The smooth appearance of euro notes and coins has triggered a valuable reconsideration of European monetary union’s ultimate aims. Two views – active since the process began in the late 1980’s – persist. The first claims that monetary union merely seeks to consolidate the Single Internal Market in goods and services; the second sees the euro as a mechanism to forge closer political union. These two motives are complementary, but the euro’s physical arrival has re-opened old divisions over its economic and political aspects and, to some extent, between the euro’s “ins” and “outs” among EU members.
The euro’s economic impact should not be underestimated. Although the biggest step in monetary union was taken when national currencies became subdivisions of the euro, the arrival of euro notes and coins delivers additional advantages. Transparency of retail prices will invigorate competition. Prices and inflation expectations will now tend to be guided more and more by a common inflation rate – kept low and stable by joint monetary policy – and not by erratic and divergent national prices. A deepening of financial integration can also be expected. Finally, the irreversible nature of monetary unification will become ever more evident to citizens.
But will completion of monetary unification enhance Europe’s political union? To obtain a clearer picture, questions related to monetary union should be kept distinct from wider political issues.
The framework for the joint monetary policy negotiated at Maastricht focussed on medium-term price stability, which is to be assured by the European System of Central Banks – the Eurosystem – made as independent as possible from national and European political authorities. Elements that might undermine this framework were addressed by targeting three potential sources of friction: national deviations in budgetary policies. These were constrained by upper limits to budget deficits, later elaborated in the Stability and Growth Pact; obligations to intervene in defence of particular levels for the euro in external currency markets. These were made unlikely by giving a major role in designing them to the Eurosystem, committed to internal objectives and hence instinctively averse to undertaking external commitments; prudential supervision of financial institutions which could in crisis lead to large injections of liquidity. These were left in the hands of national regulators.
Despite the Eurosystem’s clear assignment of responsibilities, this framework remains somewhat flawed. The Euro area’s cyclical weakness since early 2001, the external weakness of the euro, and the ongoing difficulties in harmonising the framework for financial markets (inciting controversies about legislative control between European institutions) all provide proof that establishing pro-growth policies while fighting inflation is a difficult trick to pull off. Progress in all three areas can only be resolved through continuous coordination of the discretionary powers retained by EU members, which is not what the Maastricht Treaty envisioned. To remedy this, the next steps for the euro will demand greater political union, though in a narrow sense.
Indeed, the comparatively weak economic performance of the euro area has not been addressed. Compared to the US since 1995, European industry’s productivity has failed to pick up. But Europe’s macroeconomic and monetary policy options here are, unfortunately, already visible. Although various benchmarks were developed over the past five years and an emphasis on structural issues is growing, the gap between rhetoric and achievement remains wide. It is to be hoped that the forthcoming Barcelona European Council will boost momentum. Certainly the lack of distraction from divergence within the euro area makes attention to structural issues easier.
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Can the euro also spur more political union beyond that need for monetary policy? Major spill-over effects have always seemed questionable. Recent advances in joint policies – the European arrest warrant, for example – lead some to see a link, but this does not seem realistic. Fundamental policy issues are finding support on their own merits.
Outside the euro area – in the United Kingdom, Sweden and Denmark – the impressively smooth debut of euro notes and coins has been applauded. Public opinion about euro membership has shifted most clearly in Sweden, where a weak Swedish krona is also inspiring a change of heart toward euro membership. In response to this, Prime Minister Person, indeed, has moved forward the scheduled referendum on euro membership to 2003, after parliamentary elections in September this year.
The Swedes, moreover, are not alone in rethinking their standoffish approach to the euro. Norway’s traditional hostility to EU membership has lessened, say pollsters, since the euro’s appearance in shops; and the UK government has hardened its commitment to evaluate Britain’s potential membership by mid-2003.
Aside from continuing to meet the other criteria of the Maastricht Treaty (as they probably will), Sweden and the UK will need to convince their publics and their euro area partners that they can manage their economies without a national monetary policy, and negotiate an entry rate for their currency. If they do, the euro can be introduced in 2006 at the earliest, assuming a positive outcome a 2003 referendum.
In Denmark, my own country, economic readiness is not the issue. Indeed, Danish voters have seen most of the benefits of euro membership already, due to the Danish krone’s unchanged link first to the DM, then to the euro, over the past 15 years. Public rejection of the euro in the September 2000 referendum hinged on a failure by the euro’s supporters to explain the difference between this uncontested policy and full euro participation. As a result, Denmark may be the last to vote, but not necessarily to join.
Despite the different starting positions, Sweden, Denmark, and the UK have this in common: they prefer to see the euro as a cap stone in constructing the Single Market rather than as a stepping stone to closer union. The more the second interpretation is stressed, the more reluctant they become. They prefer remedying structural impediments to growth as an important objective in its own right, not as a step on the road to federalism. So those enthusiasts who link the euro to political union do their cause a disservice by hazarding public support for adopting the euro.
