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EMU And The Ghosts Of Germany’s Past

LONDON: Chancellor Helmut Kohl has said that the economic and monetary union of Europe agreed in the Maastricht treaty is "a question of war and peace in the 21st century." Despite coming from the lips of a German leader and being delivered in Belgium -- the most war-torn country of western Europe -- the significance of these words were soon lost in the deluge of economic forecasts and monetary statistics which dominate discussion of European Monetary Union (EMU).

Even EMU opponents -- including myself -- concentrate on the economic dangers posed by monetary union. Tough budgetary criteria and deflationary policies imposed by the Maastricht treaty are blamed for aggravating Europe’s present slump, exacerbating unemployment, and threatening social stability. Moreover, they damage the fragile economies of the EU’s trading partners to the east. And there are clear dangers to the cohesion of western Europe from the likelihood that the EU will be split into two rival currency zones -- with 6 or 7 countries clustered around Germany and France belonging to EMU, while Britain, Denmark, Italy, Spain, Sweden and other economies remain outside.

Further ahead, EMU will become a huge obstacle to the transition countries seeking membership in the EU itself. Not only will they find it difficult to meet the convergence criteria (mandated low inflation and debt levels) fixed at Maastricht -- if they do join EMU they will find it hard to raise living standards to western levels, being forced to accept monetary and exchange rate policies designed primarily to stabilize prices in Germany and France.