THE FUTURE OF THE

PG02 LETTER FROM THE EDITORS PG03 HISTORY OF THE EUROPEAN MONETARY UNION A PUBLICATION OF THE INDEPENDENCE / DEMOCRACY GROUP ISSUE 3 - OCT-NOV 2006 PG05 WILL THE MONETARY UNION COLLAPSE? THE FUTURE OF THE PG08 POLITICAL UNION: THE END GAME OF THE EURO PG10 THE BIRTH AND DEATH OF THE EURO PG14 QUOTATIONS ON MONETARY UNION PG15 SWEDEN’S REFERENDUM ON THE EURO PG18 ROMANIA, FROM ADHESION TO EURO ADOPTION PG19 THE EVER DISTANT EURO PG21 A SHORT HISTORY OF SINGLE CURRENCIES €URO Independence/Democracy Group www.indemgroup.org European Parliament, Rue Wiertz, 60 - ATR 7K 082 - 1047 Brussels, Belgium PG22 THE EURO TODAY PG26 A DOUBLE RIP-OFF PG28 TRANSPARENT SUBSIDIARITY PG30 EUROPE IN NUMBERS 2 Letter from the editors "The single market was the theme of the Eighties. The single currency was the theme of the Nineties. We must now face the difficult task of moving towards a single economy, a single political unity." These are Romano Prodi's words in a speech to the European Parliament, as Commission President, in 14 April 1999. That was the year the euro was launched as the common currency of twelve member states. Since then, it has become clear that the promises made about the economic advantages of the euro were somewhat overestimated. Although the euro proved itself to be a stable currency, this stability had a high price: slow economic growth as a consequence of the provisions of the TEC and of the Stability and Growth Pact. Besides, it is more than doubtful that the system is able to handle the so-called asymmetric shocks when external impacts influence the member states differently. In this edition, EUWatch addresses the problem of the euro, giving the floor to a distinguished expert, Paul De Grauwe, professor at the Faculty of Economics and Applied Economics at the University of Leuven, and an adviser to Commission President José Manuel Barroso. Meanwhile, different authors give an overview of the history of the monetary union and the euro, display the experiences of the old and the perceptions of the new member states, and finally give some theoretical background of monetary unions. This issue also includes some thoughts on subsidiarity and on freedom and security. It closes by highlighting some interesting results of the Eurobarometer poll, where European citizens were asked about their opinion concerning the euro. Hoping that you will enjoy reading our contributions and looking forward to receiving comments or reactions you may care to send, Your sincerely, Klaus Heeger Karoly Lorant Chief Editors NOTE: The Board of editors of EUWatch is independent in its choice of articles. The responsability for the content of articles lies exclusively with their authors. EUWATCH Published by the IND/DEM Group in the European Parliament EUwatch@indemgroup.org Ind/Dem Group, Rue Wiertz, 1047 Brussels. CHIEF EDITORS: Klaus Heeger Karoly Lorant EDITORIAL BOARD: Peter Henseler Jan Johansson Jolana Mungengova DESIGN & LAYOUT EDITOR: Henry Abela FORM EDITOR: Anders Dahl ENGLISH LANGUAGE EDITORS: Kevin Bonici Anthony Coughlan David Lott Steve Reed FRENCH LANGUAGE EDITOR: Christophe Beaudouin 3 HISTORY OF THE EUROPEAN MONETARY UNION 1962 The European Commission proposed a single currency for Europe 1969 The Hague Summit The six member States of the European Economic Community (EEC) decided to establish an economic and monetary union (EMU) as an explicit goal of the Community and set up a high-level group to examine how to achieve this, chaired by Luxembourg’s Prime Minister Pierre Werner. 1970 Werner Report The Werner Report proposed a three-stage plan to create an economic and monetary union within a decade. The three stages to achieve EMU were set out as follows: – Reduction of the fluctuation margins between Member States’ currencies, broad guidelines for economic policy at Community level, co-ordination of budgetary policy, preparation of Treaty changes to facilitate later stages of EMU; – Integration of financial markets and banking systems to create free movement of capital, progressive elimination of exchange rate fluctuations, closer co-ordination of short-term economic policies and budgetary and fiscal measures; – Irrevocable fixing of exchange rates between participating national currencies, convergence of economic policies, establishment of a Community system of central banks. 1971 Collapse of the Bretton Woods Monetary System The Bretton Woods system effectively collapsed when President Nixon unilaterally announced that the US would discontinue the convertibility of the US dollar to gold, thus ending the fixed exchange rate regime and bringing about a wave of instability on the foreign exchanges. The EMU project was temporarily abandoned. 1972 Snake in the Tunnel After the collapse of the Bretton Woods system, the six EEC-Member States set up a ‘snake in the tunnel’ mechanism to narrow the fluctuation margins between the Community currencies (the snake) and the US dollar (the tunnel). However, the system came under pressure from the oil crisis of the early 1970’s, when Member States’ currencies fluctuated sharply, some leaving the system altogether. By 1977 the snake was reduced to a zone based around the German mark, with only five out of nine Member States remaining. Paris Summit Heads of State and heads of Governments approved the objective of the progressive realization of economic and monetary union. 1978 Establishing the European Monetary System Following a Franco-German initiative, the Community decided to re-launch monetary integration at the Brussels European Council by creating a European Monetary System (EMS), with the objectives of stabilising exchange rates, reducing inflation, and preparing for monetary integration. The EMS entered into force on 13 March 1979. Continues on page 4 4 HISTORY OF THE EUROPEAN MONETARY UNION Continues from page 3 replacement by a single European currency, responsibility for monetary policy would be transferred to the ESCB. Most of the ideas set out in the Delors report later formed the basis for the EMU provisions agreed in the Maastricht Treaty. 1990 Full liberalisation of capital movements (from 1 July 1990). 1992 Treaty of Maastricht With the Treaty of Maastricht, the fifteen members of the European Union agreed to set up a single currency as part of a drive towards Economic and Monetary Union. The Treaty of Maastricht defined convergencecriteria among the economies of participating countries. This was the preliminary stage of the single currency. 1994 Establishing the European Monetary Institute (EMI) The purpose of the European Monetary Institute was to promote cooperation between the national banks of the member states in the European Union. It was eventually replaced by the European Central Bank and the European System of Central Banks. The European System of Central Banks consists of the European Central Bank and the local, central banks of the European Union’s twenty-five member states. 1995 The name “euro” was decided upon, on 16 of December 1997 The European Council decided to adopt the Stability and Growth Pact (June). This pact was to ensure budgetary discipline after the creation of the euro, and to set up a new exchange-rate to provide stability between the euro and the national currencies of countries which had not then entered the Euro-zone. 1998 The European Council agreed the list of participating countries: Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain (arrival of Greece in 2001). The European Central Bank (ECB) was established as the institution responsible for European monetary policy. 1999 The single currency was launched (1st January) 2002 Euro coins and banknotes entered circulation (from 1st January) The system consisted of three elements: – Currency basket (European Currency Unit or ECU); – Monetary stabilisation mechanism (Exchange Rate Mechanism or ERM); – Mechanism for financing monetary interventions (European Monetary Co-operation Fund or FECOM). The ERM gave each currency a central exchange rate against the ECU, which also gave them central cross rates against each of the other participating currencies. Participants were then required to maintain their exchange rates within a 2.25% fluctuation band above or below each bilateral central rate. 1986 The Single European Act The Single European Act placed the free movement of capital on the same footing as that of goods and services. Monetary co-operation was introduced as a new area of Community competence. By introducing qualified majority voting for a number of issues, the Act extended the Commission’s power. 1989 Delors Report endorsed by the Madrid summit The Delors Report set out a plan to introduce EMU in three stages, which required an institutional framework to allow policy to be decided, and executed, at the Community level, in economic areas of direct relevance for the functioning of EMU. This institutional framework entailed also the creation of a monetary institution, namely a European System of Central Banks (ESCB) which would become responsible for formulating and implementing monetary policy, as well as managing external exchange-rate policy. Unlike the Werner Plan, it did not propose a new body to coordinate economic policy, but rather that these functions could be carried out within the existing institutional framework. The three stages for the development of EMU were: Stage One: Increased co-operation between central banks in relation to monetary policy, removal of obstacles to financial integration, monitoring of national economic policies, co-ordination of budgetary policy; Stage Two: Preparatory stage for the final phase of EMU, establishment of the ESCB and progressive transfer of monetary policy to European institutions, narrowing of margins of fluctuation within an exchange rate mechanism; Stage Three: Fixing of exchange rates between national currencies and their 5 “THE EURO AND THE OCA”: BY PETER HENSELER WILL THE MONETARY UNION COLLAPSE? PETER HENSELER OFFERS SOME INSIGHT BEHIND AN INTERVIEW GIVEN BY PROF. PAUL DE GRAUWE TO JOHAN CORTHOUTS, PUBLISHED ON THE FLEMISH DAILY DE MORGEN ON 18 MARCH 2006, AND REPRODUCED AT THE END OF THE ARTICLE. In 1961 Robert A. Mundell published a small article in the American Economic Review on “A Theory of Optimum Currency Areas”. In the 1990s several economists took up Mundell’s ideas, for example by asking whether Europe could be an Optimum Currency Area (B. Eichengreen 1990) and by analyzing the real exchange rates within and between Currency Areas (J. v. Hagen/ M.J.M. Neumann 1994). One of the most important books on the economics of monetary integration dealing with the theory of Optimum Currency Areas (OCA) and the costs and benefits of monetary integration was published in 1992 by Paul De Grauwe, Professor of Economics at the University of Leuven, Belgium. It is now available in the 5th edition (2003) titled “Economics of Monetary Union”. The OCA theory postulates that the candidate countries for a Monetary Union (MU) should form an area which is sufficiently similar, if not homogeneous, from an economic and social point of view (concerning common economic and social standards and performances) to provide a stable basis for the common currency. As MU means centralization of monetary policy and giving up national exchange rate autonomy, asymmetric economic shocks cannot be absorbed by national exchange rate policy any longer (in particular by devaluation of the national currency to regain competitiveness of national goods and services on the world market). The OCA theory therefore developed several criteria or conditions which justify giving up exchange rate autonomy by entering the MU. These are in particular: · sufficient flexibility of wages in the future MU; · sufficient labour mobility in the future MU (i.e. within and between the MU member candidates); · freedom of capital mobility within the MU; · stability of the real exchange rate behaviour (variability) between the candidate countries which is measured by the price level and cost ratios (in real terms) between the candidate economies. Although freedom of capital was introduced on 1 July 1990 and at the same time linked to the first stage of the European MU (thus pulling down already one of the most important bastions of national economic policy), the other criteria in reality are not fulfilled (although freedom of movement for workers is legally guaranteed by the Treaty). This causes economic and social disparities between the MU member countries, putting the MU at risk - even of collapsing, as a whole, or of losing those members, who are under pressure because of significant disparities. In the latter case perhaps that “hard core” of countries which had already linked their currencies together before the first stage of the MU started, namely D, NL and A, would remain. Moreover this area, which is nearly identical with the Holy Roman Empire of the German Nation, would according to the empirical findings of the OCA economists mostly fulfill the OCA criteria mentioned above. To minimize the risk mentioned above several compensation mechanisms are necessary, namely: Continues on page 6 6 WILL THE MONETARY UNION COLLAPSE? Continues from page 5 · more funds for the Union budget to establish a (partly automatic, partly discretionary) fiscal equalization system (as in the European federal states) in a more effective way than it is provided by the structural funds up to now, · may be by augmenting national contributions to the Union budget, · if this would turn out to be not possible or not sufficient, may be by introducing Union taxes, in particular income taxes (i.e. partly centralization of taxation policy); · more Union competences (centralization) in the field of income policy, social policy, employment and labour market policy, in particular to improve the comparative advantages and thus the competitiveness of the MU economies and the European economy as a whole, which, in the world of neoliberal theories, would mean more deregulation, but, in eurocratic practice - presumably more re-regulation at the supranational level. To guarantee all these things would inevitably lead to Political Union. Centralization of monetary policy alone would thus turn out to be insufficient, because of the political limits of purely economic integration and – apart from this – the deficits of political legitimacy of the ECB would become evident. All this has been well known in the world of academic economics since 1961, when Mundell published his groundbreaking article on the OCA theory, for which he was awarded the Nobel Prize in 1999. Besides all this – and particularly in the case of rising unemployment – a lot of contradictions and inconsistencies would become evident between economic policy instruments, namely, between supply-side oriented OCA conditions (flexibility of wages, movement of labour and capital) and demand-side oriented national fiscal policy instruments. The latter will come more and more under pressure because of the requirements to achieve the Maastricht and Stability Pact criteria (although these criteria may be viewed as the simplistic, “vulgareconomics” approach of monetarist epigones). Thus, if the EU member states refuse to provide more funding for the Union budget – to counteract economic disparities between the member states (in particular those of the MU, but even more with respect to the MU candidates) – the second best solution would be to maintain sufficient budgetary autonomy at the national level, even by allowing increasing