No small change for Europe’s new money

Date: 28/11/1996

By Tim Jones

THERE can be few issues which spark as many misunderstandings, misrepresentations and outright lies as European economic and monetary union.

The proponents of a single currency are often as guilty as the nationalists who cling to their currency - of all things - as if it were the last fig leaf preventing the exposure of their country's shivering sovereign nakedness.

While the euro-phobes forget that sovereignty is also about such minor details as language, an independent foreign policy and nuclear weapons, EMU's champions sometimes give the impression that nothing will change except the name of Europe's currencies.

Anyone casting more than a cursory glance at the 13-14 December EU summit in Dublin will soon discover otherwise. Unless heads of state and government start to believe that their own well-leaked negotiating positions are really their opinions, they will sign the most far-reaching budgetary coordination agreement in modern European history.

If EMU does go ahead on time in January 1999, it will be a tightly-organised monetary alliance.

At its Frankfurt nucleus will be a European Central Bank (ECB) run by an executive board and a council of governors. Because they are already national presidents, these (mostly) men will have the kind of independence and intellectual confidence which not even the mighty Bundesbank can claim.

From day one, the ECB and the linked European System of Central Banks will control all the levers of monetary policy. All the national governors will have a say in the setting of short-term interest rates and the day-to-day management of the external value of the currency, but there can be no arguing with the assertion that monetary policy will be conducted from Frankfurt.

That, however, is not the end of the story. The 'stability pact', to be agreed in Dublin as the price of German support for EMU, ensures that finance ministers' fiscal room for manoeuvre will be minimal. Every budget they prepare will be as much for European as domestic consumption.

Ministers will go on drafting their annual budgets, but this will be done within strict guidelines set by the European Commission and fellow pact members. At all times, they will be required to keep their budget deficits below 3&percent; of gross domestic product and close to balance in boom years.

They will have to submit 'stability programmes' to their colleagues showing not only their budgetary aims, but also spelling out the automatic corrective measures they will take the moment they look like overshooting their targets. They will pay for continued slip-ups with a huge cash sanction.

Who would have guessed that such an onerous pact would find such acquiescence among member states? It seems that many of them are so grateful to the historically (but no longer) dangerous Germany for binding itself into a financial alliance that they will put their hands into virtually any fiscal strait-jacket proffered by Bonn.

Whatever the pact's supporters say, there can be no doubt that it will be a short step from constructive criticism of member states' overall fiscal position to suggesting taxing and spending priorities.

Is this really so bad? For many of Europe's citizens, it will make little difference whether their pensions, family allowances or industrial subsidies are decided in London, Paris or Brussels. They are all equally far away both geographically and psychologically.

If the creation of a viable monetary union with a relentlessly inflation-fighting central bank ends fierce swings in the economic cycle and raises everybody's standard of living, who cares whether interest rates are under democratic control?

Arguments like these are hard to counter, but trying to tell people that little will change is disingenuous. Even worse, however, is when the two sides start to wheel out those most dangerous of secret weapons - economists.

Economics is not an exact science. When it is applied to a monetary union comprising an indeterminate number of member states at unknown exchange rates two years from now, it turns into a fine art. However, this does not seem to hold them back.

Work carried out for one MEP concluded that 10 million jobs could be lost through the creation of the EMU. Of course, it was a figure which made the headlines, but this forecast of an employment massacre assumes that all 15 member states will reduce their public debt level to 60&percent; of GDP by January 1999.

Given that Belgium is sure to be let into the single currency bloc with a public debt stock of more than twice that, such a forecast appears designed to frighten.

In arguing for EMU, the Commission has long been touting around figures which claim that the cash companies will save from currency hedging and unnecessary 'in-house' costs could add 0.4&percent; to the EU's annual wealth. Given that, how could anybody argue in favour of keeping national currencies?

It is time for the two sides to come clean.

Those who argue against the single currency usually do so because they fear the loss of monetary and budgetary sovereignty. On the right, this is attributed to nationalist or patriotic reasons. On the left, it is prompted by fears that countries will forever lose their ability to conduct policies of demand management through fiscal and interest rate adjustments.

Those in favour of the euro are usually - although admittedly not always - the same people who support political union. The economic arguments are weak, but the political justification for a currency union to bind Germany and France together is strong.

In fact, it is so strong that politics are already taking precedence over the purely technical.

The Maastricht Treaty always left itself open to interpretation. The idea was to create the kind of flexibility which is needed when measuring moving targets such as the proportion of a nation's income taken up by the government's budget deficit.

It is bizarre how this has become the Holy Grail of EMU. If a government manages to get its deficit down to 3&percent; of GDP during 1998 then that, ministers believe, will be their country's ticket into EMU.

The German establishment turned this into a hard-and-fast rule, emphasising 3&percent; so often that it began to sound like a mantra.

Unfortunately, the French and Italian governments listened only too well. French Premier Alain Juppé's already beleaguered government did not have the heart to find another 9 billion ecu in budgetary savings for 1997, so it raided France Télécom's pension fund and dipped into its savings account at the Caisse des Dépôts et Consignations.

Italian Prime Minister Romano Prodi surpassed even this. The extra 3 billion ecu necessary to get the deficit under 3&percent; in 1997 was proving a killer, so he opted for a one-year 'Euro-tax'. This tax will be withheld from income declared in 1996, but will be repaid from 1999 in instalments and privatisation bonds.

These measures are absolutely contrary to the whole idea of meeting the Maastricht targets. It is rather like watching two sprinters throwing themselves at the 100-metre finishing line only to discover they are taking part in a marathon.

By acting this way, the French and Italian governments are simply proving how unpopular the EMU project has become. How was it that a great adventure aimed at ending once and for all any chance of another European war came to be associated with lost jobs, slashed welfare benefits and dull bankers?

This makes the job of the euro-proselytiser all the more difficult. In addition, people are being asked to hand over currencies with names dripping with historical resonance - mark, franc, lira, pound, guilder - for a euro.

At last December's Madrid summit, when premiers were offered the choice of the ecu, the shilling or the florin, they settled on the euro.

If Europeans do learn to love their new-born currency, it will be despite - rather than because of - the efforts of their politicians.