From the FT archive: New money for Europe

Many big questions remain to be settled about how monetary union will work in practice

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This article was first published in the Financial Times of October 14, 1996.

Britain's voters may soon find themselves choosing a government without knowing what either candidate would do about the most important issue facing the country. The Conservative and Labour parties are so deeply divided on European monetary union that neither is prepared to risk serious debate. Britain cannot decide formally until next year whether to join Emu as a founder member in 1999. But enough is now known about how it will work and which nations are likely to join in 1999 for a choice to be made in principle. The issue is not simple. Emu is the expression of a grand vision beset by difficulties. It derives from the same ideal of nations working in harmony which cre ated the common market from the wreckage of war.

The ideal of a united Europe was shared not only by Jean Monnet, architect of the European Coal and Steel Community in 1951, but also by Winston Churchill who proposed a political union for continental Europe in 1946. These considerations might seem distant from the economic arguments about Emu. But it is crucial to understand the strength of political conviction in continental Europe, particularly in France and Germany, which is propelling the union towards closer ties and a common currency. 

Serious risks

Emu is therefore not only a technical matter but part of a historic process. This is not to belittle the economic difficulties, which are real. But the key to success will be political will and the political arrangements that are put in place to overcome those difficulties. Critics fear, for example, that a tight monetary policy pursued by the European central bank would cause intolerable strains in regions or countries of the union already suffering from high unemployment. National governments, unable to reduce interest rates and with limited scope to increase their deficits, would have little to offer an electorate clamouring for reflation. In such circumstances it has been argued, political unrest might even break up the union. In countries such as the US with a large central budget, such imbalances are alleviated by transfers from prosperous areas, which pay more taxes, to poorer areas, which receive more benefits. The EU's "federal" budget is much too small to make significant adjustments, and that is how it should stay. But fiscal transfers are not the only way of easing strains within the union. A more effective remedy is the adoption of greater flexibility in prices and labour mar kets. Such measures are likely to be painful. For this reason, governments that move into Emu will have to give a very strong political lead on the need for change. It is true that EU governments have so far been slow to tackle the rigidities in their economies. But they are showing remarkable political unity on the challenges of the moment: meeting targets for deficit reduction and setting up the rules for Emu. The fact that member states as different as Germany and Italy are prepared to take tough domestic measures in the common pursuit of Emu shows how strong the political imperative is. 

Moreover, to characterise this process only in negative terms - as an abandonment of sovereignty - misses the point. For in co-ordinating economic policy, governments are pursuing interests that all agree to be desirable in their own right. These are sound money, low inflation and prudent fiscal policies. Whatever the arguments about the detailed targets set by Maastricht, the broad objectives are nowhere in serious dispute. Britain, it is said, could pursue such goals outside Emu as well as in. Unfortunately, the UK's depressing record of rising wages and prices followed by devalua tions is not encouraging. A European central bank dedicated to price stability could hardly do worse than the peaks of 11% inflation and more than 3m jobless reached during the last boom and bust economic cycle. The real economic question for Britain is whether it is at last becoming serious about financial discipline. The immediate political decision the UK faces is dif ferent: not whether or in what circumstances Emu might be a good thing, but whether to join an arrange ment which may well be a done deal on January 1 1999.

Loss of influence

Nor is this any longer a choice about joining a small group of countries within Emu. It now appears that almost all current EU members are determined to qualify for membership. It is unlikely that they will all succeed by 1999, but they could do so a few years later.

In such circumstances, life on the periphery could be isolated and uncomfortable. The UK would probably pay a price in higher interest costs on its borrowing; it would still be subject to most of the economic disciplines applying to Emu members; on the outside, its exchange rate would still be con strained by other members. Its voice in advancing other issues, like the single market, would be weakened. It might retain some flexibility over interest rates.

But this would be limited and might not be worth the cost in terms of lost influence over the institutions and rules of Emu - especially if the UK changed its mind and joined several years later. Many big questions remain to be settled about how monetary union will work in practice. These include issues such as the formulation of exchange rate policy for the euro, the relationship between national central banks and the new European central bank, and the relationships between the bank and politicians. There are also legitimate concerns about the way in which some countries are trying to meet the Maastricht crite ria by statistical sleight of hand. Clearly, Emu can work only if would-be members are fully committed to long-term economic discipline. None of these questions, however, can justify contin ued indecision. What the UK badly needs is a serious debate about Emu. Thereafter, a decision to join would require broad consent by the electorate. Since the main parties will be doing their best to avoid the issue in the run up to the general election, this means that a referendum would be essential. Like all great enterprises, Emu might fail. The risks are substantial: politicians across Europe may be unwilling to face up to the hard decisions that Emu will require. But there are big risks in staying out as well.

The prize is a Europe of sovereign states bound together politically by shared economic interests: an open market, financial stability and mutual support. So provided that the entry conditions are right, Europe's history and Britain's future require the same answer. In principle, it must be Yes.

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