last finance minister of that currency area, I can say this: Because there was no nominal exchange-rate difference between Czech and Slovak territories, and because I was unwilling to dismantle federal fiscal policy, we had to send money to Slovakia – to make fiscal transfers to minimize rising economic and income differentials.

I can´t imagine having been able to do this without a political union. When that broke down at the beginning of 1992, monetary union between the newly independent Czech and Slovak states lasted only an additional six weeks.

To return to my original argument, different monetary arrangements have different consequences. We should be discussing them, not just the technicalities of setting up the European Central Bank. A useful comparison might be drawn with the U.S. One might say, of course, that it would make no sense if each U.S. state had its own currency.

But that´s just half of the story. There is another, far more relevant comparison to draw: How would the U.S. fare with no president, no Congress, no federal budget, and almost no federal institutions apart from the Federal Reserve itself – but with a powerful central bureaucracy in place? That´s why the issue of a single currency isn´t just about savings on transaction costs – it also concerns political representation and processes and appropriate institutions.

Now for the issue of expansion. I consider the enlargement of the EU to the East an enormous and unrepeatable opportunity and challenge, one which must be taken seriously. I strongly believe that the genuine and gradual enlargement of the EU will make a positive contribution to the goals I mentioned.

Nevertheless, there is no doubt that the individual countries interested in entering are at different stages of preparedness to do so. While all have made huge steps forward in recent years, the results have been uneven, and I hope that actual differences and achievements – not feelings – will be taken into account in the evaluation process.

The lasting, bloc-like thinking about Central Europe is an unpleasant relic of the past that should be forgotten. Speaking for my country, I can say we are aware of the fact that as future members we must be true partners for existing members, not free riders. We know that it is our task to prepare ourselves to play that role.

On the other hand, it´s worth looking at the willingness and preparedness of the EU itself to absorb new members. While I know and appreciate the well-known positive declarations existing member states have made welcoming expansion to the East, I still remember many contradictory statements.

It can´t be denied that the enlarged union, expanded to include countries with lower gross domestic products per head, will cost more, not less. But this fact should be accepted and expressed in a transparent, understandable way. Instead, we hear official statements about a potential future reduction of payments of individual countries to the EU budget after enlargement. In Central Europe, these are being interpreted as a warning. Last year, one EU prime minister even said in a press interview that enlargement will be the most unpopular project in Europe in coming years. This problem must be clarified as soon as possible.

No doubt, Europe will search for the optimal institutional arrangements as the broadening and deepening processes continue. I hope that we, the Czechs, will be able to contribute to it, and that our marginal contribution to such a noble aim will be a positive one.

Václav Klaus, Notes for the speech at the AEI World Forum, Colorado, 25-29 June 1998.