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Europe on the Homestretch

English Pages, 21. 11. 1997

Thank you for inviting me to this well-known and undoubtedly already very prestigious gathering which I have been following - at a distance - with the help of the published documents. I was invited in the past as well but unfortunately I did not find time to come. Nevertheless, to dramatize it a little, I have some difficulties to understand why I was invited this time because I am not an expert in horse-racing. I even had to look up the word „homestretch“ in the dictionary before writing this text.

On condition that I understand the term correctly, I have to start with saying that I do not think Europe is on the homestretch. The reason is that Europe (with all its weak and strong points) is definitely not approaching its end, and that there will also be no end of history in general and of European history in particular. Such misleading, ahistoric concepts were fashionable in the first days after the shock connected with the collapse of communism but I suppose that they have been forgotten. I believe that those prominent dealers with ideas who used and advocated them several years ago are true believers in other, more recent fashions in the non-perfect market of ideas now. We have, therefore, to return to the fundamentals.

The organizers, when choosing the title of the congress, had on their minds probably something else, namely the suggestion that not Europe as such, but one specific institutional arrangement of European affairs is approaching its realization (or completion). This is, however, only a partial and from the long term perspective transitional achievement. What is durable and indestructible for Europe and in Europe is a search for freedom, safety and prosperity. These, more or less undisputed goals can be, however, realized in various institutional settings and in various extents (or degrees).

The distinction between instruments and goals is for me absolutely crucial and in the rather fuzzy debate about Europe more than usually. It is frustrating to see so often this difference to be blurred. European integration (and its potential variants) should not become a goal itself or a substitute for other, implicit goals. I am afraid that this is exactly the way how it has been dealt with in many European debates in the last years, in the pre-Maastricht as well as post-Maastricht period.

It seems quite obvious to me that the form of European integration should depend on the goals themselves, on their ranking, on the relative weights attached to them as well as on the non-trivial trade-offs among them.

We should ask ourselves serious questions. Is there an additivity, or perhaps an incompatibility, or possibly a trade-off between freedom and peace, between peace and prosperity or between freedom and prosperity? The answer is not self-evident. I have the feeling that the current European unification ambitions (including the European Monetary Union) stem from the assumption that some of the original goals are highly superior to other goals. To put it clearly, the insufficiently structured and specified goal called peace (or perhaps security or safety or the reduction of the risk of another intra-European war among individual nation states) has for some of us such a special standing that it almost blocks any serious debate about other goals or about existing trade-offs. It has been sometimes even used as a „dummy“ for some hidden goals which is - I am convinced - something we have to avoid.

Talking about Europe and about European Union, there are many recent institutional endeavours worth discussing here. I will concentrate today on two issues, one connected with the widening and one with the deepening of the European Union. My selection is, of course, quite intentional.

I consider the enlargement of EU to the East to be an enormous and at the same time unrepeatable European chance and challenge which have to be taken seriously and realized. I strongly believe that the genuine and gradual enlargement of EU will be a positive contribution to the goals I mentioned earlier, I take for granted and I myself value so highly.

Nevertheless, I would like to make several remarks to that. On the one hand, there is no doubt that the individual countries willing to enter are in different stages of their preparedness to do it. All of them have been making huge steps forward in the past years but the results are uneven and I hope the actual differences and achievements - not aprioristic, undifferentiated feelings - will be taken into consideration in the evaluation process. The lasting „block-like“ thinking is the unpleasant relic from the past which should be disregarded. It - in reality - blocks enlargement. Speaking for my country, we are aware of the fact that as future members we have to be true partners to the existing members, not free riders and we know that it is our task to prepare ourselves to be able to play that role.

On the other hand, we have to mention the willingness and preparedness of EU itself to accept and receive new members. I appreciate the well-known positive declarations and political statements welcoming EU enlargement to the East but I remember - at the same time - many opposite statements. There is no doubt that - ceteris paribus - the enlarged Union, enlarged by countries with lower GDP per capita, will cost more, not less. It should be accepted and expressed in a transparent, understandable way. In this respect I have to say that the statements - perceived with pleasure and with enormous expectations by tax-payers in all today’s member-countries - about the potential future reduction of payments of individual countries to the EU budget in the moment of enlargement are interpreted as a warning in associated countries.

