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European Monetary Union: Its Economic and Political Interdependencies

English Pages, 4. 12. 1998

As a politician and a former economist, I have a frustrating feeling that everything about EMU has been already said. There is no lack of knowledge. The problem is what to do with the existing knowledge.

Famous economists – some of them are here with us today – repeatedly tried to explain all basic, more or less textbook arguments about both optimum currency areas and monetary unions but I am afraid that nobody listened.

They continued to remind us of the fact that the conditions for a successful monetary union are microeconomic which means that they have nothing to do with the macroeconomic conditions specified at Maastricht. Nobody paid attention.

They emphasised that the benefits of free trade derive from the European economic community (which means from a free trade area and a customs union) and that they are independent of a monetary union.

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

All of us could continue with additional arguments but it is almost useless. It will not help because nobody questions the above-mentioned arguments and I expect that nobody will question the new ones either. The exponents of EMU preferred to talk about something else, about benefits.

EURO will undoubtedly come and our task remains to analyze and forecast its consequences. There will be consequences. And not just benefits. We will be confronted with substantial costs as well.

The exponents of 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 needed. Additionally, they have to assume that labor mobility is very high. The empirical data do not, however, support these assumptions. In such situation, something else must become flexible and mobile. This variable can be, of course, found and we used to call it fiscal transfers among individual countries. It is a mistake that their potential size and frequency have not been openly discussed. (Their size in a recently created monetary union called Germany was and is enormous).

This probable outcome is connected with another problem. The exponents of EURO have, probably implicitly or subconsciously, assumed that currency domain (monetary union) can be greater than fiscal domain (fiscal union). It has, however, never been proved that this can create a viable institutional arrangement. Some countries may not mention this issue because it may be in their economic interest to do it that way (they look forward to free riding in such an arrangement). Other countries will have to pay the bill but – probably – are not aware of it, do not care or have other ambitions. I am convinced of the inevitability of the path: monetary union – fiscal union – political union. As I see it, one of the consequences (and I include it into costs) of a monetary union will be the emergence of a fiscal and political union. The justified question is: Do we really want a political union? It seems to me that we should not feel guilty of a deadful sin when we give a negative answer.

Without political union, the existence of a monetary union means that sovereign states delegate monetary policy to a supranational agency. It can be neutral 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 heterogenity. I am afraid that the costs and benefits of a monetary union will not be equally distributed among its members. There will be, therefore, not a unified economic interest. Because of that, the supranational agency in charge of monetary policy will be under tremendous pressure and lobbying. The interesting solution to this problem could be a currency board. If it can be so easily recommended to emerging markets, why not to an emerging, immature monetary union? (Vested interests of monetary economists would not allow it, however. They would lose their employment opportunities in the supranational agency).

Recently, I discussed EURO with an influential European parliamentary president. After a while, he could not find enough arguments in favor of EMU and the situation forced him to reveal his deeper, normally hidden thoughts. During our conversation, I understood that he did not 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. I felt a dangerous undertone of antiamericanism and antiasiatism in his arguments. He hopes to check the assumed global dominance of the U. S. and the assumed economic strength of Japan and other South East Asian countries through the vehicle of an united Europe. He does not know that competitiveness has no connection with size. He forgot that the economic power of Singapur or Hong-Kong is not based on 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 Dèfi Americain” is with us again and again.

It brings me to my last point. EMU is a project which was chosen – deliberately – as a substitute for something else, as an “Ersatz” activity. Instead of redefining European integration along classical liberal lines, another idea was brought to the fore. And it is a mistake. I am convinced that Europe does not need unification but a liberal order and the relevant question is whether EMU brings us closer to such a goal or keeps us preoccupied with an alternative endeavor. As someone who tried to hold the Czechoslovak monetary union together, but failed, I know what I am talking about.

Václav Klaus, Notes for the Conference „The Euro as a Stabilizer in the International Economic System“, Luxembourg, 3-4.12.1998.