national budget deficits. This, however, would contradict the Stability Pact criteria. If, in the really worst-case scenario, neither sufficient funds for establishing a fiscal equalization mechanism on the supranational level, nor sufficient funding of the national budgets, can be provided, we shall perhaps experience a lot of Mezzo-Giorno effects within the MU! In any case, if the Union does not succeed in minimizing the risk, the MU could collapse. This is the central message of Prof. De Grauwe in an interview given to the Flemish newspaper De Morgen on 18 March 2006. Prof. De Grauwe is, as one of the most distinguished monetary economists, also a member of the Group for Economic Policy Analysis, which is advising EC President Barroso. He was also a member of the Belgian Senate until 2003. EUWatch is grateful to De Morgen for authorization to publish this interview in English. Peter Henseler studied law and economics, former Austrian delegate to the Budget Committee of the Council, now independent consultant and reader in Public Finance, European Economic Policy and European Law. INTERVIEW WITH PROFESSOR PAUL DE GRAUWE IN DE MORGEN Earlier this year Prof. De Grauwe gave an interview to Johan Corhouts for the Belgian daily De Morgen (18 March 2006) which is reproduced here with kind permission. Paul De Grauwe is a full professor at the Faculty of Economics and Applied Economics, Department of Economics, University of Leuven. He was born in 1946 in Ukkel, Brussels, educated at the Catholic University of Leuven and the John Hopkins University in Baltimore. He has been Professor or Visiting Professor of a number of European and American universities. He is a regular correspondent of the Financial Times and was recently appointed member of the Group of Economic Policy Analysis advising the European Commission President Barroso Since the rejection of the European Constitution, Europe has been evolving towards a large freetrade area. You must be pleased about that? ‘A large free-trade area remains the only feasible option for Europe. It is an illusion that we can achieve political union in Europe in the near future. Political unification has failed – but this poses a serious problem for monetary union. The latter is at risk. Political union is the logical end point of monetary union. If that political union fails to materialise, then in the long term the euro area cannot continue to exist.’ Continues on page 7 7 INTERVIEW WITH PROFESSOR PAUL DE GRAUWE IN DE MORGEN Continues from page 6 Why not? ‘This has to do with the wide disparities within the euro area. Italy, for example, is really on the road to ruin. The main reason for this is that it has suffered a severe loss of competitiveness. Italian prices are 20% too high. In the past, before the introduction of the euro, each country had the option of devaluing its currency. Devaluation was a “big bang” to put the economy back on track. It would have been possible to make Italy’s prices 10 or 20% lower than Germany’s at a stroke, and thus give the economy new impetus. Devaluation is no longer an option.’ What happens now? ‘The only way for Italy to put its economy back on its feet is to lower prices below the European average. Average inflation in the euro area is 2%. Italy’s needs to remain below this level for 10 years, which is possible if the Italian Government pursues a very restrictive budgetary policy. This would be an extremely painful exercise, entailing further unemployment. Italian economists all agree on this. The euro is a bad thing for the Italian economy. I am afraid that Spain is also evolving in the same direction. If that happens, we shall be faced with a major problem. ‘Political union could mitigate that scenario. For example, it would be possible to decide to redistribute funds, and to start re-arranging budgets. Well-off countries could come to the assistance of those in financial difficulties. The European budget could also be drawn upon to stimulate the economy. Now that nobody appears to want that political union, it begs the question whether monetary union was such a good idea. I would almost venture to predict that, in the longer term, monetary union will collapse.’ What kind of time frame are we talking about? ‘Not next year; it will become more likely within 10 or 20 years. There is not a single monetary union that has survived without a political union. They have all collapsed. There are invariably large shocks. A monetary union becomes very fragile without a political framework. With the exception of the Don Quixotes, such as Guy Verhofstadt, I cannot see anyone pushing the case for political union. We have reached a nadir in terms of political unification.’ For six years now, Europe has been soldiering on with the implementation of its strategy to inject more dynamism into its economy. Is there any point in continuing the so-called ‘Lisbon process’? ‘Lisbon was a political fiction. The Lisbon process is best buried. The whole process, for that matter, is based on the wrong diagnosis. Many people think that Europe is technologically inferior to the USA – but that is incorrect. It is true that the USA has the edge over Europe in the field of information technology, but in many other fields it is lagging behind. One example is the automobile industry. Along with Japan, Europe has had much greater success in producing energy-efficient cars. The USA is hopelessly behind in this field. The superpower cannot even manage to sell cars outside its own country. In the production of mobile telephony systems, too, the USA lags behind Europe. Europe is without doubt holding its own in the technological field. That is not the problem.’ What is the problem? ‘We have built a system of social security that gives people too many incentives not to work. They can easily interrupt their career and leave the labour market early. For many people it is financially unattractive to work. We should not be surprised, then, that economic growth is subdued. ‘That is the great difference between the European Union and the United States. The US economy is growing faster. In terms of per capita growth, however, the difference is considerably less. If we look at productivity, and at the growth per hour worked, there is hardly any difference between Europe and the USA. Working Europeans match up to working Americans in this regard. The difference is that there are fewer working-Europeans, and that we prefer a model that enables us to relax more. The number of hours we work has fallen, whereas the figure for the USA has risen. It is not surprising, then, that its growth is faster. This means that Americans can consume more, and perhaps they are happier that way. We prefer to take holidays.’ Should Europe adopt the American model? ‘No. That does not appeal to me. Do we really need to work to buy a second or third car? I enjoy my work. I have an interesting job, but there are those who do not. I can understand that they would rather take holidays.’ How much longer can such a view be maintained now that competition with China and India is becoming ever stiffer and that we are seeing our industry disappear to those countries? ‘Many people are saying that, but it is only half of the story. It is true that China and India are growing rapidly and are taking over some of our activities, but, as in the past, that kind of competition gives rise to a great many opportunities to increase our prosperity. I am not pessimistic about this. ‘It goes without saying that adjustments will have to be made. It is a change that will entail definite job losses in some sectors, but job creation in others. There is no fundamental difference between this situation and the developments of the past 50 years, however. The figures show that industrial employment declined much more rapidly between 1975 and 1985 than it is doing now. There is no real difference between what happened then and what we are seeing today. Those years also saw competition from low-wage countries; it was just that people did not talk in terms of globalisation back then.’ 8 POLITICAL UNION: THE END GAME OF THE EURO EUWATCH CO-EDITOR KAROLY LORANT MET WITH PROFESSOR PAUL DE GRAUWE IN LEUWEN FOR AN INTERVIEW and promises a lot of things and then the budget gets out of hand and that creates divergent movement which then becomes very difficult to adjust to. So these are the two reasons why I believe that without more political union a monetary union will be difficult to sustain. I am not predicting that the eurozone will disappear, I am just predicting that there will be big problems for a number of countries and then at some point the temptation to get out may become overwhelming. The east European countries are facing serious problems even now. One can see, for example, what is going on in Hungary. What would you suggest for these countries, what can they do at this stage? Well of course the new member states are not yet part of the eurozone, except for Slovenia that will soon join. So the problems do not arise in the same way for the new member states because they always have the option of adjusting the exchange rate if something happens that they cannot easily adjust to. Of course they have joined the European Union and that creates new pressures and new problems but personally I think this can be overcome. However not only Hungary is in a difficult situation but also other central European countries. But I would not talk about the new member states as a whole because there are so many differences among them. Some countries, like Slovakia, are doing relatively well while others have more problems, like Hungary. It turns out that it is very difficult for open countries, especially countries that have recently opened to manage the macroeconomy in a stable way, and I think the Hungarian experience shows this. In Hungary, for instance, one of the biggest problems is that the country ran into debts decades ago and now its foreign debt is very high, and since the interest rate is higher than economic growth the debt-toGDP ratio is increasing. Is there any solution in this situation? Well I think this is not the first time this happens. Let me refer to my own country, Belgium, where we were almost world champions in government debt and exactly the same situation happened. The nominal interest rate was higher than the nominal growth of GDP which , creates a dynamics of increasing indebtedness. But this can be counteracted by creating a surplus in the primary budget, making sure that spending (spending without adding the interest payments) has a surplus that generates the revenue to service the debt. Continues on page 9 Paul De Grauwe is a full professor at the Faculty of Economics and Applied Economics, Department of Economics, University of Leuven. He was born in 1946 in Ukkel, Brussels, educated at the Catholic University of Leuven and the John Hopkins University in Baltimore. He has been Professor or Visiting Professor of a number of European and American universities. He is a regular correspondent of the Financial Times and was recently appointed member of the Group of Economic Policy Analysis advising the European Commission President Barroso If there are problems with the euro in Western Europe what are your thoughts about the east European countries? I think the problems are the same for the east and west European countries. East European countries, when they join the euro - which is their intention since they have signed to do so if the conditions are satisfied - will face the same problem as in the West. And this problem is that in the absence of political union there is no mechanism that tries to redistribute across countries when they are hit by different shocks, in the way we have within nation states, where we see that there is redistribution through a centralised budget when regions are experiencing different economic conditions. That is one reason and it has long been identified by economists. The other reason why it is difficult to sustain a monetary union without political union is that when nation states in Europe continue to exist as they do, you have what we call ‘idiosyncratic shocks’ all the time. This has a socio-political origin and developments in one particular country might be rather different from other countries because the political systems are different. There are elections, and some politician comes out 9 THE EURO WILL NOT SURVIVE WITHOUT POLITICAL UNION Continues from page 8 In this way the debt-GDP ratio can be decreased. That is what happened in Belgium. It was not easy, but we have reduced the debt-GDP ratio from a level of close to 140 percent in the early 1990’s to about 95 percent today. But, of course, that meant reducing spending, increasing taxes for many-many years. So, it can be done but it is tough and politically difficult. There is a difference between a country that is indebted to its own citizens and a country that is indebted to foreigners, because foreigners can exert more pressure on the country. There are a lot of examples from the developing world. What can be done in this case? Yes of course one has to make a distinction. When the debt is held by foreigners that creates a stronger pressure. But the conditions to get out of indebtedness are definitely the same as those when government debt is held domestically. A problem arises of course, when large sections of the economy are not competitive. This seems to be the case in Hungary. Then macroeconomic adjustment will be necessary and finally it will hurt many people. Any government that tries to do it will not make itself popular and this seems to be the case in Hungary today. Coming back to Western Europe and the eurozone, if we can clearly foresee what will happen, as an adviser to the Commission and Mr. Barroso, what is your advice? Well I would certainly advise that the Commission should try to convince the member states to move forward in the integration process. There is a kind of integration fatigue in Europe today. Most countries just want to move to a certain integration, and it seems most people think that it is enough. It is clear that we need more political integration to make the eurozone a sustainable institution in the long run. The commission and the commission president have a great responsibility because they are the only institutions that can make clear that this has to be done. Now I realise that in the short run not much can be achieved. Look at how the discussions have been concerning the budget. Most people do not want to increase the size of the European Budget. And there is no momentum today to go forward, yet I think that there is a responsibility of the Commission to continue, to hammer on this because this is an unfinished business. This year is the fiftieth anniversary of the Hungarian revolution. At the time, it was destroyed but later people accepted the communist regime because there followed a fast economic growth and an improvement in the people’s everyday life. Do you think that the main problem in the European Union might be that there are no really good results? Do you think that projects like airbus, or fast train would be better than forcing the liberalisation of services of general interest? Yes, I agree with you that with successful projects people’s attention can be focused on the positive things you mentioned. But one can have doubts that this can be applied to the process of political unification. Now I do not want to be misunderstood. All I am saying is that here we have the