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.