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The smooth appearance of euro notes and coins has triggered a valuable reconsideration of European monetary union’s ultimate aims. Two views – active since the process began in the late 1980’s – persist. The first claims that monetary union merely seeks to consolidate the Single Internal Market in goods and services; the second sees the euro as a mechanism to forge closer political union. These two motives are complementary, but the euro’s physical arrival has re-opened old divisions over its economic and political aspects and, to some extent, between the euro’s “ins” and “outs” among EU members.
The euro’s economic impact should not be underestimated. Although the biggest step in monetary union was taken when national currencies became subdivisions of the euro, the arrival of euro notes and coins delivers additional advantages. Transparency of retail prices will invigorate competition. Prices and inflation expectations will now tend to be guided more and more by a common inflation rate – kept low and stable by joint monetary policy – and not by erratic and divergent national prices. A deepening of financial integration can also be expected. Finally, the irreversible nature of monetary unification will become ever more evident to citizens.
But will completion of monetary unification enhance Europe’s political union? To obtain a clearer picture, questions related to monetary union should be kept distinct from wider political issues.
The framework for the joint monetary policy negotiated at Maastricht focussed on medium-term price stability, which is to be assured by the European System of Central Banks – the Eurosystem – made as independent as possible from national and European political authorities. Elements that might undermine this framework were addressed by targeting three potential sources of friction: national deviations in budgetary policies. These were constrained by upper limits to budget deficits, later elaborated in the Stability and Growth Pact; obligations to intervene in defence of particular levels for the euro in external currency markets. These were made unlikely by giving a major role in designing them to the Eurosystem, committed to internal objectives and hence instinctively averse to undertaking external commitments; prudential supervision of financial institutions which could in crisis lead to large injections of liquidity. These were left in the hands of national regulators.
Despite the Eurosystem’s clear assignment of responsibilities, this framework remains somewhat flawed. The Euro area’s cyclical weakness since early 2001, the external weakness of the euro, and the ongoing difficulties in harmonising the framework for financial markets (inciting controversies about legislative control between European institutions) all provide proof that establishing pro-growth policies while fighting inflation is a difficult trick to pull off. Progress in all three areas can only be resolved through continuous coordination of the discretionary powers retained by EU members, which is not what the Maastricht Treaty envisioned. To remedy this, the next steps for the euro will demand greater political union, though in a narrow sense.
Indeed, the comparatively weak economic performance of the euro area has not been addressed. Compared to the US since 1995, European industry’s productivity has failed to pick up. But Europe’s macroeconomic and monetary policy options here are, unfortunately, already visible. Although various benchmarks were developed over the past five years and an emphasis on structural issues is growing, the gap between rhetoric and achievement remains wide. It is to be hoped that the forthcoming Barcelona European Council will boost momentum. Certainly the lack of distraction from divergence within the euro area makes attention to structural issues easier.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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Can the euro also spur more political union beyond that need for monetary policy? Major spill-over effects have always seemed questionable. Recent advances in joint policies – the European arrest warrant, for example – lead some to see a link, but this does not seem realistic. Fundamental policy issues are finding support on their own merits.
Outside the euro area – in the United Kingdom, Sweden and Denmark – the impressively smooth debut of euro notes and coins has been applauded. Public opinion about euro membership has shifted most clearly in Sweden, where a weak Swedish krona is also inspiring a change of heart toward euro membership. In response to this, Prime Minister Person, indeed, has moved forward the scheduled referendum on euro membership to 2003, after parliamentary elections in September this year.
The Swedes, moreover, are not alone in rethinking their standoffish approach to the euro. Norway’s traditional hostility to EU membership has lessened, say pollsters, since the euro’s appearance in shops; and the UK government has hardened its commitment to evaluate Britain’s potential membership by mid-2003.
Aside from continuing to meet the other criteria of the Maastricht Treaty (as they probably will), Sweden and the UK will need to convince their publics and their euro area partners that they can manage their economies without a national monetary policy, and negotiate an entry rate for their currency. If they do, the euro can be introduced in 2006 at the earliest, assuming a positive outcome a 2003 referendum.
In Denmark, my own country, economic readiness is not the issue. Indeed, Danish voters have seen most of the benefits of euro membership already, due to the Danish krone’s unchanged link first to the DM, then to the euro, over the past 15 years. Public rejection of the euro in the September 2000 referendum hinged on a failure by the euro’s supporters to explain the difference between this uncontested policy and full euro participation. As a result, Denmark may be the last to vote, but not necessarily to join.
Despite the different starting positions, Sweden, Denmark, and the UK have this in common: they prefer to see the euro as a cap stone in constructing the Single Market rather than as a stepping stone to closer union. The more the second interpretation is stressed, the more reluctant they become. They prefer remedying structural impediments to growth as an important objective in its own right, not as a step on the road to federalism. So those enthusiasts who link the euro to political union do their cause a disservice by hazarding public support for adopting the euro.