eurozone, which is a great achievement in a way. It is something exceptional. I am just saying that if you want to preserve it in the long run we are forced to go to ask for more political union. Most Europeans tell me: we do not want political union; then I, as an economist, say that’s fine, I mean it is not a problem at all if you do not want a political union. How can I say that you are wrong? You want to keep your own little place and your own habitat and this is fine, and I have no problem with this. But think also about the consequences and this could very well be that in the longer run the eurozone will disappear. Do you think that there might be a solution in between, something similar to the Breton Woods agreement? The Bretton Woods agreement was very unstable. It would not last if applied today. Do not forget that the Breton Woods agreement was an agreement among countries after the Second World War that maintained fixed exchange rates. There was no capital mobility and that made it possible. The exchange rate was fixed at the end of the forties and remained so in the fifties and a large part of the sixties. There were few crises (with the pound Sterling in the midsixties and then with the German mark), but on the whole there was stability. However, capital could not move freely. As soon as capital started to move freely the system collapsed. So applying the Bretton Woods system today with fixed exchange rates would mean that we turn back the financial integration in Europe that we have achieved. And, okay, fine with me, but I am not sure we want to do this. We are in a world where trade integration and financial integration are two sides of the same coin. I mean, turning back financial integration in Europe would also mean turning back trade integration. Is it not possible to establish some kind of financial fund that can counterbalance the rapid capital movements? Do you mean some kind of European Monetary Fund? That will not work. In the European monetary system there was a system of swap agreements. Each central bank was committed to provide its own currency when another central bank got into trouble. When there was speculation against the lira, people were selling lira and buying mark, then the Bundesbank was there to provide the necessary liquidity, to provide the German mark. But at a certain moment the size the speculative movements became so big that the German Bundesbank refused to go on doing this. So I do not think that this is a realistic goal, we cannot go back to this. We would have to go back to the situation of the seventies and this has been shown to be unstable. So I do not think that it is a good option. So this means that we have two options: either more political union and a centralised budget, or face the foreseeable economic and social problems. That is right. That is the choice we have. If we want to keep the eurozone as an entity, then in a way we are condemned to move forward towards political union. If we do not want political integration then the future of the eurozone in the longer run is at stake. 10 THE BIRTH AND DEATH OF THE EURO BY ANTHONY COUGHLAN THE EURO IS MORE A POLITICAL THAN AN ECONOMIC PROJECT. IT IS A POLITICAL PROJECT USING ECONOMIC MEANS THAT MOST ECONOMISTS BELIEVE ARE INHERENTLY UNSUITABLE. The political project is to help turn the European Union into a highly centralised Federal-style State under the political hegemony of Germany and France, with the other EU members grouped around them. "We need this united Europe," said Spanish Premier Felipe Gonzalez on the eve of locking together the eurozone exchange rates in 1998. "We must never forget that the euro is an instrument of this project." Commission President Romano Prodi wrote at the same time: "The pillars of the nation state are the sword and the currency, and we changed that." German Chancellor Gerhardt Schröder said in 1999: "The introduction of the euro is probably the most important integrating step since the beginning of the unification process. It is certain that the times of individual national efforts regarding employment policies, social and tax policies are definitely over. This will require to bury finally some erroneous ideas of national sovereignty. National sovereignty in foreign and security policy will soon prove itself to be a product of the imagination." referring to the two States of divided Germany. Now Gorbachev was permitting German reunification virtually overnight. Mitterand tried but failed to talk him out of it. To reconcile a worried France to the prospect of a reunified German State, with 17 million extra Germans on her eastern border, Kohl agreed to abolish the Deutschemark, the great symbol of post-war Germany's economic achievement, and share with France the running of a new European currency. In return France agreed to closer political union with France, a common EU foreign and security policy, and in due time an EU army with the French-German duo effectively commanding it. In euro-jargon this was Monetary Union for Political Union. Or, put crudely, it was the Deutschemark in exchange for the Eurobomb! Germany is forbidden by the post-war treaties to have nuclear weapons. This way she could get her finger on a collective EU nuclear trigger. Germany and France would captain an EU world power together, as they could no longer hope to be world powers separately. As foretaste of the future they established that same year a FrancoGerman army brigade, with French and German officers jointly in command. It still exists as the nucleus of the coming EU army. Naturally the citizens of the various European countries did not want to abolish their national currencies. In Denmark and Ireland the people had to be asked in referendums. In 1992 the Danes rejected the Maastricht Treaty, which was the legal basis for the euro. Continues on page 11 FRANCE AND GERMANY - MIDWIVES TO THE EURO The euro would not exist if Germany's Chancellor Helmut Kohl and France's President Francois Mitterand has not decided on it in the early 1990s. For them the euro was essentially a political scheme to reconcile France to Germany's sudden reunification. "I like Germany so much that I prefer two of them," France's President Charles de Gaulle said once, 11 THE BIRTH AND DEATH OF THE EURO Continues from page 10 Their europhile Government then pushed it through by making them vote a second time, without making any changes to the treaty. In France Mitterand held a referendum on Maastricht, confident that it would easily go through. It was the votes of France's overseas territories that won him a narrow 51% majority and thereby helped to abolish the franc. The German people were wholly against abolishing the Dmark. Indeed recent opinion polls show that they would very much like to have it back again. Unfortunately their constitution does not permit referendums, so their eurofanatical political elite pressed ahead regardless. British public opinion forced John Major's Conservative Government to opt out of the euro. Sweden has no legal opt out from the euro, but its government has been unable politically to push it through. The "common position" of the 15 EU Member States in their accession negotiations with the 10 recent EU Members from Central, Eastern and Southern Europe was that the newcomers had all to agree to abolish their national currencies and adopt the euro in due time - even though Britain, Sweden and Denmark intended keeping their currencies. There could be no clearer evidence of the EU's fundamentally anti-democratic, imperialistic character. When the East Europeans were client states of the USSR during the Cold War, the Russians never told them that they must adopt the rouble! WHY COUNTRIES NEED THEIR OWN CURRENCIES It is not sentiment, but enlightened self-interest, that makes people want to hold on to their national currencies. It is democracy in other words, the desire for national independence and self-rule. All independent States have their own currencies. All currencies belong to independent States. Possession of its own currency enables a government to control the rate of interest, which is the domestic price of a currency, and with that the money supply and volume of credit in an economy, so that these may serve the interests of its citizens. Or to control the foreign exchange rate, the price of a currency in terms of other currencies, which governs the terms on which a country conducts its foreign trade and which can be vital for its economic competitiveness. These policies are now decided for the 12 Member States of the eurozone by the European Central Bank in Frankfurt - theoretically in the interests of the eurozone as a whole, in practice in the interests of Germany and France, who make up half the eurozone's population. Thus at present Germany needs low interest rates to encourage investment and reduce its nearly 5 million unemployed. The Republic of Ireland had an economic boom from 1993 to the present. It has needed higher interest rates to reduce inflation and hold back soaring prices, especially for dwellings. The interest rate that suits Germany does not suit Ireland, and vice versa. The EU Central Bank maintains the same interest rate across the eurozone for economies at different stages of the economic cycle, with different levels of productivity, different resource endowments and different degrees of exposure to economic shocks. The unsuitability of the ECB's one-size-fits-all interest rate regime is shown clearly by the contrast between Ireland and Germany. The welfare of their respective citizens requires different policies, but they must suffer the same one because the EU says so. THE "BLACK HOLE" OF THE EUROZONE ECONOMY These days the eurozone looks more and more like an economic Black Hole. Its core economies, Germany's and France's especially, are in poor shape. When the euro was established Germany insisted that the EU Central Bank be run like the German Bundesbank. It is independent of political control and its sole brief under the Maastricht Treaty is to keep prices stable and inflation under 2%. The eurozone economy may suffer deflation and job losses may soar, but that is no concern of the ECB. Its deflationary policy mandate encourages recession instead of countering it. In addition the Germans insisted that the eurozone members be bound by the Growth and Stability Pact. This lays down that if countries run budget deficits of 3% or over of their national product a year because of recession, falling taxes and rising unemployment, they must cut public spending further - which makes recession worse - or else face fines that could amount to of billions of euros. Continues on page 12 12 THE BIRTH AND DEATH OF THE EURO Continues from page 11 The irony is that when Germany and France found themselves in breach of these rules, the EU Commission did not seek to bully them like it bullied smaller-size Ireland and Portugal when they broke the rules. The other irony is that when pushing for the euro Germany's rulers were so busy seeking to impose monetary discipline on the Italians and others, that they took their eye off the ball and themselves joined the eurozone at too high an exchange rate. They exchanged the D-mark for the euro at a rate which burdened themselves with an implicitly overvalued currency. This makes it harder for their export industries to sell abroad, and easier for foreign firms to sell to Germany. This has increased German unemployment. All this is due to the political love-affair with the euro of Germany's political elite. . When the euro was launched in 1999 the EU's europhiles and eurofanatics said confidently that it would soon become a strong world reserve currency like the dollar, as people would switch from dollars into euros. Instead the opposite happened. The euro weakened against the dollar and British pound. Indeed in its first few years it was the euro's weakness that proved to be the main thing helping the competitiveness of the eurozone economy, Germany's and France's in particular. Now this looks like changing. The coming years could put the eurozone under great strain. The Americans are likely to want to boost their economy by acting aggressively to let the dollar fall, so stimulating US exports to Europe and making EU exports to America less competitive. A major rise of the euro against the dollar would threaten the competitiveness of eurozone industry, but there is nothing individual eurozone countries can do about it, as they no longer have national currencies of their own. Another cause of strain is that China's currency, the yuan, is linked to the dollar, so that if a weakening dollar makes US exports more competitive in eurozone and other world markets, it makes China's exports more competitive too. Is was therefore no wonder that in September 2003 the people of Sweden, one of the most educated and politically sophisticated in Europe, said No to jumping into the eurozone's economic Black Hole by 56% to 42% on a turnout of 81% of voters. Sweden's economy is doing very well outside the eurozone, as is Britain's and Denmark's. er regions and social classes pay on average lower taxes and receive more public services than their richer areas and classes. These expressions of national solidarity mean that there exist automatic resource transfers from richer regions within a country to compensate poorer regions to some extent for the drawback of their not having their own currency, interest rate and exchange rate, with which to balance their payments with the rest of their national economy. Despite this, poorer areas suffer from migration of capital and workers to richer areas within national economies, but less than what would happen in the absence of these fiscal transfers. There is no such solidarity in the EU monetary union however ,such as to induce the rich Eurozone countries to compensate the poorer ones for loss of key economic powers. Of course some international solidarities exist between EU members, but nothing that compares to the solidarity that binds national States together and makes their citizens willing to pay taxes to a common government because it is THEIR government, which they willingly obey, with all the authority and legitimacy that derive from that. EU monetary union is not a fiscal union. Taxes and public spending are overwhelmingly national in the EU, and likely to remain so. Brussels funds amount to a mere 1.2% of the EU's annual gross product, whereas national taxes and spending typically amount to one-third or more of national products. There is thus no realistic likelihood of the richer EU countries being willing to pay the vastly greater sums to Brussels in the name of a common "Europeanism" that would compensate the poorer EU countries for surrendering their ability to use a national exchange rate and interest policy to balance their national payments. Continues on page 13 WHY THE EURO CANNOT LAST One can confidently predict that the euro will not last. The only question is how long will it continue. It might be gone in a few years, or it might last decades. But certain it is that as long as it lasts it will generate problems and tensions for the peoples of the eurozone. "There is no example in history of a lasting monetary union that was not linked to one State," said Otmar Issing, German governor of the EU Central Bank. History is full of examples of abandoned currency unions. Where now is the USSR rouble, the AustroHungarian thaler, the Czechoslovak crown or Yugoslav dinar? Yet these currencies