A Yankee Recipe for a EuroFed Omelet By Robert F. Graboyes

FT-leader, May 19, 1999

Diverging Europe

One of the biggest doubts about the European single currency was how one interest rate could be appropriate for the 11 countries that joined economic and monetary union. In the long run, it is hoped, cycles will converge. But for now, the economies are diverging.

There is nothing the European Central Bank can, or should, do about this; more worrying, though, there is little hope that the countries themselves will be able to force their economies back into line.

The Organisation for Economic Co-operation and Development, in its latest Economic Outlook, spells out the problem. Germany and Italy, it says, have slowed to well below their potential growth rates.

Meanwhile, countries including Ireland, Spain and Portugal have excess demand.

But the inflationary pressures in these countries carry only a small weight with the central bank. In the euro area as a whole, output is growing at a lacklustre 2 per cent, unemployment is more than 10 per cent and inflation is virtually non-existent. Interest rates, if anything, may have further to fall.

To some extent, higher inflation in Emu's so-called periphery nations is to be expected. These countries tend to have lower productivity than the core countries, and so lower wages and prices. As productivity catches up with Europe's leaders, wages and prices should rise. This may account for higher inflation in some countries, particularly Portugal. But the cyclical divergences are plain, especially in Ireland, where the economy grew last year by 9 per cent.

In theory, with monetary policy centrally controlled, countries should use fiscal policy to fine-tune their economies. The Spanish government, rightly, now appears to be considering this option. But elsewhere, this may not be possible. Ireland, for example, already has a sizeable fiscal surplus, and has promised to cut taxes as part of a wage restraint deal.

An alternative is for slower-growing countries to run a more expansionary fiscal policy; but they are already too close to the Stability and Growth Pact limits.

The OECD's advice is for more structural reform, which would increase flexibility, and allow countries to respond more quickly to changing economic conditions. Although this is correct, it is a long-term solution to a short-term problem.

With their policy options restricted, countries have been resorting to more direct methods to keep inflation low. Ireland is relying on a wage deal with the unions; Spain recently cut a range of utility prices.

The blunt fact is that countries that are out of synch with the rest of Europe will suffer, unless they have either extremely flexible economies or an ability to make large and rapid changes to fiscal policy.

This is the unavoidable cost of the single currency.

Martin Wolf, Financial Times, March 31, 1999: Few have realised the most dangerous feature of Emu: it has locked Germany into a seriously uncompetitive real exchange rate

ECB is a law unto itself FT 98-11-12

Paul de Grauwe says the European Central Bank is accountable to no one, which compromises its chance to be truly independent. Do the conditions exist for the successful independence of the European Central Bank? The answer is no, for the following reasons.

The author is professor of economics at the University of Leuven and a member of the Belgian parliament

Jacques Santer, President of the European Commission

EU:s Infeuro, May 1988

... The euro is also a powerful factor in forging a European identity. Countries which share a common currency are countries ready to unite their destinies as part of an integrated community. The euro will bring citizens closer together, and will provide a physical manifestation of the growing rapprochement between European citizens which has been taking place for the past forty years or more.

This symbolic aspect of the euro will also be evident in relations with the outside world: in view of the strength and solidity of the economies on which it will be based, it has the potential to become a major international reserve and transaction currency. The Union will finally be endowed with the currency which its position in the world requires, and which its partners expect as a factor contributing to the stability of the international monetary system. ................... more

David Smith, Economics Editor of The Sunday Times, author of i.e. The Rise and Fall of Monetarism and From Boom to Bust, has written a new book "Eurofutures - Five scenarios for the next Millenium", Capstone, Oxford. From that book I quote:

Stephen King in Emu, Four Endings and a Funeral James Capel, p. 50

Some argue that most of the 'major' asymmetric shocks for Europe have already happened - the collapse of Communism, German unification. But this view is surely naive. There are plenty of potential upsets with important economic - and, particularly, fiscal ramifications. Civil war in Russia would raise the risk of a massive influx of refugees into Germany.

A rise in Islamic fundamentalism in North Africa could lead to a surge of refugees into France, Spain and Italy France or the UK might be forced to defend territories outside Europe, implying a one-off surge in military spending. Italy or Belgium could split in two. Parts of the Netherlands could be destroyed via a tidal wave from the North Sea.

