Richard Lambert: Europe's dangerous monetary experiment Financial Times 97-11-19
The US is waking up to the reality of European economic and monetary union - and does not much like what it sees. What in Europe looks like a bold political adventure appears in the US as a dangerous economic experiment. Pestilence and famine are on the agenda.
Martin Feldstein, professor of economics at Harvard, goes further than most. In "Emu and International Conflict", a dark essay in the latest issue of Foreign Affairs, he reminds his readers that, although 50 years of European peace is quite an achievement, there were also more than 50 years of peace between the Congress of Vienna and the Franco- Prussian war.
And in case that is not enough to frighten the children, he further argues that a formal political union would be no guarantee against an intra-European war. "The American experience with the secession of the south may contain some lessons about the danger of a treaty or constitution that has no exits," he observes.
Others are almost as gloomy. Henry Kaufman, the Wall Street economist, was arguing the other day that localised recessions would be all but inevitable under the system. Financial markets would question whether the country involved would stay in the system, or seek to re-establish its own currency. He thinks that the early years of the experiment will be especially volatile and dangerous.
Officials in Washington have come to recognise that monetary union is near enough a political certainty, so their public statements are polite, even welcoming. Their private views are sometimes another matter.
Why does the prospect look so bleak from the western side of the Atlantic? There are two obvious answers. The first is that New York is beyond the range of the stun gun of Helmut Kohl, the German chancellor. The confidence of French officials does not reach Wall Street, nor does the grim determination of Romano Prodi, the Italian prime minister, and, from a distance, the motives driving Europe's leaders forward seem both obscure and overly complicated.
Everyone seems up to crafty dodges, as in France's recent attempt to have its man appointed to the top of the new European Central Bank. Until recently, they have had very different views about the proper role of monetary policy.
The second explanation is that the US has its own experience of what makes a single currency work - and none of the most relevant features apply in Europe. Millions of workers cross state lines in the US each year. If the defence industry takes a hit in southern California, displaced workers hop in their truck to Colorado, or wherever else work is to be found. The US can transfer federal resources to cities and regions affected by economic downturns through a well-established system of automatic stabilisers and discretionary programmes. I
t has a tried-and-tested central bank, with a credible record and a political counterweight in Washington. Alan Greenspan, the chairman of the Federal Reserve, has considerable independence, but he cannot ignore Congress.
The country is bound together by a common language, shared values and a sense of national identity - more or less.
And Europe? American observers tend to overstate its problems. They see only an over-regulated business sector, inflexible labour markets, unaffordable social programmes, and high unemployment. They tend to write the French off as a bunch of hopeless socialists, and they often don't recognise the real changes that are taking place in Germany at plant and company level. They can't believe that Italy and Spain will even be allowed to join the party, or that there is much real popular support for a single currency.
From this stems their view that the European system will be unable to cope with a localised economic shock. Workers will be unwilling or unable to trawel around Europe for opportunities. On the evidence, they don't move from Yorkshire to London, let alone to Frankfurt.
With no room for monetary manoeuvre and their fiscal freedom curtailed, tensions between countries will rise - and the European Union will be held responsible. From that point, it's not too large a leap towards the growth of economic and political nationalism - and to that ultimate of all ironies: a system that was designed to unite Europe ends up by blowing it apart. An idea intended to bring down the last remaining barriers to trade has precisely the opposite effect.
Good Europeans do not have to swallow all this gloom. They can point to signs of economic recovery around the continent, and the hope that a period of sustained growth would make the problems look a lot more manageable. They can argue that the pressures of the union will force through needed labour market reforms: there will simply be no alternative. But it is quite a hard case to make.
And it is difficult to shake off this sneaking feeling: if it were not for the fact that the Europeans who are opposed to Emu are mostly so frightful, you would begin to harbour a few doubts yourself.
Jfr Lawrence Lindsey, former Fed Govenor