Ever closer union?
National currencies are certainly symbols of sovereignty. When the countries of the former Soviet Union broke away from Russia, one of the first things they did was to introduce their own currencies. The D-mark has become arguably the most potent national totem for post-war Germanswhich is partly why they are so reluctant to give it up.
There is also little doubt that joining a currency union means surrendering some sovereignty, even though at Maastricht the then British prime minister, John Major, and his foreign secretary, Douglas Hurd, stoutly denied it. But just what is it that countries are giving up by handing responsibility for monetary policy to the European Central Bank? The immediate answer is: sovereignty to inflate the economy and to devalue the currency. Presumably even eurosceptics favour neither.
Yet this is not all there is to it. Remember that the negotiations leading up to Maastricht embraced two separate inter-governmental conferences: one on monetary union, one on political union. This was because the Germans, in particular, insisted that they would accept monetary union only if greater progress towards political union was in prospect. In the event, they got little. But even today the Bundesbank makes no secret of its view that monetary union necessitates political union.
Does it? There are, it is true, few historical instances of currency unions that have not, ultimately, corresponded with a political union. The 19th-century Latin Monetary Union is one. During this century, Belgium and Luxembourg have shared a currency without being a political unit. Britain and Ireland managed to share a currency for 60 years although they had numerous political clashes and even spent six years with Britain involved in a war and Ireland determinedly neutral.
Yet the European Union is something new and unique: a partially supranational organisation, complete with executive bodies and a supreme court, that stops well short of political union. So, similarly, will the euro be unique: a currency voluntarily shared among several countries, all of them sovereign and democratic. The notion that such an arrangement is bound one day to entail political union is impossible to refute; yet there seems no reason to take it for granted.
Indeed there are two good arguments against superimposing political union on the single currency. One is provided by the most recent European example of a currency union: Germanys. It is widely believed that the cost of German unification was so high (both in huge fiscal transfers from west to east and in high unemployment in the east) because the federal government insisted, against Bundesbank advice, on converting Ostmarks to D-marks at one-to-one. Yet it was not currency unification that caused the trouble in Germany: it was wage and welfare-benefit unification. In the absence of unified productivity rates, this was bound to make eastern Germany hopelessly uncompetitive. The trouble was that German unification made it politically impossible to maintain separate wage and welfare regimes. So the lesson of German unification for EMU is the opposite of what integrationists claim: EMU may succeed only if it is not accompanied by political union, because that way it will be possible to maintain wage and benefit differentials that reflect differences in productivity and wealth.
The second argument against joining political to currency union is even simpler: Europes people are against it. There is a marked lack of popular enthusiasm for the euro in Europe. True, in several countries there seems to be a majority in favour of it (see chart 7). But most Germans do not want it because they are loth to sacrifice the D-mark. And Swedes, Danes, Britons and Finns seem not to want it because they fear a loss of sovereignty.
From the beginning, a strong argument against proceeding with EMU has been that it does not command popular support. Hence the promises of referendums in Britain and Denmark before their governments contemplate joining. Yet if the ECB and euro member governments are sensible, they could increase popular support for the euro even in countries that are not yet participants. The bank should quickly make clear, even to sceptical Germans, that the euro will be every bit as sound as the D-mark (which has, incidentally, been one of the worlds weakest currencies in the past two years). As for sovereignty, governments could reassure their citizens that, although further policy co-ordination in Europe may be a good idea, the euro itself need not accelerate political union.
In and out
That still leaves one more huge political issue for Europe to cope with: the ins and the outs. Greece can be ignored for this purpose, as it has shown by joining the ERM that it wants to be in EMU by 2001. But one big EU member, Britain, and two smaller ones, Sweden and Denmark, will remain outside the euro zone, possibly for several years or even forever. Note as an ironic aside that, thanks to their flexible economies, Denmark and Britain are the best-placed countries in Europe to cope with EMU.
The Danes are the easiest, for they are planning to shadow the euro. Indeed, in economic terms there will be little difference between being in and out. The country is simply paying an interest-rate premium (of around 0.4 percentage points) for the political sake of maintaining a separate currency.
The Swedes are trickier. Like the British, they refuse to tie their krona to the euro through the exchange-rate mechanism. But big Swedish companies, and even tax authorities, have said they will deal in euros from the beginning. Given Swedens trade patterns and the global reach of its companies, the stage could be set, suggests one commission official, for the euro to edge the krona out of the marketplace.
The expectation in Brusselsand probably in Stockholm and Copenhagen toois that a decision by Britain to join would pull in the Swedes and Danes too. Yet although the British government is now officially, as the jargon has it, a pre-in, there remains all to play for on whether and when it joins. The government has ruled out membership during this parliament, but it has also said it sees no constitutional bar, implying that it is not swayed by the sovereignty argument against entry. It still has to win a referendum, however, and will not be helped by a press largely hostile to the euro.
The government has also set several tough economic tests of its own for membership. These include, most importantly, the synchronisation of economic cycles, and a convergence of monetary-policy mechanisms (Britons still rely more than other Europeans on variable-rate mortgages), both of which will take time. The British also want an assurance that the euro will be good for jobs and competitiveness, neither of which will become clear for some years. And they are keen advocates of structural reform in Europe, a cause they have been pressing during the British presidency of the EU.
None of this will matter if Britains absence from the euro lasts only a few years. But if it is drawn out, or even permanent, the consequences may not be pleasant. Already the euro countries are forming, against British objections, a euro-11 group of finance ministers. Such a group might easily decide to co-ordinate taxes or social policies in ways the British dislikegiving them an additional reason for staying out of EMU. The euro could, in effect, become increasingly harder, not easier, for Britain to swallow.
That would, among other things, be bad for the euro. Loss of influence, either in euro-11 or in the EU more generally, is not perhaps the most persuasive reason for Britain to join. Loss of foreign inward investment might beif it happened. So might loss of business in the City of Londonthough that is unlikely to happen for many years, and the EMIs Mr Duisenberg even suggests that the City may be better prepared for the euro than a number of continental financial centres. Some bankers, indeed, reckon the City might do better staying offshorea Hong Kong to Europes China.
For the in countries, however, British entry would be a huge prizethe most deregulated economy, the biggest financial centre in Europe and a significant (if fading) world player. Indeed, over Britain the traditional EU politics could be reversed, especially if structural reforms in the rest of the EU are slow to come. It is the in countries that may turn out to need British membership more than Britain does. They would therefore be well-advised not to make it harder to achieve.
Bow to the inevitable
Will the euro be good for Europe or not? In a sense this question is now redundant, since the common currency is coming anyway. The economic effects are nicely balanced between pluses such as price stability and more competition to benefit winners, and minuses such as loss of the safety valves of lower interest rates or devaluation for losers. As for political effects, it is simply too soon to be sure what they will be. What is certain, though, is that cancellation or collapse of the project now would be a disaster for the European Union.
The big potential for EMU, however, lies elsewhere: it is that it will bring pressure to bear on Europe to tackle long-overdue structural reforms. These may cause social tensions, even a backlash of public opinion against the EU and the single currency. But the reforms have to come anyway, euro or no euro; and things that are inevitable tend one day to happen. The Awfully Big Adventure is likely to make them happen faster, so on that basis it should be good for Europe.