The danger of postponing EMU

Christa Randzio-Plath (*)

The current debate in France and in other countries on the consolidation of public finances has sometimes led to opinions like Maastricht would be damaging to the economic and employment prospects or that the beginning of EMU should be postponed in order to give financial policies more flexibility in view of the present slowing down of economic growth in Europe. The actual temptation for all member governments not achieving the Maastricht criteria of 3% - only Luxemburg, Germany, Ireland are fulfilling this criterium while 11 countries follow already the inflation and long term interest rates criteria - take the Maastricht treaty as a scape goat for their austerity policies.

This is dangerous: First, because the national situations as such need the consolidation of the fiscal policies and it is necessary that people realize this. Second, because the governments create strong Anti-European feelings and attitudes. People have difficulties to understand that Europe is in their interest if they loose jobs and public services. It is however extremely important to stick to the timetable set up in the Maastricht Treaty and why we should try to implement EMU on 1.1.1999.


It is true that the Maastricht Treaty requires demanding performances on the field of economic and financial stability and additionally economic convergence on the basis of stability. Moreover, with the beginning of EMU the member states will give up a major economic-policy instrument. Therefore the EMU members must be choosen carefully in order to prevent economic tensions and instability in the European currency area. The better the economic performance record of the countries, the better the prospect that EMU will run smoothly and support the single market successfully.

Today it is generally accepted that price stability is the necessary precondition for sustainable growth employment, and the efficient allocation of our scarce resources. Especially the stagflation period after the oil-price shocks has proven that inflationary policies can stimulate economic growth and employment at best for a very short period of time, whereas it has lasting negative consequences like higher nominal interest rates, redistribution of wealth usually from the poor to the rich etc. But stability is one side. Acceptance of EMU will not be achieved if we do not put Europe back to work.

So the Intergovermental Conference 1996 will have to address the importance of employment for the whole political system and the credibility of European Union. The Maastricht Treaty has to get an Employment Chapter concretizing Article 2 of the Maastricht Treaty calling for a high level of employment. There has to be included an Employment Chapter of the Union Treaty setting out common aims, common procedures and a common commitment to key principles of employment policy because national employment policies can be made substantially more effective through European coordination. The non-implemention of the Delors White Book on Growth, Competetiveness and Employment demonstrates very clearly the lack of this coordination. It would be helpful to get an "economic government" to put this through and at the same time overcome the imbalance existing between centralized monetary policy to be pursued by the ECB and the decentralized fiscal, economic and employment policies pursued by member states.

Furthermore, the European Union should stress the importance of a better coordination and efficiency of structural fonds, European Bank of Investment and European Investment Fonds to enhance competi-tiveness, create employment and more investment. Structural reforms on the employment market are crucial to fight unemployment. So far the efforts of European governments in this respect are not sufficient to create up to four or five million new jobs. The resolutions of Essen, Kopenhagen, Korfu and Cannes need to be realized. Especially more investment in human resources is the challange for the forthcoming years.

The consolidation of the public finances is also a task which would have to be fulfilled anyway - with or without EMU - in order to stop an overburdening of future generations, to guarantee the stability of our social safety nets, and to prevent governmental default. Moreover, less government spending makes room for tax cuts thereby supporting consumer's demand as well as productive business investment especially for those budgets paying more than 15% of their budget for debt services like Belgium and Italy, e.g. It also stimulates private investment by giving leeway for interest-rate reductions on the financial markets.

The European Council in Madrid finally decided on the scenario of the change-over to the single currency and its name, Euro. While doing so the final preparatory phase to Stage Three has begun. It is foreseen that at the end of 1996 all organisational and logistical preparations for ECB and ESCB are finished. As early as possible in 1998 and on the most recent data available those member states are going to be chosen that fulfill the convergence criteria. So at the latest the fixing of the exchange rates can be set for 1.1.1999 and the ECB can start its work. On 1.1.2002 the distribution of Euro-coins and banknotes will be started. But still the discussions about postponing do not cease. Why should we stop this argument and rather focus on still unsolved problems in the transition to EMU?