Recently I came accross an article written by former EU Commissioner Claude Cheysson („Defining Europe’s Place in the World“, The Phillip Morris Institute for Public Policy Research, September 1997) in which he says: „Whether we like it or not, there is not going to be much scope in an enlarged Union for funding the same depth of integration as with a smaller EU made-up of wealthier members“ (pg. 33). If it is an expression of disagreement with existing excessive, too generous fundings of various welfare state policies, it is very promising to all liberal and conservative politicians (and their voters). If it is, however, a warning, that enlargement is not possible, it suggests a problem. And I must confess that we have to interprete it in such a way because the depth of integration (or the deepening of integration) is in EU documents taken for granted. Last month one EU prime minister even said in an interview in Die Presse that the enlargement will be the most unpopular project in Europe in the coming years. This problem must be clarified as soon as possible.

The boldest „deepening“ project - with the exception of the Common Agricultural Policy - is undoubtedly the European Monetary Union. I expect that it will happen and I do not intend to guess how many countries will participate at the beginning. The criteria are given and I cannot speculate how much they will be loosened to let all those who want to enter to do it.

My arguments aim at something else. They aim at possible consequences of monetary unification. The well-known Maastricht criteria are macroeconomic in nature whereas the economic theory of optimum currency areas (R. A. Mundell, The Theory of Optimum Currency Areas, American Economic Review, Vol. LII, No. 2, 1961) is defined in microeconomic terms which is something totally different. Size of budget deficits or of government debt has no connection whatsoever with the degrees of wage rigidity or labour mobility or with the occurance of the so-called assymetric shocks.

There is, of course, one missing link or if you prefer one possible connecting link between the two perspectives, and this is fiscal policy. I agree with those who argue that „a monetary union requires fiscal federalism to operate efficiently“ (Barry Eichengreen, A More Perfect Union?, Essays in International Finance, No. 198, June 1996, Princeton University) and that „currency domain should not be bigger than fiscal domain“ (Peter B. Kenen, Sorting Out Some EMU Issues, Essays in International Finance, No. 29, December 1996, Princeton University). All human endeavours have, of course, costs and benefits. As we all know, the main cost of a monetary union is connected with the giving up monetary autonomy which is the freedom to conduct an independent monetary policy and the freedom to use the nominal exchange rate as a policy instrument.

At the same time, there is a difference between nominal and real exchange rate. The crucial rate is the real one. Because the real exchange rate behaviour depends on price and wage flexibility and on labour mobility, if the labour market mechanisms do not work sufficiently there must be a change in nominal exchange rate.

All that is elementary and I suppose we all know it. Monetary union eliminates nominal exchange rate changes and we have, therefore, to ask how happy we are with price and wage flexibility and with labour mobility in Europe. To make an empirical statement, I do not think they are sufficient to guarantee fast real exchange rate realingments. And if it is true, we need fiscal policy to enter the stage. But fiscal policy is at the core of national sovereignty. Hence, it seems to me that the debate about European Monetary Union should be accompanyied by the debate about European Fiscal Union, and if I am not wrong such a debate has not yet started, at least in a serious way.

To put it simply, monetary union has deep fiscal consequences as I tried to argue many times in the past (V. Klaus, Europäische Währungsunion - ihre ordnungs - politischen und fiskalpolitischen Konsequenzen, Europäisches Forum Alpbach 1996, Ibera Verlag 1997). My old theoretical convictions have been strengthened by my recent practical political experience. Former Czechoslovakia was - even if it was not interpreted that way - a monetary union and as we understood several years ago, it was already too large to be an optimum currency area. As the last minister of finance of that currency area, I know that:

- without the help of a nominal exchange rate between Czech and Slovak parts, and

- without my willingness to disintegrate fiscal policy

we have to send money, which means to make fiscal transfers to minimize arising economic (and income) differentials. I cannot imagine to be able to do it without a political union. When it broke down, monetary union lasted only six additional weeks.

To return to my original argument, I have to repeat that different monetary arrangements have consequences and that we should discuss them, not just technicalities of the European Central Bank and its policies. A useful comparison can be made with the United States. To say that it would make no sense if each American state had its own currency is only one side of looking at it. The other side is more relevant: how would the United States make out with no president, no Congress, no federal budget, and almost no federal institutions apart from the Federal Reserve itself plus a powerful central bureaucracy? The issue is, therefore, not just savings on transaction costs with the single currency but new political processes and appropriate institutions.

I am „ on the homestretch“ with my speech now, Europe, however, goes ahead and will search for the optimum institutional arrangement which will maximaze the hypothetical social welfare function with the three above mentioned goals as arguments. I hope that we, the Czechs, will be able to contribute to it and that our marginal contribution to such a noble aim will have a positive sign.

Václav Klaus, Keynote speech given at the 7th Frankfurt European Banking Congress 1997, Frankfurt, 21 November 1997.