belonged to real, long-established States, multinational political unions that were also monetary unions and, more importantly, that were fiscal unions, bound together by common taxes and services, which is something the EU is not and never can be. All sovereign States are fiscal as well as monetary unions. They have common taxes and public services throughout their territories. This means that their poor- 13 THE BIRTH AND DEATH OF THE EURO Continues from page 12 The only thing that countries threatened with such imbalance inside the eurozone can do about it, is to accept lower wages and profit rates compared to their competitors, or, if people are not willing to do that, to join the jobless at home or else emigrate abroad. Neither the eurozone nor the wider EU has the solidarity that marks a nation or people. There is no EU "demos", no EU national community, no EU political "We, " with which citizens can identify and accept the authority of, and for which is some circumstances they are willing to die. Rather there are the EU's many nations and peoples. Foreign exchange rates of currencies are always fixed for political reasons and there is nothing more rigid than a monetary union. This is the fundamental reason why the euro is bound to generate tensions and antagonisms between the different members of the eurozone as long as it endures. The common interest rate and exchange rate that suit some some countries will not suit others, and people will gradually realise that their governments have surrendered key policies for advancing the national welfare because of the folly of their uncritical europhilia. For this reason most monetary economists believe that the euro is bound to fail, although it could last years or even decades, as the rouble and thaler did, while generating policy conflicts and international tensions as long as it does last. In fact the euro is likely to make the national question, the right of nations and peoples to self-rule and self-determination, the principal issue of European politics for years to come. This will happen as countries which in the past possessed empires and which through them suppressed the national independence of others, discover the drawbacks of being ruled by foreigners, that is, by people they do not elect, who are not responsible to them and who pursue policies that are against the basic interests of their citizens. Anthony Coughlan is Senior Lecturer in Social Policy at Trinity College, Dublin, and Secretary of the National Platform EU Research and Information Centre, Ireland. He has been chairman of The European Alliance of EUcritical Movements(TEAM). 14 QUOTATIONS ON MONETARY UNION 1807 “My brother, if you mint coins, I want you to adopt the same divisions of value as in French money... I’ve already done the same thing for my own Kingdom of Italy. The confederated Princes have done the same thing. That way there will be uniformity of currency throughout Europe, which will make trading much easier.” Napoleon Boneparte (Napoleon I), 6 May 1807, in a letter to his brother Louis, King of Naples. 1808 “Any nation which gives up its freedom in pursuit of economic advantage deserves to lose both.” Thomas Jefferson, US President 1801-1809. 1880s “Before long, all Europe, save England, will have one money”. William Bagehot, the Editor of “The Economist”, the renowned British magazine. 1891 “The finance of the country is ultimately associated with the liberties of the country. It is a powerful leverage by which English liberty has been gradually acquired. If the House of Commons by any possibility loses the power of control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison.” William Ewart Gladstone, British Liberal Prime Minister 1868-74, 1880-85, 1886, and 1892-94. Speech in the House of Commons, 1891. 1970”Economic and monetary union thus appears as a leaven for the development of political union, which in the long run it cannot do without” The Werner Report (Pierre Werner Luxembourg’s Prime Minister) 1991 “There is no example in history of a lasting monetary union that was not linked to one State.” Otmar Issuing, Chief Economist of the German Bundesbank Council,1991. 1996 “A single currency is about the politics of Europe. It is about a Federal Europe by the back door.” John Major, British Conservative politician, Prime Minister 19911997. November 1996. 1997 Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity. Milton Friedman in: Wall Street Journal 1997-06-20 1998 “The single currency is the greatest abandonment of sovereignty since the foundation of the European Community ... it is a decision of an essentially political nature. We need this United Europe ... we must never forget that the Euro is an instrument for this project.” Felipe Gonzalez, Socialist Prime Minister of Spain from 1982 to 1996. May 1998. 1999 “The single market was the theme of the Eighties. The single currency was the theme of the Nineties. We must now face the difficult task of moving towards a single economy, a single political unity.” Romano Prodi, EU Commission President, speech to European Parliament, 14 April 1999. 1999 “On 1 January 1999 with the introduction of the Euro ... an important part of national sovereignty, to wit monetary sovereignty, was passed over to a European institution ... The introduction of a common currency is not primarily an economic, but rather a sovereign and thus eminently political act...political union must be our lodestar from now on: it is the logical follow-on from Economic and Monetary Union.” Joschka Fischer, German Foreign Minister and Vice Chancellor since 1998. Former Communist firebrand and photographed beater-up of a policeman (ironically called Mr Marx). Speech to the European Parliament, January 1999. 2002 “The richest state in Asia is Singapore - a small island with almost no natural resources; the richest country in Europe is Switzerland, which is not even in the EU, never mind the Euro.” ‘In or out - the case against the Euro’, Fabian Society Pamphlet by Janet Bush and Larry Elliott, Labour party policy wonks. 3 August 2002. 2002 “[What is needed is the] Europeanisation of everything to do with economic and financial policy. European Monetary Union has to be complemented with political union that was always the presumption of Europeans.” Gerhard Schröder, German Chancellor from 1998 who does NOT dye his hair. Interview, 2002. Well that’s pretty clear. 2005 “The euro for me is an issue with a specific economic dimension because it’s an economic union that you’re joining. Even though politically there is a case for joining, economically there isn’t that case at the present time... The issue is what is good for Britain’s interest rates and investment and jobs.” Tony Blair Frost on Sunday (TV show) 09 January 2005 “A European currency will lead to member-nations transferring their sovereignty over financial and wage policies as well as in monetary affairs... It is an illusion to think that States can hold on to their autonomy over taxation policies.” Hans Tietmeyer, Bundesbank President. Date uncertain. “The process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe.” Wim Duisenburg, President of the European Central Bank. Date uncertain. Source: http://www.liebreich.com/LDC/HT ML/Europe/08-Euro.html 15 SWEDEN’S REFERENDUM ON THE EURO BY MARKUS NYMAN IN THE SWEDISH REFERENDUM ON THE EURO IN 2003, THE ‘YES’ CAMPAIGN HAD FINANCIAL RESOURCES, ACCESS TO THE MEDIA AND THE SUPPORT OF THE POLITICAL ESTABLISHMENT. DESPITE THESE FACTS, THE ‘NO’ SIDE WON AN OVERWHELMING VICTORY. IN THIS ARTICLE, MARKUS NYMAN, ANALYSES THE ELECTION CAMPAIGN AND REFLECTS ON THE REASONS FOR THIS HISTORIC RESULT. Sweden became a member of the European Union in January 1995. Since it was not formally granted the right to remain outside the eurozone during the membership negotiations, it is bound by the TEC to join the Monetary Union. The Swedish Government declared prior to the negotiations on membership that Sweden would adopt a final position on the euro “in the light of further developments and in accordance with the provisions of the Treaty”. In December 1997, the Swedish Parliament decided that Sweden would not join the eurozone on the date of its final introduction on 1 January 2002. The Swedish people had been sceptical of the EU since the narrow referendum victory for EU membership. Furthermore, the then-ruling Social Democratic Party was internally divided on whether the euro was desirable for Sweden or not. It was therefore too early and politically dangerous for the Social Democrats to make a clear decision and statement on the euro and the political parties agreed that the introduction of the single currency would not be possible without the approval of the Swedish people. So in March 2003, the Parliament decided that a national referendum was to be held, setting the date to 14 September 2003. Prime Minister Göran Persson had earlier been sceptical of the single currency and had claimed that the euro could transform the EU into a federal state, knowing that the majority of the Swedish people were opposed to such a development. The prime minister had also publicly mentioned that the euro would not fulfil the criteria of an Optimum Currency Area (OCA). However, after an extraordinary party congress in March 2000, the Social Democratic Party decided to advocate Sweden’s joining the eurozone. Three parties in parliament, however, still opposed it, namely the Centre Party (exFarmers’ League), the Left Party (excommunist party) and the Green Party. These three ‘No’ parties represented only about 19% of the voters. The remaining four parliamentarian parties were all in favour. DAVID’S BATTLE AGAINST GOLIATH The difference between the financial resources of the ‘Yes’ and the ‘No’ campaigns was substantial. Whereas the Confederation of Swedish Enterprises contributed over 55 million euro to the ‘Yes’ campaign, about 13 million euro of public funds were divided between the two campaigns, of which a slightly larger portion was given to the ‘Yes’ side. In effect, the ‘No’ campaign relied almost exclusively on the allocated public funds. Continues on page 16 16 SWEDEN’S REFERENDUM ON THE EURO Continues from page 15 There was also a remarkable difference in terms of media coverage. A survey of the 38 most important newspapers established that during one week of the campaigns’ final stages, leading figures from the ‘Yes’ campaign were mentioned in 6069 news items, while their counterparts from the ‘No’ campaign were only mentioned in 1939 news items. In addition, proponents of the euro controlled nearly all major institutions and organisations, including the parliament, the government, the most powerful business organizations and the media. A large part of the euro-critics within the “chattering classes” would not even participate in the euro debate, since – as was reported – “it could be negative for their future careers”. The debate was led in a climate of intolerance. People who opposed the euro were accused by wellknown journalists and established politicians of being uneducated, retarded, egoistic, xenophobic, conceited and isolationists, and of having no interest in, or understanding of Europe. Although around 80% of the members of parliament supported the euro, the Swedish population rejected the single currency with 56% against 42%. The turnout was high, with 82.6% of eligible voters. The parliamentarian majority realized that it could not ignore the verdict of the people and promised to respect the result of the referendum. Given these facts, it is likely that the enormous resources of the ‘Yes’ campaign have been more of a handicap than an advantage, since the people did not want to be “bought” by the political establishment and “brainwashed” by the media. Only a few commentators concluded that the population had actually understood the question, and that it was neither isolationist, nor narrow-minded, but that it simply did not share the opinions of its political leaders. WHY DID THE PEOPLE VOTE ‘YES’ OR ‘NO’? The main arguments among the part of the population that voted ‘Yes’ were that the euro would be positive for Sweden’s influence within the EU, for peace in Europe and for the Swedish economy. On the other side, the most important issues for the ‘No’ voters were democracy, national sovereignty and an independent monetary policy in relation to interest rates. Regarding the latter, it was feared that the Swedish economy could find itself out of synchronization with economic developments in the eurozone. Maintaining an independent monetary policy and currency would allow Sweden to stabilise the national economy without any influence from the European Central Bank, since a country within the eurozone that faces an external economic shock, or internal structural difficulties, would not benefit from the advantages of an independent monetary policy. In the eurozone, the national governments have no option but to accept the common interest rates and exchange rates that apply throughout the European Union. This could become problematic when the economic and social situation in one country differs significantly from another. Of particular significance for the outcome of the referendum was the influence of five cabinet officials, including from the Minister of Industry and Commerce, who opposed the euro. Although Prime Minister Persson strongly disapproved of their outspoken criticism, he had to tolerate their presence in his government due to the strong anti-euro opinions within the ruling Social Democratic Party. Broad layers of the population considered it undemocratic when Persson later ordered his cabinet officials to be loyal to him and not to participate actively in the ‘No’ campaign. On his part, Persson argued that a European single currency was an instrument for guaranteeing peace throughout Europe. He claimed that Sweden contributed to this important and noble cause by participating in the currency union. He also said that if the euro was introduced, 100,000 new jobs would be created in the public sector and that a typical household would save more than 3000 euro annually. Clearly, however, his argumentation did not have any observable effect on public opinion. Continues on page 17 THE REACTIONS TO THE REFERENDUM OUTCOME The media, political leaders and leading social personalities criticised the population for not having understood the values and virtues of the EU and the single currency. Former Prime Minister Carl Bildt proclaimed that “The Swedish people have always been isolationists,” while Marciej Zaremba, a respected journalist, maintained that the Swedish people’s reluctance to give up the possibility to run an independent monetary policy was a “first step to racism”. And whereas Swedish author Jan Guillou commented: “I hope that the Swedish people are not also against electricity”, the Minister of Foreign Affairs, Laila Freivalds, claimed immediately after the referendum result that her foreign-policy mission was to “further integrate Sweden into the EU”. The disrespect, denial and the lack of understanding of the message from the people were astonishing. 