A nuclear reactor accident could, potentially, wipe out thousands of square miles of one particular country. A sharp rise in oil prices would have a significant differential effect on the UK.

An exchange rate shift would not necessarily be the most appropriate response in all of these circumstances. However, the possibility of asymmetric shocks does suggest that exchange rate shifts can still serve a useful purpose.

In their absence, other mecharisms will be required. And here, serious problems arise.

David Smith: We come back to a familiar problem, that of the need for massive resource transfers within Europe once Emu is in operation, and the near impossibility, under present arrangements, of providing them.

Mica Panic: ... Given the limited volume of resource transfers that the Community can realistically be expected to mobilise, their /the weak countries/ long-term chances of remaining in the complete union are likely to be even smaller than those of the countries that found the much less demanding arrangements under the classical gold standard too costly.

Mica Panic: European Monetary Union, Lessons from the Classical Gold StandardSt Martins Press, p. 158)

In a study published by UBS, 'Labour Markets and Emu', George Magnus and Paul Donovan found that labour mobility within Europe had declined in the two decades from the mid-1970s. /They/ cited four principal reasons for declining labour mobility in Europe:

• Lirguistic and cultural barriers. Even in the United States, there are problems of mobility for populafion groups where language is perceived as a barrier, for example Hispanics in California. In Europe, with so many different languages, the constraints are that much bigger.
• A lack of cross-border job information. Although there is some limited information, for example for jobs with the EU institutions themselves, or withir mulfinational companies operafirg across Europe, the emphasis, particularly for governmert-sponsored employmert services, remains strongly national in character.
• The problem of diverse state berefit systems. High social costs in the EU have been idertified as a cause of competitive problems for the region as a whole. For individual employees, variations in benefit and tax systems also form a significant barrier to mobility.
• A perceived lack of opportunity elsewhere. Although there are substantial variatiors in unemployment rates between countries and regions, the fact that unemployment is generally high throughout Europe severely limits the incentive to move to other countries in search of work.

Those hardest hit by rising unemployment, the unskilled, will tend to find that opportunities are as limited in other countries as at home.

Anthony Jay: However much money and power the Commission have, it is improbable that they will be able to have any significant impact on the competitiveness imbalance problem which a single currency will pose.

This will leave the problem to nature's remedy - the migration of population. It seems hard to believe that the political, economic and social success of Europe, whether one approves or disapproves the objecfive, will be promoted by establishing at the heart of its economic fundioring a mecharism which depends for equilibrium on the enforced migration, on pain of destitution, of its population in the tens of millions:

• Away from the places to which they are fied by natural affection, by family relationships, by social capital and by individual will.
• Across frontiers of language, culture, historical experience and law.
• To places of which they know little, which they like less and where they are so far from welcome that they are likely on arrival to be violently assaulted.

If this is the character of monetary urion, conceived by politicians who saw it as little more than a trite gesture of nationhood, to go with a blue flag and a jolly anthem, then we can say that it is not in the long-term interests of Europe and very far from being a sensible economic sacrifice even for the sake of a large political goal.

Indeed, one may wonder that anyone who professes to hope for the success of political union in Europe could wish to implant in its foundations such an engine of mass destruction.

Anthony Jay in The Darlington Economics Lecture, November 17, 1995

EU warned of jobs chaos under single currency - Sunday Times 98-04-26 by Peter Conradi

Democratic Values and the Currency Rt. Hon., Michael Portillo

German economics professors call for delay of EMU

David Owen: "Yes to Europe, No to federalism"

The Economist 98-01-24, utdrag

David Owen explains how he reconciles his pro-Europeanism with opposition to British membership of a single European currency.

Lord Owen was Britain’s foreign secretary from 1977-79 and EU co-chairman of the international conference on the former Yugoslavia from 1992-95.

MY POLITICAL career has been dominated by the question of British membership of the European Community. I have resigned three times, with the EU as the most important issue each time. On the first two occasions, I was protesting against the Labour Party’s negative attitude to Europe. In 1972 I resigned with Roy Jenkins from my position as a junior defence spokesman for the Labour Party; and in 1980 I stood down from the Labour shadow cabinet when the implacably anti-European Michael Foot was elected leader.

Despite my commitment to the European Community I have never been at any stage a federalist, or a believer in a United States of Europe.