The unsolved problems

People argue that with regard to recent data, only Luxemburg - and maybe Germany - will be able to fulfill the convergence criteria. But the question who is going to participate has not to be decided now. This will be done early 1998. Furthermore the Commissions report on economic convergence of the member states forecasts that Germany, France, Irland and Luxemburg are likely to be the first countries able to join EMU. This choice of states already comply economic power which equals that of Japan. It is rather counter-productive to ask for strict fulfillment of the convergence criteria and on the other hand stress that without Italy EMU does not work.

If Europe fails to implement this historically unique project on 1.1.1999 the so far achieved results in more economic stability in terms of small debts and deficits of member states households would be endangered. Member states could stop their efforts complying to the convergence criteria.This could lead to serious turbulences on financial markets with unforeseen damages to Europe's economies. Even those countries that so far show good results in their economic data might be affected as well as the functioning of the internal market. An internal market without frontiers but with turbulences in exchange rates would be doomed in the long run since the logic development of "one market" is "one money".

A delay in the start of EMU moreover would damage political integration in Europe enormously. The motor for more economic and political integration would cease to work and Europe would be thrown back for years in political and economical development. It would be a serious danger to the achieved "stability culture" in Europe and a distortion of competitiveness amongst European countries on grounds of competitive devaluations. Even the achievments of the internal market possibly could not be secured in this case. People have to understand that Europe has to act unitedly, otherwise its position as a world economic and political power would crumble away. EMU will be very important to secure Europe's competetiveness.

EMU is meant to enhance the economic development and convergence of the EU and the single market. On the other hand the probable institutional separation for some time of member countries participating in the European currency area and member states with a derogation carries some danger of economic divergence. Therefore the Union wide monetary links, and those of the real economy, must be further strengthened such that the European Union does not disintegrate. The Intergovernmental Conference in 1996 should contribute to this by striking an institutionally protected balance between economic, fiscal and monetary policy, as must the Council and Commission by supporting sustainable employment boosting measures for all the member states.

Moreover, a mechanism for solidarity between the countries without and with a derogation should be implemented in order to give some orientation to the pre-ins on their way to join the European currency area later on. It is quite obvious that a new European Monetary System would be a candidate for such a mechanism. The current system must be politically and technically adjusted, reflecting the legal and economical consequences of EMU. The adjusted system should be underpinned by the single currency as the anchor for the countries which will join the currency area of the European currency later on.

But it is of utmost importance that the possible future Monetary System between the ins and pre-ins does not overburden the European Central Bank, which cannot draw on a successful record in fighting against inflation otherwise. In addition, an adjustment of the EMS must take into account the experiences with the old EMS, e.g. possible system-construction failures which might invite currency speculation.

The European Parliament acknowledges that a monetary union must consist of a sufficiently homogeneous and stable group of countries, because they have to be able to cope with a single European monetary policy and they must not export instability to the other members of the monetary union. A prudent choice of the participating countries is therefore crucial for the success of EMU. But in order to ensure a sustainable and lasting economic convergence of the participating member states in the European currency area, more has to be done.

Closer co-ordination of national economic and fiscal policies than is provided for in the Maastricht Treaty, will be needed as an outcome of the Intergovermental Conference in march 1996. The widely accepted idea of an additional stability pact, which shall provide for permanently stable and healthy public finances, can be another step towards more co-ordination and to an European Economic and Financial Council. But it has to be fitted into the EU's existing institutional framework and must not exclude any member state. For the (Maastricht) Treaty says: The Union shall be served by a single institutional framework which shall ensure the consistency and the continuity of the activities carried out in order to attain its objectives while respecting and building upon the "acquis communautaire" ... The Council and the Commission shall be responsible for ensuring such consistency. (Article C, Maastricht Treaty)

A clear signal is needed that governments of all member states accept their responsibility to ensure that demand in the European community is growing at a sufficient rate to sustain the recovery. Europe's citizens are waiting for a European employment strategy to be based on a clear vision of society and which defends and strengthen the European social model gives less tax income and engages more funds for social issues. "Citizens first" does actually mean to prepare for EMU in the best way possible on the monetary issues and by and with the monetary authorities and political institutions and at the same time contribute to economic and social cohesion by promoting via nominal convergence real convergence and thus support an active employment policy by a Europe-wide employment pact.


(*) European Parliament, Chairman of the Subcommittee on Monetary Affairs. 93-113 rue Béliard - 1040 Brussel.