17 SWEDEN’S REFERENDUM ON THE EURO Continues from page 16 THE FORECASTS OF THE ‘YES’ SIDE During the euro-campaign, advocates of the euro had warned repeatedly that a ‘No’ vote would result in a weaker currency and higher interest rates, leading among others to substantial economic problems. The political elite attached considerable weight to the prospect of Sweden’s position in the EU being weakened by a decision to remain outside EMU. However, the gloomy picture painted by the ‘Yes’ camp has not become a reality. The Swedish Crown is actually rather strong and interest rates have declined. The general economic trends are above the average in the eurozone. In addition, it is not generally perceived that Sweden lost any influence in the EU as a consequence of the referendum result. According to a pre-referendum survey, 25% of those who had voted for membership in 1994 were planning to vote ‘No’ in the euro-referendum. Only 8% of those who had voted ‘No’ to the EU had eventually come to favour the EMU. The general public did not seem convinced that further political and economic integration was desirable. Whereas 72% of ‘No’ voters in the euro-referendum were opposed to the idea of the EU becoming a “United States of Europe”, only 6% were in favour and 22% were undecided. Women were much more strongly opposed to the euro than men. Whereas 62% against 36% of women voted ‘No’, their male counterparts expressed their negative opinion with 50% against 48%. The most critical group was that of young people, often experiencing an insecure situation in the labour market. They voted ‘No’ with an astonishing margin of 70% against 26%. Blue-collar workers opposed joining the euro by 69 to 29 %, while white-collar workers were in favour by a margin of 52 to 46 %. The unemployed voted ‘No’ by 66% to 32% and students with a 58% against 38 %. The arguments of the ‘No’ voters underlined that monetary union would drive the EU towards further political integration, since it would be difficult to run a coherent monetary policy without centralised fiscal, social, trade and foreign policies. The harmonisation of taxes and the introduction of a common EU tax were predicted and it was warned that the Swedish welfare state would be threatened, or at least negatively affected. As history shows, currency unions tend to end up in fiscal unions. Given that proposals on the introduction of a common EU tax had already been put forward, the Swedish people had clearly expressed that it wanted these issues to be dealt with at a national level. The Swedes had apparently understood the issue quite well. They simply did not consider the eurozone as an Optimum Currency Area. It was recognised that it is difficult to run a coherent monetary policy that is optimal for all euro countries. In addition to that, the euro was considered to be an elitist project. People with lower incomes, often women and young people, did not see the supposed advantages of the euro. Finally, as a common currency and a common foreign, security and defence policy seemed to indicate that the EU was about to become a federal state, the Swedish people seemed to favour a limited form of European cooperation within more democratic structures. BUSINESS AS USUAL In my view, the message of the people has been disrespected, denied and misunderstood. That clear verdict should have taught politicians a lesson, namely to listen to the people, to debate EU issues and to advocate a more limited and flexible co-operation framework within the EU. However, it is “business as usual” on the agenda of the established political parties in parliament. The EU in general and the EU Constitution in particular were hardly mentioned in the campaigning for the national elections in September this year. Furthermore, parliament rejected the idea to hold a referendum on the EU constitution, despite the fact that opinion polls showed that a majority of the people wanted a say on this decisive issue. As the proposed EU constitution stipulates that the euro should be the only currency of the EU it opens the door to the possibility of introducing it in Sweden despite the people’s decision. In fact it could be implemented through the entry into force of the constitution, over which the people would not be allowed to vote. The will of the people would then clearly be disregarded by the political establishment. The Swedish political parties continue to accept, and even advocate, further EU integration and centralization of new areas of power. It is likely that this will lead to further disbelief in politics and politicians and a widening gap between the elected and the electors. In the long run, it is probably politically impossible to avoid a public debate on EU issues and to continue to transfer powers to the EU, without opening the door to new political parties with alternative EU agendas. Markus Nyman is working as researcher for the Swedish delegation in the IND/DEM group. 18 ROMANIA, FROM ADHESION TO EURO ADOPTION BY CORINA CRETU While waiting for the country report confirming 1 January 2007 as the date when Romania adheres to the European Union, people working in the economic field and at the National Bank of Romania discuss the future calendar of integration into the eurozone. The more necessary the discussion becomes, the harder it is to predict the adhesion shocks in an economy undergoing a fragile balance. Even if the most macroeconomic indicators look good, no one can afford ignoring the structural weaknesses of the Romanian economy and the constraints arising after accession. Since the end of 2000 Romania has entered a cycle of economic growth at a brisk pace, which peaked at 8.2% of the GNP in 2004. A growth of at least 6% of the GNP is expected this year. At least two of the criteria of nominal convergence – the Maastricht criteria – have already been met. I am here referring to a public debt of only 16.7% of GNP as at 1 June 2006, and a deficit of the consolidated budget that reached about 2.5% of GNP after the last budgetary rectification at the end of August. The disinflation process and the current account deficit are still the most delicate issues when it comes to adopting the single currency. An inflation of about 6.5%–7%, far above the limits of the convergence criteria, is predicted this year. An inflation of 2.5% (December to December) is predicted for 2010 when the national currency – the ron – will probably get integrated into the Exchange Rate Mechanism, ERM II. The National Bank has created a scenario according to which the integration into the ERM II could take place in 2012, instead of 2010; in both cases the period of participation in this mechanism will be of two years. As far as the current account deficit is concerned, it is expected to rise from 9.8% of GNP in 2005 to about 12% in 2010. The issue of its financing will arise even if the transfers from the EU to Romania increase within the solidarity mechanisms and even if there is a higher volume of foreign investments. As the de-etatization process has ended as a whole, the state’s receipts from privatization will be insignificant the moment Romania enters the ERM II. The adoption of the euro will have the following positive effects in Romania: lowering the macroeconomic risk, raising financial discipline, eliminating some costs, eliminating the currency risk; which should lead to reducing interest rates and raising investments. In any case, the euro is already a ‘national’ currency for a lot of Romanian citizens, especially for those working in West European countries and their relatives. Last decade’s extremely high inflation, the problems of the bank system and a series of scandals related to the bankruptcy of some investment funds have weakened the belief in the ron and have turned the dollar, and now the euro, into alternative currencies and a means for the population to keep their savings. This is why giving up the national currency will not be traumatic for the citizens. Furthermore, after the ron’s denomination of 1 July 2005, the new notes have dimensions and colour schemes quasi-identical to those of the euro. The introduction of the euro will have a series of negative effects, both on companies and on citizens, at least in the short term. The prices of a series of goods and services are very likely to increase, which will result in pay-rise requests. Romania will no longer be able to apply currency devaluation to stimulate exports and reduce home consumption in order to decrease the current account deficit. The successful transfer to the euro depends essentially on the way the public power will be able to generate and apply public politics in the industrial, agricultural, financial-banking, fiscal and monetary fields, which would accelerate the processes of reducing the development gaps and straighten a series of structural weaknesses in the economy – especially those weaknesses related to competitiveness and productivity, which will suffer a deficit in the average and high-quality workforce after the EU labour market opens for Romanian citizens. To sum up, Romania must accelerate economic reforms in order to meet the nominal convergence criteria, which will decrease the period of participation in the ERM II and push for progress in reducing the gaps in the real economy so that it can enter the euro zone between 2012 and 2014. CRETU T. CORINA, born 1967 in Bucharest, is a senator in the Romanian Parliament for the Social Democratic Party. She graduated in 1989 at the Planning and Cybernetics Faculty of the Academy for Economic Studies, Bucharest. Earlier in her career she became an expert at the Romanian Senate and later Presidential Advisor with the rank of Minister. In 2004, she was elected Senator (MP) in the Romanian Parliament. In 2005 she became a member in the Romanian Parliamentary delegation of Observers to the European Parliament, where she is a member of the Committee on Economic and Monetary Affairs. 19 THE EVER DISTANT EURO A HUNGARIAN PERSPECTIVE ON THE SINGLE CURRENCY BY LASZLO ANDOR The single currency has been more popular in the less developed European countries and Hungary is a good example of this fact. People have had negative experiences with their own currency (inflation, panics, etc.), and they look up on hard currencies, like the US dollar, the Swiss frank, and now the euro. The paradox is, however, that where it is more popular, there are more difficulties with its implementation. Monetary union is not necessarily a bad idea in the European Union, however, the Maastricht criteria, defined as rules of entry to the club, were definitely not created for the countries of east and central Europe. These criteria were outlined in order to commit the more inflationary European economies to the old standards of Bundesbank monetary policy. Ironically, it was difficult even for the post-unification Germany to comply with these rules. The peripheral European economies could only comply with them with the help of the combination of exemptions and subsidies. The ten new member states of 2004 signed up to the Economic Monetary Union without hesitation and thus they have to outline their plans on how to achieve this. Yet, their economic fundamentals differ from the more advanced market economies of the EU. They are still in the phase of catching up, i.e. they need large-scale capital inflows and an export-led economic recovery with a higher than EU-average annual GDP growth rate. Due to the so-called Balassa-Samuelson effect, this is also accompanied by higher-than-average rates of inflation. Crudely speaking, if these countries want to comply with the Maastricht criteria, they have to give up their goals of catching up. In more technical language: they have to subordinate real convergence to monetary convergence. This is something any government would be reluctant to do. The east and central EU region (EU-8), however, does not follow a standard pattern. As it is well known, Slovenia will be able to introduce the euro in 2007, and the Baltic States are also very close to introducing the euro. One could say therefore that the problem group is the so-called Visegrád Group of countries (Czech Republic, Hungary, Poland and Slovakia), and their problem is lack of discipline. Even if that were the case, one should not ignore the fact that these four countries constitute 90 per cent of the EU-8 economy, even if they form only half of the EU-8 states. Their problems are the typical of those faced by the eastern periphery of the EU. Slovenia is a relatively advanced country, and it is far from typical of the EU-8. The former Yugoslavia had always been more market oriented than other East European economies, and Slovenia was always far above the average income of their former Yugoslav federal state. Their relatively small size and nearness to two advanced EU countries means that their needs for large-scale infrastructure construction are less imminent, which is a gift to the state budget in comparison to their north-eastern neighbours. The Baltic States seem to be closer to monetary union too, if we compare them with the Visegrád countries. The picture is otherwise similar, but the reasons are different. These countries left the Soviet Union in dire economic circumstances. Their small size and openness created a need for currency boards or similar monetary solutions, i.e. the subordination of wage policies and development considerations to monetary stability. This experience and capacity proved useful when they faced the Maastricht challenge. Continues on page 20 20 THE EVER DISTANT EURO Continues from page 19 Therefore, the Baltics have also been better situated for EMU accession than the Visegrád Group, but not perfectly. As revealed earlier this year in the case of Lithuania, the EU is not prepared to apply the same flexibility for the EU-8 as they did in 1999 for the Western countries. They justified the rejection of Lithuania by questioning the sustainability of their stability, which is nothing but discrimination, since sustainability was never a criterium among the founding members of the eurozone. The Lithuania decision did not affect the policies of the Visegrád states in a positive way. Hungary produced a convergence plan for eurozone accession without a deadline, and the new government of the Czech Republic immediately abandoned the previously held target. Poland is not even on the map of EMU with her floating zloty, and the government of Slovakia faces the dilemma of choosing between fulfilling electoral promises and maintaining the 2009 deadline to introduce the euro. The recent political crisis of Hungary cannot exclusively be written to the account of the euro, but it is not unrelated. Hungarian politics has never managed to grasp the reality of the EMU challenge. During the mid1990s illusions were entertained about meeting the criteria by 2000, and then by 2004, the year of EU accession. The first official plan in 2003 promised to introduce the euro in January 2008. This was modified in less than one year to 2010, and this was also abandoned earlier this year when the budget deficit was recalculated after clarifying the statistical methodology. Hungary needs financial stabilization even without considering the euro, but in a couple of years it will again be the Maastricht framework that provides the framework for the hardest policy decisions. Due to the accession treaties and some economic considerations, the adoption of the euro cannot be officially abandoned. Most of the new EU member states, therefore, need to struggle with this impossible task in the foreseeable future. The choice, however, is not only theirs. It is also up the EU to decide whether to lock the Eastern members into this unpleasant dilemma, or rethink the monetary architecture of the European Union. The question is, how many more crises will they need for them to take the second option. Andor Laszlo is an