When I campaigned for Britain to join the EC in general elections from 1964 to 1970, I believed that it was not inevitable that the European Union would become a single state. I believe that even more today, with at least 11 nations due to join. But even if, regrettably, it does become such a state I hope it would be without the participation of the United Kingdom.

For Britain to join a single European currency would represent a quantum leap in the pooling of sovereignty. It is not just economic sovereignty which can be forgone by adopting the euro, but political sovereignty as well.

Much is written about the changing nature of the nation-state. Most people accept that change here is inevitable, but while they may not be able to define the nature of the state in which they want to live, they know they will recognise when that state no longer exists.

Some of Britain’s ambivalence about the euro is rooted in a sense of unease about where we are heading if we just acquiesce in another move towards integration, and appear to be becoming a mere province of Europa.

I want to believe that the British people will not allow their government to give up the pound and join a single European currency if they sense that to do so is to forgo some of the essential sinews of nationhood, which are still worth preserving in the 21st century.

Such policies will be very different from British foreign policy over the last 1,000 years. More relevantly, it will be very different from that practised over the last 25 years.

Remember the Gulf

The EU was not ready to act in concert in November 1997 when there was clear evidence that Saddam Hussein was circumventing the UN inspectors charged with stopping him developing all three weapons of mass destruction—biological, chemical and nuclear.

The French and Germans had their own interests to protect and they too as member states must be free to take independent action. The British government made its own decision and Britain on this occasion would have acted militarily with America. Had we been locked into qualified majority voting as part of an EU Middle East policy, we would not have been able to block an EU policy that would not have supported military action. It is worth reflecting on this incident, for it encapsulates most of the deeper questions about continuing on the path of integration and eroding national independence within the EU.

For continental european politicians a single currency is above all a political not an economic issue. It is a return in history to the Empire of Charlemagne Charles the Great from 768 to 814 which stretched from the Atlantic to the Danube, from the South of France to Holland. That had a central silver coinage and some historians have termed it the ‘first Europe’ with its own international executive class.

Since the Second WorId War there has been a less dramatic but determined drive to build on the back of the European Coal and Steel Community a democratic or third Europe. This deliberately concentrated on a continental Common Market core of six nations. Winston Churchill advocated it for Europe but not for Britain. General de Gaulle openly opposed widening it to include the UK but did talk of a Europe from the Atlantic to the Urals.

In 1973 the Channel was crossed and the UK included in an enlargement to nine. This ‘third Europe’ has always had amongst its leaders people who aspire, often only in private, to a United States of Europe. They see the USA as the most successful continental size federation and they want to achieve over time the same degree of integration.

This is, even though I believe profoundly misguided, a legitimate objective. But it is only honourable if it is openly and democratically espoused.

Unfortunately in some countries and for the most part in the UK those who want such an outcome operate by stealth, denying this is their ambition while edging constantly towards it.

There have also been failures particularly when attempting to realise the ambitions of its federalists. The most ambitious federalist project was the Pleven Plan for creating a European Defence Community, but this was eventually rejected by the French Assembly in August 1954.

In the late 1960s and early 1970s the federalists made their first attempt at monetary union with the Werner plan. This was for the total and irreversible convertability of currencies, the elimination of margins of fluctuations in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital. The Werner plan for the Common Market was to include all members and was supported by Edward Heath’s government but never put to the test in the British Parliament being quickly consigned to the wastepaper basket after the oil price shock of 1973.

It is salutary to reflect that had it been established it would have been blown to smithereens by the after effects of the Arab Israeli war.

Chancellor Kohl’s refusal to champion further integration during the 1997 negotiations prior to and during the Amsterdam negotiations may be a pointer. As is the fact that he has stopped referring in speeches to the goal of a United States of Europe. What is now emerging is a multifaceted Europe.

How should the UK handle this new EU? Where lies the true destiny of Britain? I believe it is to say ‘Yes’ to Europe but No to Federalism.

A Political Currency

The political origins of the euro are that after the fall of the Berlin Wall in November 1989 a pact was formed initially between the Chancellor of Germany and the President of France early in 1990 well before the formal reunification of Germany on 3 October 1990.

