CAN A MONETARY UNION SURVIVE WITHOUT AN ECONOMIC
UNION?
The menace of a Greek default shows
that there is something wrong in the institutional architecture of the European
Union. In the Maastricht Treaty, the EU’s member states decided to create an
Economic and Monetary Union (EMU). Today this acronym is interpreted as meaning
“European Monetary Union”. The Economic Union aspect is forgotten. Indeed, during
the euro’s first decade European citizens experienced an effective monetary
policy implemented by the ECB but the EU was unable to implement a parallel
economic policy for growth and employment. As a result the EU now faces a
dramatic dilemma. According to the Treaty a bail-out for Greece is forbidden;
but if the EU does nothing, a Greek default will endanger the entire Monetary
Union.
The root
of the dilemma lies in the Maastricht Treaty itself for, while it established a
well-designed Monetary Union, it was almost silent on the governance of the
European economy. The widespread “Brussels consensus” was based on the
assumption that only a “minimum government” was necessary. In effect, the EU
budget was not increased to provide more convergence and social cohesion. The reasons
for a minimum European government have been well explained by a German
economist who signed a declaration in 1999 to delay the creation of the euro. “Europe’s
single market and currency set countries in competition with each other on the
basis of their economies and institutions,” Mr Wim Kösters said recently. “Germany
largely rose to the challenge. Now, it is up to Greece and the others to do the
same” (The Economist, February 20th,
2010).
Let us
consider what “competition” means in a Monetary Union. Euroland is split in two
parts: weak and strong countries. If we look at the OCDE data concerning the
Current Account of the Balance of Payments, we can see that Germany, the Netherlands,
Luxembourg, and Belgium have been able to maintain a structural surplus which,
in the case of Germany, is substantial. France has a small deficit. But the
so-called PIGS – Portugal, Italy, Greece and Spain: i.e. the Club Med countries
– are in permanent deficit. In Portugal and Spain this amounted to almost 10% of
GDP in 2007. No surprise about that. People know very well that the PIGS have
serious problems with their public administration. Some, like Italy, are not
able to promote structural reforms, nor to fight effectively against corruption
and the mafia, and all have excessive deficits and debts.
But these problems existed before
the Maastricht Treaty and indeed the creation of the EMU was seen as an opportunity
for these countries to overcome their structural problems. As it turned out,
the creation of an Economic Union was no more than wishful thinking. In 1994,
just after the Maastricht Treaty, President Delors launched a plan for Growth, Competitiveness, Employment, but
the national Finance Ministries considered their own domestic reforms to be the
main priority and did not provide the necessary financial support for the
Delors plan. Even now, 15 years later, the Economic Union is still wishful
thinking.
Let us recall two major failures of
the European project. The first is the failure to complete the internal market.
Important sectors such as the advanced technological industries, energy and
services are still regarded as the domain of national governments which take
pride in their “national champions”. France and Germany, for example, are
strongly opposed to the creation of a single market for energy although it is
clear that the Commission could deal more effectively with OPEC countries,
Russia, etc. if allowed to consider energy as being like any other commodity,
for the EU is stronger in international politics than any one of its members.
The consequence of a disunited Europe is that the weak countries of the Club
Med are obliged to compete not only with the giants of the global market, like
China, India, Russia, USA, Japan, etc., but also with the stronger members of
the EU itself, such as France and Germany which protect their own national
champions. Is this fair competition? Les
dés sont pipés. The process of European integration is not accomplished.
The second failure concerns the EU
strategy for growth and employment. In 2000, the European Council launched the
Lisbon strategy in order to transform the European economy to become by 2010 “the
most dynamic and competitive knowledge-based economy in the world capable of
sustainable economic growth with more and better jobs and greater social
cohesion, and respect for the environment”. We are in 2010, and we are obliged
to take note – bitterly – that the Lisbon Strategy is another promise not kept.
The reason is simple: the open method of coordination gave national governments
the freedom to realise – or not – the agreed goals such as a certain level of
investments for R&D, a certain participation rate for the workforce, etc.
Therefore, when the national budgets are discussed, the national lobbies get
what they want, which is usually not the European goal agreed in the framework
of the Lisbon strategy. The moral is that it is impossible to provide European
public good by national means. Indeed, the failure of the Lisbon strategy
actually obliged every EU member country to follow a national strategy for
growth and employment and, obviously, the stronger countries of the Union have more
opportunities for growth than the weaker. Moreover, since structural reforms
are difficult and costly without growth, or with only a low growth rate, the weaker Club Med countries are unable
to catch up with the stronger states of the Union. In such cases, one could
even claim that competition is unfair because a level playing field does not
exist. Les dés sont pipés.
To
conclude, it is right to ask to Club Med countries to make every effort to
modernise their political systems, their administration and their economy. But France
and Germany should also understand that in the new global world of the 21st
century there is no future for purely national foreign and economic policies.
France and Germany may cultivate the illusion of being stronger than the other,
weaker states of the Union but in reality they have no chance of competing
successfully with a global player such as China. The EU, on the other hand, can
act effectively on the world stage.
Europe needs more integration with the
European Commission becoming its democratic government, endowed with genuine
financial and foreign policy competences. The reform of the European budget, at
present underway, offers a good opportunity to create a real federal budget,
financed by euro-taxes and with the Commission endowed with the power to issue
Union-bonds, as Delors himself proposed back in 1994. The “EU 2020 Strategy”,
proposed by the Barroso Commission, can become a reality only if the Commission
can acquire the powers needed to realize these goals. The EMU as it stands, if
not followed by an Economic Union, risks creating a harsh level of political
divergence among its members – witness the present tension between Germany and
Greece – which could lead to its eventual collapse.
Guido Montani
Vice-President of the UEF