Progress to EMU has been too rash and hasty

Despite the healthy support given to EMU by the likes of Helmut Kцhl, Jaques Delors and Franзois Mittererand, there are some arguments that progress towards EMU has been too rash and hasty for it to be successful.

Firstly, there are several political factors that support this notion.

Public support for EMU is insufficient not only in Britain and the countries outside of the Euro but even in the Eurozone countries themselves. There is significant opposition to the single currency (taken as about 40% of the population) in over half of the Eurozone’s countries that make it up. Likewise, the populations of most European countries are not happy to lose their national currencies, as national currencies are unquestionably signs of sovereignty. For example, the Germans see their Deutschmark as the most powerful national symbol of post-war Germany, partly explaining why they are so hesitant to give it up. The majority of Europeans are also adamant that the European Central Bank is not sufficiently accountable, and moreover, the necessary democratic structures are not in place throughout the institutions of the EU. The ECB cannot be influenced or checked upon by anyone other than the subcommittee of the European Parliament. This inefficient body lacks the resources to hold the ECB or its president - Wim Duisenburg - to account. The Council of Ministers is almost always allowed to make decisions without even referring them to the electorates, and overall, European citizens are very rarely included in the decision-making processes. Therefore, it is not surprising that most European citizens feel out of touch with the powers by which they are (or will be) ultimately governed. This is furthered by the argument that EMU is simply driven by the political dream of a small elite. This idea is easy to agree with, particularly when examining the social composition of those in support of EMU. More businesspersons, financiers and distinguished entrepreneurs in general support EMU than average citizens of the EU, of which there are far more. As a whole, political union seems insufficient to support further economic union.

However, it can be argued that political union has advanced sufficiently to allow economic union to be a success. The Single European Act of 1986 certainly made EMU more likely, adding further impetus towards economic union. It removed physical, fiscal, and technical barriers between EU countries to complete the Single Market and revealed that exchange rate fluctuations were also an obstacle. It had strong political impact and was seen as a move towards federalism, particularly through the creation of Europol and the introduction of QMV in the Council of Ministers. EMU has been an official policy of the EU since 1969 when it was first raised at an EU Summit at The Hague. This led to the creation of the European Monetary System and the Exchange Rate Mechanism in 1979, and in 1989 the Delors Plan set out the stages towards a single currency, reiterated in 1992 by the Maastricht Treaty. To say that progress towards EMU has been “hasty” seems silly, considering the length of time over which this progress has occurred and the number of times it has been brought up. There is indeed a fair deal of support for the Single Currency across Europe, despite the apparently huge opposition. In the UK, the Government’s “5 economic tests” are claimed by many to be simply delaying tactics for further progress to EMU, “trying to hide the obvious aim of joining the single currency... The tests are deliberately vague in order to give the Government a chance to say that the economic conditions are right for entry to the Euro whenever it likes.” (NO Campaign) Nevertheless, Gordon Brown’s insistence on a patient analysis of his 5 tests gives clear indication that at least in the UK, progress towards EMU is definitely not hasty. The tests were laid down four years ago, and British entry to the Euro is unlikely at least for a further few years given the very poor level of support for it.

There are however, important economic issues to suggest that proceedings across Europe have been too hurried. The convergence criteria laid out in the Maastricht Treaty of 1992 were not fully met before countries were allowed to join the EMU. In the 1998 assessment, only 7 countries met the public debt target, Germany and Ireland failed on inflation, and Greece alone failed on interest rates. Some economists have suggested that efforts to reduce the level of public debt (generally spending less and taxing more) have had a detrimental effect on European economies, and that the convergence criteria have left some countries “worse off” than before. This certainly adds weight to the argument that progress to EMU has been “rash” and not properly planned. It is felt that the Eurozone economies haven’t undergone sufficient structural reforms (such as making the labour market more flexible) to prepare for EMU. Measures are being called for to smooth out probable difficulties before they become too apparent and stop EMU from working efficiently or altogether. The falling exchange rate of Euro against US Dollar over the last few years is also disturbing, and gives an indication that the Euro will be a weak currency making Europe less competitive on the global market. However, most importantly, there is a belief that the economic conditions of Europe as a whole are not suitable for one single currency. This is supported by the failure of all previous attempts to unite European economies, namely the Exchange Rate Mechanism of 1979. It is the closest thing that Europe has had to a single currency, and it showed that putting different currencies together in Europe would not work.

But the failure of the ERM also gave support to an argument that smaller national economies are too vulnerable to speculation and exchange rate fluctuations, and therefore they should merge to become one stable currency. EMU is perhaps becoming the best-looking alternative to unstable currencies caused by modern capital markets. Economists have predicted that the right economic conditions may be created and greater convergence stimulated by further progress to EMU. This is backed up by the fact that there has already been a reasonable level of further convergence within the Eurozone. Short-term interest rates, levels of inflation, and average output levels have become more obviously similar in many of the Eurozone countries. In addition, there is suggestion that the more important parts of the 1992 convergence criteria were met. Reducing the level of public debt in order to achieve qualification has been since said to have damaged some economies, reducing this criterion’s worth, but Greece was not allowed to join, emphasising that the criteria as a whole did have some value. A clause in the Maastricht Treaty said that so long as the national debt was “sufficiently diminishing” a country could join the EMU.

Overall, progress to EMU appears to have been too politically based and some important economics missed out. The Euro’s performance as a currency so far has been disappointing, and gives a certain degree of support to the suggestion that Europe is not suitable for a single currency. I would not go as far as to say that EMU cannot be a success but would agree that progress towards it has not been properly thought out and may be considered rash or hasty.