The motivation of Helmut Kohl was to demonstrate to his friend Francois Mitterrand that France had nothing to fear from a much larger Germany for they would put their Deutschmark with the French franc into a single currency to forge out of the ‘third Europe’ the historic ‘first Europe’.

The Maastricht Treaty of 1992 was the manifestation of that Franco-German political deal but its detail had within it compromises of a deeper significance. For while the Ministry of Finance in France conceded to the Bundesbank on the design of an independent European Central Bank so Germany conceded to the Elysee and Quai d’Orsay the crucial three intergovernmental pillars:

I. Economic; II. Common Foreign and Security Policy; and III. Justice and Home Affairs Policy, which are written into the Treaty. Thereby, Maastricht, for the first time, put Treaty parameters to the extent of European integration. It also left Britain and Denmark free to decide, as they have both done, not to give up in 1999 their own currencies.

Since Maastricht Sweden has taken the position that they are not obliged to put their Kroner into the Euro in 1999 and this flexible interpretation of the Treaty will in practice be on offer to all new entrants even ifnot offered formally by the EU. Because the motivation for a single currency is political the criteria for entry spelt out in the Maastricht Treaty will continue to be stretched for these political leaders have vested too much of their own personal credibility, for the 1999 start date to be postponed. In fairness the criticism is not that they lack vision but that they are taking an immense risk with the political, as well as the economic, stability of Europe.

By the mid 1980s I had begun to argue that ERM entry would be advantageous. Margaret Thatcher did not allow the then Conservative Government to join but acquiesced as Nigel Lawson shadowed the Deutschmark for far too long when the government should have introduced higher interest rates to cool the economic boom. Margaret Thatcher’s government then compounded this error by entering the ERM at a too high a rate.

It was John Major’s government which then defended the pound at an absurd cost rather than seeking the very currency readjustment which was allowed under the rules. The ERM was by design a flexible system for stabilising rates but the politicians saw maintaining the rate as a national virility symbol.

That same vice was followed by British governments, Labour and Conservative, after the Second World War under the Bretton Woods fixed rate system most damagingly by Labour before the devaluation of 1949 and again in 1967.

Although this rigidity about exchange rate policy was deeply unfortunate at least we were able to adjust the value of the pound or as we did in 1992 leave the ERM. To give up the pound and to join the euro means that there is no way out short of breaking the Treaty and recreating one’s own currency.

My political career since 1962 has been dominated by the question of British membership of the European Community but only since 1992 has a single currency been seen as the test of one’s Europeanism. In the early 1960s the leader of the Labour Party, Hugh Gaitskell, was someone I greatly admired. He had a passionate pride in the British nation’s capacity to lead but also the intellectual rigour of mind to warn against the political risks of joining a common market which had federalist ambitions, He dismayed friends like Roy Jenkins but he demonstrated a statesmanship that led millions to mourn his premature death a few months later. On 21 September 1962, I watched Hugh Gaitskell on television reply to Prime Minister Harold Macmillan’s broadcast of the night before. He asked if Macmillan wanted to enter a European federation. If so it ‘means the end of Britain as an independent nation; we become no more than Texas or California in the United States of Europe. It means the end of a thousand years of history it means the end of the Commonwealth to become just a province of Europe.’

The need for convergence

A country in the single currency facing a political crisis because of high unemployment and falling living standards has no currency of its own to adjust, no interest rates of its own to change —there is no safety valve. Many independent economists do not believe the necessary economic convergence in Italy, Spain or Portugal exists for a stable euro. The EU collectively will be hard pressed to help for it is barely able to face the redistribution costs inevitable in the process of enlargement over the next seven years.

For the single currency to survive not just interest rates will have to be the same. Much of the anxiety about the sustainability of the single currency relates to the fear that some participating countries will in an economic downturn balk at the discipline required. Also their electorates will not understand why other member states still outside the euro, have a far greater measure of national economic decision making, for example in letting their currency float downwards or upwards or to decide to run larger or smaller deficit.

There is a need for cool, clear minds to focus on the issues of substance and disentangle the propaganda.

The British people will need convincing before they will endorse such a massive economic and politica1 commitment. Particularly when they register that a single currency by its very nature cannot be put up for periodic review. No country can step out of the euro without appalling and largely unforeseen consequences for itself and for Europe in general. It is effectively an irrevocable decision.

