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The Euro as a Stabiliser in the International Economic System

English Pages, 4. 12. 1998

Ladies and gentlemen, it´s a great pleasure to be here.

I didn´t expect to be the first speaker of the panel and definitely, I don´t dare to give you the Eastern European view on these issus. That would be too ambitious. I can give you the view of Václav Klaus only, I´am afraid.

There are many topics to be discussed during our two days´ conference, and I am sure our panelist will talk about other topics. I am a very special person to talk here about Monetary Union, becouse I am well-known for dismantling one monetary union called Czechoslovakia. So I am here from the negative side. Not building anything, but liquidating something. It gives me, however, a very special perspective and a very special sensitivity to some of the issues discussed here and elsewhere. I will pick up just one topic. For me, it is the question of economic and political interdependencies or consequences of the European Monetary Union.

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 – some of them are here with us today – Profesor Kindleberger, Profesor Mundell, Profesor Cooper, Profesor Frankel and others – 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 fre-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 incuding movements of some other variable or variables.

We could go on with similar arguments, but it seems to me that it´s not sufficient becouse we usually talk about the benefits of a Monetary Union and not about its costs. I know that the euro will start in 28 days from now and I am sur it will start and the introduction will be very successful. 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.

Undoubtedly, there will be costs and not just benefits. We will be confronted with substantial costs, tangible costs as well as non-tangible costs. I will concentrate on one issue only. 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 flexoble and mobile. This variable, of course, exists and we call it fiscal transfrs among individual member countries of the EMU. It seems to me to be 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 andfrequency 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.

There is another problem. It was 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 create aviable 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 be guilty of a deadful sin when we raise that question or even give a qualified answer to that.

The existence of monetary union without political union means that states delegate monetary policy to a supranational agency. It can 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 becouse he had a strong argument against something else. He explicitly stated that EMU is against something or someone. And I feel that this is something which must be discussed at a symposium like this one. I feel that the danger is 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 doesn´t know that competitiveness has no connection with size. He forgot that the economic power of Singapore or Hong Kong ies 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 a chosen, a very ambitious project - and I agree it is the most important change in the international monetary architecture since Bretton Woods in 1944 - as an alternative to something else. Istead 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 cocentrate on the second task wit the same determination as on the first one.

Thank You.

Václav Klaus, Keynote Session, Luxembourg, 4 December 1998.