economist, associate professor (Corvinus University of Budapest), board member at the European Bank for Reconstruction and Development (the views expressed in this article do not reflect the position of EBRD) 21 A SHORT HISTORY OF SINGLE CURRENCIES ANCIENT TIMES In the course of mankind’s history there have been numerous attempts to introduce a single currency. Whenever economic and political stability have enabled international trade to expand, a single monetary standard has usually followed the expansion of political power. In Europe the first single currency was established by the Roman Empire when local currencies were replaced by Roman coins wherever the Roman Empire extended its rule. However, single currency areas persist only as long as political and economic stability continues, for, when the economy becomes less stable, the financial system also deteriorates. In ancient Rome, as in China, economic and political instability contributed to the failure of the single currency. out the German Reich. Germany’s reichsmark survived two World Wars and devastating inflations. It was transformed into the Deutschmark after the Second World War, and was finally vanquished only by the introduction of the euro. THE GOLD STANDARD The gold standard was introduced in England as early as 1717, but it did not become universal in Europe until the 1870’s, when all currencies were fixed to gold, and gold fixed currencies to each other. The result was almost a complete elimination of currency fluctuations among the world’s major currencies. Countries could issue paper currency, but only if it was backed by sufficient gold reserves. The establishment of the gold standard made it easier for countries to re-introduce paper currency. Thus, countries began issuing notes which were fully redeemable in gold. The gold standard worked smoothly until August 1914, when World War I forced countries to suspend currency conversion. THE MIDDLE AGES After the Roman Empire divided into the multiparous western half and the stable Byzantine empire in the east, Western Europe went without a common currency of any kind for centuries. This was not the case in the Byzantine Empire, where the gold tremessis (also known as the nomisma or solidus) maintained its value for one thousand years, until the fall of Byzantium in the fifteenth century. The Byzantine solidus acted as the primary currency for international trade throughout this period. Western Europe lacked the resources to issue gold coins until the issuance of the Florentine Florin and the Genoese Genovino in 1252. By coincidence, the introduction of the single currency in Europe in 2002 occurred on the 750th anniversary of this re-introduction of gold coins in Western Europe. THE BRETTON WOODS SYSTEM Despite numerous attempts to stabilize the international financial system between the two World Wars, any success was only temporary. Without political and economic stability, attempts at introducing a single currency were doomed to failure. After World War II, an agreement at Bretton Woods, in the USA, established the dollar standard to replace the gold standard. The value of the dollar was fixed to gold at $35 to the ounce, and the world’s currencies were fixed to the dollar. Exchange rates were fixed in the short run, but flexible in the long run. In the 1950s, most currencies were not freely convertible, and the low level of international capital flows and international trade made it relatively easy to manage the Bretton Woods system. As it became easier to send money between countries, trade increased, countries began pursuing different monetary policies, and the Bretton Woods system began to break under the pressure. By the 1970’s, demands for increased government spending, combined with the desire of governments to minimize economic downturns through Keynesian fiscal policy - and through the subordination of monetary, to fiscal, policy - produced inflationary pressures throughout the world. Under the increasing strain, the Bretton Woods system collapsed in 1971, following the United States’ suspension of convertibility from dollars to gold. LATIN MONETARY UNION The first attempts to create an international currency for Europe, in modern times, occurred in France in the 1800’s, when Napoleon’s finance minister, Francois Nicholas Mollien, wanted to supplement the uniform system of measures with a uniform currency. However, Napoleon’s régime fell, and it was not until 1865, with the inception of the Latin Monetary Union, that the first international currency was established in modern Europe. Member-countries (originally France, Belgium, Switzerland and Italy) agreed to mint coins to a single standard and to limit the minting of their coins. Coins that conformed to this standard would be accepted as legal tender by government offices in any of the member countries. At its peak, eighteen countries adopted the Gold franc as their legal tender (or peg). Member countries voluntarily limited their money supply by adopting a rule which forbade them to mint more than 6 franc coins per head-of-population. The Latin Monetary Union continued until the outbreak of World War I, in 1914. THE EAST CARIBBEAN CURRENCY UNION AND THE CFA Only two multinational currency unions have worked since World War II. These were the East Caribbean Currency Union (ECCU) and the Communauté Financière Africaine (CFA) which consisted of the former colonies of France in Central and West Africa. The latter proved to be by far the most successful. It has operated a currency union among its members, ever since the former French colonies gained their independence in the early 1960’s, right up to the present day.. THE ZOLLVEREIN The German Zollverein (customs union) was established in 1834, but was transformed into a currency union only in 1875, when Bismark of Prussia, after uniting the German states, established the Reichsbank and forced the Germans to accept a new currency as the only legal tender through- 22 THE EURO TODAY BY CHRISTOPHE BEAUDOUIN Thirteen years after the narrow victory for ratification of the Maastricht Treaty, the middle and working classes, who gave the ‘no’ campaign its victory, appear to have wanted to gain back the upper hand on 29 May 2005. Suffering from an erosion on three fronts – an erosion of their standard of living, an erosion of national identity, with all that the nation holds together, and an erosion of sovereignty, i.e. democratic control over public choices – it was those French people in particular who punished the current European process (‘model’ no longer sounds appropriate), which they saw as increasingly dubious and which culminated in the Constitution. Today, 61% of French people say they miss the franc, whilst in Germany, in Italy and in the Netherlands the matter is no longer taboo. Since the euro is without doubt the most tangible symbol of this threefold erosion, which led to the first ‘no’ votes in France and the Netherlands, it is only right and proper that debate on the future of the euro has been ongoing since 2005. The federalists who are planning to ‘save’ their plan to create a constitution for the European Union, a plan which has been rejected by the people, by pushing ratification through parliament after 2007, now explain, in the face of the failure of the euro, that an economic government is needed to resolve all the problems. As usual, they believe that Europe is the answer to the problems that it creates. In our view, as advocates of a Europe of the nations, the euro must in fact be reformed. Indeed, we should not rule out the possibility of getting rid of it altogether. _____________________ ‘2003: a fall in Wall Street prices causes a similar drop on European stock markets, followed by a banking crisis. (...) The Stability Pact adopted in Dublin in 1996 forces the countries in the euro zone to make massive cuts to their public spending just when the economy is flagging. Protests are strongest in France; violent demonstrations take place in Paris. In response to the domestic crisis, Jacques Chirac proposes reforming the monetary union and forcing the European Central Bank to work to put the economy back on an even keel. European Union imports will be subject to a 10% tax to finance employment programmes.’ This scenario from the realms of political fiction was envisaged by Der Spiegel on 17 February 1997 and ended with a European crisis summit, the reintroduction of the franc and a serious political crisis in Europe, requiring Germany to ‘face up to its responsibilities’. Sold on the pretext that it would help maintain peace, hasn’t European integration actually increased mistrust of the Franco-German axis, especially since 1990, the single currency being both the culmination and the symbol of the integration process? The euro, wrote JeanPierre Chevènement, ‘is a decisive step in France’s political integration into a small Carolingian Europe which Germany would dominate through the inevitable effect of gravity’. But it was former German Chancellor Helmut Kohl himself who gave the best summary: ‘Our reunification will be completed only when Europe too is one’. When all was said and done, the single currency was to be the instrument of this unification. In fact, the euro is not the product of any economic rationale, but a purely ideological creation, a political tool to force the states to merge into a federal entity, as we will see. AN ISLAND OF STAGNATION IN AN OCEAN OF GROWTH With a German economy threatened by recession, even if France is managing to extricate itself slightly better, the euro zone has for some time been an ‘island of stagnation in an ocean of growth and employment’ in the words of the economist Nicolas Baverez. There has been unprecedented economic expansion throughout the world since 1976, with average growth of 5%. Continues on page 23 23 THE EURO TODAY Continues from page 22 While Europe is lagging behind the global economy, it is the non-member countries of the European Union – Iceland, Norway and Switzerland – that are avoiding this pessimistic situation. Furthermore, within the European Union it is the countries that have kept hold of their national currencies that are still coming out best. The United Kingdom, Denmark and Sweden are seeing growth well above the European average. The euro zone, on the other hand, in the period of 2000-2005 achieved only 1,8% GDP growth rate, whilst the three non-euroland countries reached 2,6% as an average. This debate on the future of the euro therefore needs to be resumed, without any taboos and without dogmatism. In Greek mythology, Procrustes (in ancient Greek ‘Prokroustes’, literally ‘he who stretches’) was a robber whose speciality was to capture travellers and torture them by stretching them on an iron bed, where they had to fit exactly; if they were too tall he amputated the excess limbs; if they were too short, they would be stretched until they reached the required size, hence his name. Procrustes was killed by Theseus, who subjected him to the same fate. For Europe the lesson is clear: a single currency for different peoples puts them in Procrustes’ bed and places them collectively in a lessthan-optimum position since their economies have different needs. A currency represents a people and a nation, and a currency cannot exist without a people, without a state or without a nation. According to François Asselineau: ‘We are in this situation with the euro, which requires the French to accept, until the end of time, the same wage discipline as Germans and Finns, the same social security cover as Greeks and Italians, the same corporate tax rates as Luxembourgers, the same inflation as Austrians’. Georges Berthu put it succinctly when he said: ‘the important thing about having a national currency is not being able to manipulate it (…); it is being able to allow it to develop without constraints in parallel with the growth of the country. If we want a prosperous economy and a peaceful society, the national currency must be linked to the life of the country and not to the life of neighbouring countries.’ 2005 that he was in favour of having both the euro and the lira in circulation, and the Minister for Reform, Roberto Calderoni, envisaged the creation of a new Italian currency linked to the dollar. In Germany, too, the dismantling of the euro is no longer a taboo issue. On 2 June 2005 the magazine Stern devoted a special report to the subject, with a German eagle choking on a euro coin on the front page. It asked ‘Has the euro gone down the wrong way?’ before answering plainly: ‘The euro is destroying us’. It revealed the content of an informal meeting in Berlin between the President of the Bundesbank, Axel Weber, the then Minister for Finance, Hans Eichel, and a number of economists. One of those present, Joachim Fels, an economist from Morgan Stanley, felt that economic differences in the euro zone could ‘lead to the euro being dismantled within a few years’. The then Minister for the Economy, Wolfang Clement, himself blamed the euro for his country’s economic stagnation, declaring that Germany ‘is sacrificing a considerable part of its growth on the altar of monetary union’ because of the interest rate levels imposed by the European Central Bank. An internal German Ministry of Finance memo entitled ‘euro zone: growing concerns over increasing disparities in inflation and growth’ considers that ‘the gulf is likely to widen further and there is consequently an increased risk of an adjustment crisis’. Another memo states that when Germany lost the deutschmark, it also lost the competitive advantage provided by the lowest interest rates in Europe, for the benefit of countries like Greece, Ireland, Portugal or Spain. By allowing its neighbours to obtain the same interest rate as itself, Germany is said to have lost 1.4 percentage points in growth in 2004. According to a Forsa survey, 56% of Germans would like to see the return of the mark, 48% believe that the euro has contributed to the poor economic situation in Germany and 90% think that it has led to lasting price increases. A legal argument is reported to have been floated among German decision-makers, according to which it would be possible to exit the euro, by agreement, if the foundations of EMU were no longer respected. That argument is taken from a document drawn up by Bundestag staff at the request of the EU-critical MP Peter Gauweiler (CSU). THE DOUBLE ‘NO’ VOTE HAS LIFTED THE TABOO OF THE UNTOUCHABLE EURO Now that European discontent can be expressed freely at last, it is in two countries, Germany and Italy, where the Constitution was ratified in parliament by the ruling elites, that criticism about the impact of adopting the single currency has been most fierce and the dismantling of the euro has been seriously raised. While Italy is under threat of an excessive deficit procedure by the Commission in Brussels, the former Italian Minister for Social Affairs, Roberto Maroni, declared in THE EURO IS ECONOMICALLY IRRATIONAL In a column published by Le Monde on 14 January 2004, two economic experts (Anthony Gribe and Laurent Jacque) were already asking ‘Are the days of the euro numbered?’ showing why the single currency had not checked the European economic malaise and questioning whether it was to blame for the current economic difficulties in the euro zone. Continues on page 24 24 THE EURO TODAY Continues from page 23 A comparison of performance in the euro zone and the non-euro zone is conclusive: in the former, economic ‘growth has been weak, unemployment has continued to creep up and the budget deficits of the two largest economies in the zone are exceeding the 3% GDP ceiling set by the Stability Pact’; in the latter (United Kingdom, Sweden and Denmark), we see ‘markedly lower rates of unemployment, higher growth rates and very low budget deficits (where they do not have a budget surplus)’. The politically-motivated launch of the euro in 1999 was not based on the economic theory of the optimum currency area (OCA). Developed by the American Robert Mundell and elaborated by Milton Friedman in the United States and Jean-Jacques Rosa in France, the OCA theory defines such areas as a group of countries or regions whose economies are closely integrated, as regards both trade in goods and services and mobility of factors of production. The United States – which is a nation – is an example of a successful OCA. The European Union is not an OCA: intra-EU trade represents around 15% of the area’s GDP, which is very low compared with the United States; labour mobility in Europe is very limited compared with the United States (where 17% of the working population moves each year) and, moreover, is low even within the individual States. If the EU were an OCA, the economy of a country encountering difficulties would automatically be adjusted because of the mobility of its labour force in the rest of the area, and also because of wage and price flexibility, as well as budget transfers from Brussels, which the Community budget does not allow in the case of an ‘asymmetric shock’ (2.5% of public spending compared with 63% of the US federal budget). None of these three conditions has actually ever been met. And with good reason: the euro zone is not a nation, there is no pre-existing political federation or a single – or merged – people, common language or imperial conquest. The euro has also necessitated a single monetary policy managed by the European Central Bank, taking away from each country two economic policy tools: an independent monetary policy and exchange rate flexibility; the third tool, budget policy, is constrained by the Stability Pact. Because of the differences between the EU countries, the reduced autonomy of their economic policies can be dramatic if one of those countries suffers a particular crisis which does not affect the rest of the euro zone. In the view of the experts ‘the combination of centralised monetary policy and decentralised budget policy leads to inflation differentials between the EU countries which result in disparities in the purchasing power of the euro in the Member States’. In a ‘national’ exchange system, this effect would be easily corrected through monetary policy and a ‘competitive’ appreciation or depreciation of the currency. However, ‘the straitjacket of the euro has killed the exchange rate policy tool and frozen monetary policy’. Because of this inability to respond flexibly to inflation, the purchasing power of the euro in several countries is rapidly being eroded compared with the German and euro-zone averages. We are reminded of the sad tale of the Argentine peso, locked throughout the 1990s in a one-to-one peg with the US dollar – creating a de facto monetary union with the United States. ‘In so doing Argentina abdicated its monetary policy independence to the United States and gave up its exchange rate policy without gaining, in return, fiscal transfers from the United States and without being able to bring labour mobility into play. The peso became grossly overvalued (by approximately 30% in purchasing power parity terms) while the Argentine economy wilted, unemployment skyrocketed, the peso/dollar parity collapsed and the exchange rate plunged.’ Continues on page 25 25 THE EURO TODAY Continues from page 24 A deepening recession (and Germany is not far off) with structural unemployment reaching 11-13% will exert unbearable pressure on the euro-zone countries. Politicians would then find ‘the temptation of an independent currency float’ hard to resist. Whilst ten eastern European countries joining en masse ‘will only weaken an already rickety “equipage”, the economists conclude that ‘however traumatic reinstating national currencies may be, some – not necessarily all – countries, particularly the smaller ones, may decide to abandon the euro’. It is necessary at this stage to take a historical look at the fate of plurinational currencies in the past. For example, the newly independent States emerging after the break-up of the Soviet Union were quick to abandon the rouble, which was established as the ‘single currency’ of the new Commonwealth of Independent States, to adopt their own national currency, as an instrument of their independence, a symbol of their restored dignity and an essential tool for national economic policy. The same pressing phenomenon occurred with the break-up of Pakistan, the former eastern part gaining independence in 1971 under the name Bangladesh and adopting a new currency, the taka. It could also be seen when Czechoslovakia split, with the appearance of the Czech crown and the Slovak koruna. The reason given at the time was that the Czechs ‘had had enough of paying for the Slovaks’. The scenario was the same following the break-up of the Yugoslav Federation. of the Council of Ministers of Finance of the euro zone (‘Eurogroup’) should be published. In this minimum reform that we are proposing, the European Council of Ministers should exercise all its responsibilities visà-vis the Central Bank and set for it, with a view to controlling prices, an objective of growth and employment, under the watchful eye of the national parliaments (which would obviously require institutional reform). However, we should not rule out the possibility of exiting the euro. States should be materially capable, in the event of a serious crisis affecting the euro zone, to opt out and quickly return to their national currency, while the euro would remain the common currency. For a few months, the economist Jacques Sapir has been developing his vision of an interim solution, which would consist in defining concentric zones where the euro could remain the single currency, but over a much smaller area than at present: this is the first circle. In a second circle of countries, where structural differences make the single currency too expensive, the euro would be the common currency, in parallel with the national currency which is pegged to the euro in order to combat financial speculation and to guarantee the credibility of monetary policy for the nations in the zone. In monetary policy terms, it would be necessary last of all to allow a ‘weak euro’ policy to give a boost to our exporting enterprises and to support capital flows that promote material investment, rather than speculative operations. In conclusion, we should consider the legal aspects of a withdrawal from the single monetary policy, drawing attention to the following legal argument. To set up the current Economic and Monetary Union, the governments of the euro-zone States made use of ‘extra-Treaty’ commitments in an act – a 1997 European Council resolution – which was not subject to any review or national constitutional ratification. In the face of Germany’s desire to firm up economic policy coordination procedures and to combat public deficits without having to revise the Maastricht Treaty, the Amsterdam European Council adopted a resolution which was subsequently supplemented by two Council regulations (No 1466/97 and No 147/97 of 7 July 1997). That resolution goes further than is permitted, in France for example, by Article 88(2) of the Constitution, as amended by the constitutional revision of 25 June 1992 prior to the ratification of the Maastricht Treaty. To summarise, EMU currently has very questionable legal bases which were established in contravention of the requirements laid down in the Treaty on European Union (Article 118 EC) and of the constitutional authorisations granted by the States. Christophe Beaudouin, a French lawyer, works for the IND/DEM Group as Staff coordinator for the EP Committee on Constitutional Affairs HOW CAN WE EXIT THE EURO, IF IT PROVES NECESSARY? A growing number of economists now recognise the limitations of the euro, which has become a counterbalance for international monetary fluctuations since, unlike the US and Asian central banks, the ECB, being paralysed by the differences between the euro-zone economies, has given up any pro-active management of the currency. With the euro still there, efforts must be made at least to ensure that the people suffer as little as possible, and that they gain some benefits. In our view, the most urgent task is to make the Stability Pact more flexible, increasing the States’ room for budgetary manoeuvre so that they can adapt their policy to their domestic economic situations. Each State should be able to organise its own affairs, with only flexible coordination at European level. To make the system more understandable to citizens, prices must continue to be displayed in shops in both euros and national currency, euro notes should be printed with their exchange value in the national currency and the minutes of meetings of governors and 26 A DOUBLE RIP-OFF (AND WHO MIGHT BE CONSIDERED THE PERPETRATORS OF IT) BY ANDREW STEPHEN REED OFFICIAL OFFERS OF SECURITY IN EXCHANGE FOR FREEDOM (OR PRIVACY) ARE ESSENTIALLY FRAUDULENT, BUT WHERE ARE THESE OFFERS REALLY COMING FROM AND WHY? “A DOUBLE RIP-OFF” DISCUSSES THE NATURE OF THE PROPOSED EXCHANGES AND POINTS TO THEIR COORDINATION BY A SHADOWY NETWORK OF PRIVATE THINK-TANKS. The world is governed by very different personages from what is imagined by those who are not behind the scenes. Benjamin Disraeli (“Coningsby” 1844) For some years now, the protagonists of the “war on terror” have been proposing an exchange: addressing the public, they have put the question, “how much freedom should we give up for our security?”, and most commentators appear to have accepted, and to have considered, this proposal only at its face-value, but how valid is this proposed exchange? Benjamin Franklin averred, in the Historical Review of Pennsylvania (1759) “They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety,” but how likely is it that surrendering one’s freedom increases one’s security anyway, or at all? On the contrary - given that greater freedom means more options in life - is it not more likely that less freedom will actually mean less security? Does not multiplicity of choice imply access to more modes of security and more routes of escape from danger? Is it not multiplicity of choice, which produces democracy, social consensus, government-by-consent and, thereby, security, justice, peace and prosperity? I propose that the more such multiplicity is curtailed, the fewer opportunities for communication arise, the more mutual incomprehension and tyrannical coercion grow, and the further all social goods go into decline. Freedom-versus-security is the simplistic trade-off of the gaol, which is not a complete society, but only society’s specialised, penal fraction - no more capable of independent existence than some severed portion of the living body - and to apply such a trade-off to society as a whole betrays the most extraordinarily callous and insulting folly. Security comes from consensus, vigilance and strength within the population. It arises from the common will to stand together and, if necessary, fight a common enemy under the leadership of a legitimate, popular government. It does not come about from treating society like some monstrous, enormous prison! The proposed exchange is thus not only a fraud but the product of a repellent, oppressive mind-set; and yet it escapes condemnation in political circles and the media. How can this be? Somewhat more recently - the first proposition having passed unchallenged - a new version of this fraudulent offer was put forward. Now, the simplistic trade-off of the penal institution - which is an involuntary exchange (as far as the prisoners are concerned) and which is made primarily in order to safeguard the security of the guardians, not that of the prisoners - is expressed as a deal, in which the public is asked to surrender privacy for security. Both propositions refer to internal arms (security and surveillance) of the state’s coercive power; but, with privacy as the focus, the very root of freedom - the sovereign integrity of the individual - was placed under attack, as an EU-campaign got under way, at a conference in Brussels on 16th and 17th May 2006, to introduce “radio-frequency identification” (RFID) Continues on page 23 27 A DOUBLE RIP-OFF Continues from page 22 in the form of concealed micro-chips, or tags - into identity-documents, consumer-products and the human body itself. Remarkably, similar campaigns are going on, simultaneously, across the Atlantic and in Australia. Once again, concerned commentators wondered about the possible misuse of technologies and legislative powers, but no-one challenged the basic assumption that having less privacy can somehow make you more secure. No-one seemed to notice, either, that the prevailing process of eroding frontiers - both within Europe, and between Europe and countries, which have every reason to resent western policies - and the mass-migration, which has resulted from this, betrays as blatantly negligent an attitude among policy-makers, towards security, as could be imagined. The question might, therefore, be re-phrased as, “how much freedom (or privacy) are you prepared to trade for a security, which the authorities are squandering as fast as they can?” In 2002, British officials in Central Europe, and in East Africa, were exposed in the act of soliciting for unscreened immigrants to Britain, just as Britons were being asked to take part in an essay competition, funded by the Shell-Oil Corporation and presented by “The Economist”, to answer the question, “how much of our freedom should we give up for security?” This May, a bill was introduced to the American Senate, proposing an amnesty for the millions of Central- and South-American immigrants, who, for decades, have been entering the USA illegally across the flagrantly neglected Mexican border. A few weeks before, an amnesty for millions of African immigrants was declared in Spain. In both cases, a token gesture was made towards strengthening the frontier-guard, but there is no disguising the authorities’ intent. By their own admission - and on the spurious grounds that massimmigration is considered necessary to correct a “demographic deficit”, or age-imbalance, in the population - what is happening is clearly what they want; but are they creating insecurity in order to provide an excuse for limiting freedom and privacy? Last April, the Council on Foreign Relations (CFR) - a private “think-tank” - , financed by family fortunes and several hundreds of the world’s largest corporations issued a policy-paper calling for the North American Free Trade Area (NAFTA) to be “deepened” - through the institution of further, supra-national agencies - and for the Mexican and Canadian borders to be opened. Thus, with the introduction of President Bush’s Amnesty Bill, the NAFTA - a sort of embryonic European Union - creeps along in the footsteps of the EU, which, in the preamble to its haughty Constitutional Treaty, declared its intent “to be the model for a new world order”. The shadowing of the EU, by NAFTA, is no mere coincidence. It was the American Association for a United Europe - an offshoot of the CFR - which funded and directed the so-called “fathers of the EU”, Monet and Spinelli et al., throughout two decades after the war, in their endeavours to create a supra-national, European élite (see “Britain Held Hostage”, Lindsay Jenkins) Such was its influence that, as papers discovered in Georgetown Public Library attest, millions of dollars were filtered, through the CIA, to the “Yes” campaign, in the British “Common Market” referendum of 1972 (ibid. Lindsay Jenkins) The families, and corporations, of the CFR control most of the world’s wealth, and, through the CFR, they control most of the world’s politics as well. Every developed country now has an “Institute of International Affairs”, which is closely linked to the CFR and to that country’s supposedly democratic government. CFRgraduates pass to and fro, between government and corporate posts, via the so-called “revolving door” between politics and commerce. Spokesmen from the CFR, or its satellite in London - the Royal Institute of International Affairs (RIIA or Chatham House) - frequently appear on current affairs programmes as “independent experts”, but other agents, such as Ed Balls - at HM Treasury for many years - Henry Kissinger or Zbigniew Brzhinski, and a dozen-or-so CFRgraduates in the current Bush-administration - have been, or are, senior officials in their own right. The infiltration of government is only a supplementary activity, however - a helping hand in the guidance of day-to-day policy. More crucial is the degree to which funding for political parties is steered to produce the kind of leadership and policies, which the CFR and its (too numerous to mention) allied organisations, consider desirable. In order to do this, senior CFR-directors and spokesmen have to meet, and discuss global policy with, heads of state, and of government, leading academics and the owners and editors of the world’s major media-networks, in an informal and, above all, secret setting - under the so-called “Chatham House rules”. These are the little known, annual “Bilderberg Meetings”, where, among other business, the rising generation of party-leaders is vetted for suitability, so that, whichever of them manages to persuade the electorate to vote for him, the CFR’s will is always done. Despite the presence of representatives of many wellknown newspapers-of-record at these meetings, no reports of them ever appear in the press; and yet, without understanding the role of the CFR and Bilderberg, and their influence on the governments of all developed countries, and on the supra-national institutions, in which these countries are increasingly enmeshed, current affairs and recent history are inexplicable. Andrew Stephen Reed - writer and translator, active in politics since 1985. Joined UK Independence Party 1998. Now an adviser to UKIP-MEP's in Brussels and Strasbourg. 28 TRANSPARENT SUBSIDIARITY BY RIES BAETEN From 29 June until 2 July 2006 the presidents – also called 'speakers' – of the national parliaments in the European Union met in the Danish parliament in Copenhagen. One of the topics they discussed was how to organise subsidiarity in the proposed European legislation. ‘Subsidiarity’ must be the shibboleth word par excellence of the EU institutions. This EU jargon is otherwise mostly used among theologians who study Thomas Aquinas – the saint who coined the term seven centuries before Commission president Jacques Delors would 'popularise' it, at least among administrators and legislators, in a speech at the European College of Bruges in 19893. In the EU sense of the word, ‘subsidiarity’ means that decisions are to be taken at the lowest level, i.e. by an administrative body as close to the citizens as possible. Finnish minister of foreign affairs Erkki Tuomioja complained in a text of 10 August that sensitive Council documents which are meant for member states ended up in Washington, Tel Aviv and Moscow within an hour. He called this 'false transparency', adding an abject adjective to another buzzword. Could there also be a thing called 'false subsidiarity'? Taking decisions close to the citizens sounds appealing. But it could be used by the European Commission to get rid of an important responsibility enshrined in the Treaty article about the implementation of the budget, Article nr. 274. European Union's Supreme audit bodies, i.e. the national courts of auditors, will discuss it at their next common meeting in Warsaw, in December. Countries are also expected to assume responsibility for the accounting and use of European funds. But according to the Treaty of Nice, still in force for some unpredictable time, the responsibility lies with the Commission and no one else. It is not enough to have an ‘armchair Commission’ only intervening when member states cannot cope themselves. It is hard to imagine subsidiarity applied to the sector of the management of EU funds. It never hurts to be vigilant. The EU may seek to intervene in those areas in which national governments are supposedly not efficient by themselves. Ways of doing so are soft law, in the field of employment, education and soon, if we are not careful, healthcare, too. Big Brother kindly offers a helping hand, but in reality it will look for weaknesses in member states and make use of any perceived lack of organisation in an attempt to shift more power to Brussels. In May this year the Commission celebrated Schuman Day in an appropriate way and agreed 'to transmit all new proposals and consultation papers to national parliaments, inviting them to react so as to improve the process of policy formulations' 4. As of 1 September 2006 the European Commission forwards proposals for EU legislation to 37 parliaments in 25 member states without delay. Twelve EU member states have bi-cameral parliaments; thirteen have only one. It is hard to understand why parliaments have put up with the situation that existed until very recently for so long. The opinion that “Brussels is a part of interior affairs” is not shared widely – not even in the Netherlands, where this slogan was introduced several years ago. Comparably, the Austrians baptised a conference in April with the slogan, “Europe starts at home”. The communication quoted above explains that the immediate disclosure is not in fact a result of a pressing demand from member states. Continues on page 29 SUBSIDIARITY ON BUDGET LEVEL The National Audit Office (NAO) of the United Kingdom is headed by comptroller and auditor general, Sir John Bourn. His office is at the origin of a groundbreaking idea. Instead of today's practice, the NAO advocates a system where the European Commission no longer sends EU money to thousands of different recipients. In the future, each member state would have only one point of entry and exit for EU money. Vice-president of the European Commission Siim Kallas, responsible for administration and audit, said he would study this 'interesting' idea. And the 29 TRANSPARENT SUBSIDIARITY Continues from page 28 Although the Council summit of June praised the Commission's innovative initiative, and the Laeken declaration of December 2001 had called for a clear, open, effective and democratically controlled Community approach, it was the Commission – with its Plan D of November 2005 – that was at the origin of the action. Indeed, Mr. Kallas' colleague, Vice President Margot Wallström could not conceal her surprise over how the Council welcomed the idea in its June conclusions. Here is a quote from her speech in Helsinki at a meeting of presidents of EU committees of national parliaments in September: “The Commission General Secretariat has opened a new mailbox, especially dedicated to receive your comments. You will automatically get a receipt of delivery when submitting something to this mailbox. And needless to say, you are free to send your opinions in whatever official EU language you choose. As I said, there is no formal six-weeks rule, as in the Constitution. There is no deadline or "best before date" for your opinions. But it, of course, goes without saying that the sooner we get your opinions the better; the more time we have to take them into account." By simply including contact persons in the 37 parliaments in an e-mail list, the Commission hopes to involve national parliaments to help make European policies more attuned to diverse circumstances and more effectively implemented. It realises that something will have to be done with the feedback. This means a new commitment and an expanded portfolio for several officials – three, at the time of publication. The hugeness of the extra work should neither be under- nor overestimated. Whereas it is much too early for a complete evaluation of this system, case studies and biannual reports ensure a constant flow of information on the possible success of the project. Jens-Peter Bonde MEP asked the Commission recently whether the national parliaments will get three months' time to check the proposed legislation for subsidiarity and proportionality. The Commission's answer was that, as is the case with the European Parliament, all parliaments will not have three months but six weeks of early warning, although this is not a real deadline at all. Exceptions aside, it will no longer be possible for members of national parliaments to react in astonishment or shock because of a sudden proposal that had been kept in the dark. One journalist in a German newspaper spoke of the belated initiative as a seed for a political revolution. It is probably true that one effect of this prompt information to national parliaments will be fewer Court cases filed by the Commission against member states for non-compliance with EU legislation. National parliaments will check the incoming mail from the Commission in different ways. The bi-cameral Dutch legislature recently formed a joint committee to deal specifically with the issue of subsidiarity tests, composed of members of the existing committees. The Belgians have a joint committee on EU affairs, with ten members of both chambers plus ten members of the European Parliament. The twenty members of the Belgian Senate and the Chambre des Députés are called 'europromotors'. Their task is to make sure that the Commission proposals are noticed by their colleagues of relevant committees, e.g. the Enviroment Committee, or the Employment Committee. Every committee has a European item on its agenda at least every month. Governments could fear that at some point parliaments may want to take back powers that they themselves had wanted to hand over to Brussels. Back to the annual meeting of chairs, one of the several forums where EU scrutiny is discussed. Speakers of national parliaments meet once a year and their politically neutral chiefs of staff – secretaries general – prepare the meetings sometimes months in advance. Next year's meeting will be held in Bratislava. One of the topics on the agenda can be expected to be the evaluation of the 'early warning' system. We did not need to have a European Constitution to have this system put in place. With the implementation of other positive elements in the draft text the need for a wholesale constitution imposed on all 450 million EU citizens, including its much more controversial articles, will become as unlikely as it is unnecessary. 1 http://tinyurl.com/plcdg 2 Com(2006)211 of 10 May 2006. Ries Baeten is a half Dutch, half Belgian linguist and project manager. Since 2000 he has held jobs as Parliamentary assistant for four MEPs in four different political groups. In June 2004 he was the nr. 3 candidate for the whistleblower list Europa Transparant. 31 EUROPE IN NUMBERS CHART 1 BY KARLOY LORANT Percentage ofof the total respondents percentage the total responendents Overall perception of the euro 65 60 55 50 45 40 35 30 25 20 2002 2003 2004 2005 tageous Advanatageous overall Disadvantageous overall It is evident from the articles in this edition of EUWatch that experts generally believe that as much as the euro might have been a success on the microeconomic level, it is more of an obstacle for the harmonious development of the European Union. Since the introduction of the euro in 2002, the Eurobarometer (the polling agency of the European Commission) has conducted regular polls aimed at measuring the microeconomic perception of the common currency. The Eurobarometer polls justify the opinion that the euro is a microeconomic success, with the majority of citizens polled (some 12 thousand across the 12 member states of the eurozone) believing that overall the euro is advantageous for them. However, interestingly enough, the satisfaction with the euro has been continuously decreasing since its date of introduction. As can be seen from Chart 1, in 2002 close to 60% of the respondents said they found the euro advantageous overall. Four year later this ratio decreased to close to 50%, while the ratio of those who see the euro as disad- vantageous increased from below 30% to close to 40%. The most enthusiastic response came from Luxembourg and Ireland, where some 70 to 80 percent believe that overall the euro is advantageous. At the other end of the spectrum we find Greece and the Netherlands, where the majorities believe the euro is disadvantageous. Negative perception of the euro is mainly related to price increases, while positive attitudes are attributed to the facilitation of travelling abroad, easier international price comparisons and the enhancement of European self-esteem in having the euro to somewhat look like a world currency. The deteriorating tendency of the approval rate probably comes from the gradual recognition of the overall negative macroeconomic impact, while the original high approval rate was a result of the microeconomic advantages that the euro provides for the eurozone's citizens. Continues on page 27 32 CHART 2 The ratio of those who are or rather hapy happy The ratio of those who are veryvery or rather that the that the euro could replace their national currency euro could replace their national currency 70 60 50 percentage 40 30 20 10 0 SI HU SK PL MT CY CZ LT EE LV EUROPE IN NUMBERS Continues from page 28 positively, with a majority of 65-70 percent opposing (chart 2). Meanwhile, it is clear that more citizens are inclined to believe that the euro will increase inflation, rather than help maintain price stability in their country. In this respect Hungarians are the most positive towards the euro: only one-fourth of the respondents said that it would increase inflation. Finally, the belief that the euro will strengthen the EU’s place in the world is mostly to be found among citizens of the new member states. Source: Flash Eurobarometer 175, November 2005 Flash Eurobarometer 183, June 2006 In the new member states the perception of the euro has tended to be the opposite of that in the Western part of the union. Within two years, from 2004 to 2006, the ratio of those who think that the introduction of the euro will have a positive impact grew from 40% to 46%, while the opposing side decreased from 46% to 37%. In 2006, about half (48%) of the respondents in the new member states say that they are happy to see the euro replace their national currency. The happiest are the Slovenians, Hungarians and the Slovaks, with 54-64 percent expressing a positive attitude towards the euro, while the most sceptical are the Baltic States, where only around 30% see the euro Independence/Democracy Group www.indemgroup.org European Parliament, Rue Wiertz, 60 - ATR 7K 082 - 1047 Brussels, Belgium