European Defence

All that really separates the 1995 Dayton Accords from the EU Action Plan was two years of continued war, massive further ethnic cleansing and loss of life, Both plans gave the Bosnian Serbs 49% of contiguous territory. By contrast the so-called Vance Owen Plan gave the Serbs only 43% of territory in three unconnected provinces.

A Common not a Single Foreign and Security Policy

In European parlance ‘common’ means a concensus policy, ‘single’ means a majority policy. The majority coming from either delegated power stemming from an institution like the Commission, the Central Bank or from a qualified majority vote of the Council.

The worst peace or war decision taken in British foreign policy since Suez was the decision not to veto in December 1991 EU recognition of Croatia and Slovenia because it triggered the war in Bosnia-Herzegovina.

Under the Maastricht Treaty, which had not even been ratified at that time, there was no obligation on Britain to agree, only to try to find common ground; this France and Britain had already done.

On 8 November 1991 the EC issued a Declaration in Rome which stated that the prospect of recognition of the independence of those Republics wishing it, can only be envisaged in the framework of an overall settlement. Given the German government’s strong views it would have been legitimate for Germany within the EC to invoke an overriding national interest and to recognise unilaterally.

It was perhaps not surprising, in view of the Franco-German alliance, that it was the French Foreign Minister Roland Dumas who first gave in to the Germans but it was surprising when he was followed by Douglas Hurd who had eloquently argues for months against recognition. It was a deeply damaging face-saving EC consensus taken despite the opposition of Lord Carrington, Chairman of the EC Peace Conference on Yugoslavia, Perez de Cueller, the UN Secretary General and Cyrus Vance, peace negotiator for the UN.

here is no ground for believing, as some claim, that the French would have acted differently if qualified majority voting had existed on the Foreign Affairs Council. France would not only have been unable to isolate Germany on the Council, It had become by then a French national interest to accommodate the German viewpoint. The UK also felt grateful to Chancellor Kohl for his understanding over the Maastricht negotiation and his readiness to support our euro opt out. There was probably no explicit bargain struck just an understanding reached that we would be more flexible over matters of real concern to Germany.

Given the negotiated ceasefire between the Croats and the Serbs at the end of the year the problems created by recognition could have been overcome if it had not been compounded by going forward with the recognition of Bosnia-Herzegovina

The US, who had opposed recognition of Croatla in December 1991, became very active in pushing for recognition of Bosnia-Herzegovina in the spring of 1992 but the situation was very different. This was the one internal republic of Yugoslavia that contained three large constituent peoples -Muslim, Serbs and Croats -with very different views on independence. Recognition wIthout the prior presence of a substantial UN Prevention Force was a recipe for war.

The Yugoslavian 1991 recognition debates within the EC are a sombre warning of how dangerous decisions, with the predicted consequence of an even bloodier war, can be made in an atmosphere where maintaining unity among the member states becomes an end in itself.

complete article

BBC Thursday, January 22, 1998

CBI puts the brakes on EMU

The Director General of the Confederation of British Industry, Adair Turner, has criticised the rush towards European Economic and Monetary Union (Emu).

Addressing business leaders and politicians in Berlin, he said there were strong arguments for delaying the introduction of a single European currency.

The CBI has in the past been strongly supportive of Emu and Mr Turner himself insists he is a pro-European.

However, he told his German audience that he was not willing to sign up for a blank cheque called "ever closer union".

He insisted that the CBI had not changed its position. He said Europe should integrate certain things that made sense, but not necessarily everything.

In particular he said there was no need to integrate social and fiscal policy. Although Emu did imply some form of economic co-operation, he said it was not necessary to fully integrate the tax-and-spend policies of different governments.

Mr Turner criticised those European Union governments who are pressing for the early introduction of the single currency. He said Emu was going ahead in less than ideal conditions and therefore carried risks.

He argued that high unemployment and the poor state of public sector finances in many EU countries were reasons for delaying the project.

He accused governments of ignoring such problems in their desire to rush ahead and called for them to get away from "grand slogans".

He said there had been inadequate debate of the pros and cons of monetary union and said Europe's leaders should listen to public opinion. He believed many others across the continent shared his view.

He said the whole of Europe should discuss which aspects of economic policy should be integrated as part of Emu, instead of leaving individual countries to pick and choose.

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