The Politics of EMU

Voting on a resolution during Strasbourg plenary
The Politics of EMU - Pat Cox


The past decade has been marked by a period of enormous change in the European Community.1 The Europessimism of the early 1980s was displaced by the enormous drive and focus on achieving the Single European Market. The project, which still remains to be completed in a number of sensitive sectors, was legislated for through the Single European Act. Once enacted, the foundations were laid for the successful completion of the single market and thoughts then turned, or given the Werner Plan of 1970s, returned to the question of economic and monetary union.

A single currency for a single market was the foundation of the grand design. Its author, Jacques Delors, as French Finance Minister some years earlier, had launched France on its "Franc fort" policy of disinflation. This policy, in spite of its obvious costs, has been pursued doggedly by each French administration since, and has transcended party and ideological divides. Meanwhile, the monetary union issue took on a new character in German politics.

Originally conceived as the monetary counterpart to the single market, the Gennan government played a prominent part in its planning and definition. After the collapse of the Berlin wall and the thrust for German unification, economic and monetary union took on a more central role in Germany's political consciousness. It was to be the means to bind the unified Germany irrevocably to the European Union. Monetary union marks, for the current Kohl-led German administration, a right of passage for a European Germany rather than a German Europe, with the new unified state becoming increasingly bound to Europe and moving away from the re-emergence of a balance of power, with Germany being the king-pin of Mittel-Europa.

The Franco-German alliance has been the powerhouse of deepening European integration. In the monetary sphere that remains the case, and, in both instances, the politics points unmistakably toward completing the grand design.

The Politics of Convergence

The Maastricht Treaty set out the conditions required for entry to EMU and signaled a major regime change focused on low and stable prices, sustainable budget balances, stable exchange rates and convergence of long term interest rates. Annual reports of the European Commission and of the European Monetary Institute (EMI) indicate the substantial achievements to date. There has been remarkable progress on price stability across the European Community. While judged by other criteria, especially budget balances, progress has been impressive. It is clear that an enormous level of consistent political commitment underscores this change.

In many states the emphasis on increased fiscal restraint has been set against sluggish economic growth and high and rising unemployment. In the short term, given the stage many countries are at in the economic cycle, fiscal retrenchment may be adding to the problem, yet the policy focus on the utility of fiscal consolidation in the longer term has not shifted.

The consistent willingness of governments to press ahead in such circumstances is a measure of profound determination which should not be underestimated when assessing the momentum toward realizing EMU on time. Acceleration of economic growth would ease Europe's growing dole queues by between one then and one quarter according to different estimates. However, there is an increasing and widespread acceptance, not yet translated into significant policy change, that the bulk of Europe's unemployment problem is structural in its nature and also in its solution.

Short term fiscal fixes are progressively being ruled out in favor of recognizing that in the medium to long term, growth and employment prospects are enhanced by fiscal prudence. EMU' s greatest political triumph to date has been to force politicians to recognize the fiscal corrections required to underpin the regime change contemplated.

The Politics of Sustainability

Who will qualify for participation in the third stage of EMU is the source of endless and, as we get closer to the decision date, growing speculation. The Treaty on European Union (TEU) brings us a considerable way toward answering the question. In regard to fiscal positions it emphasizes three aspects not one. Firstly, it sets the two reference values of 3% deficit ceiling and a 60% debt ceiling which should not be exceeded. Secondly, it allows for deviations from these reference values under certain carefully described conditions which are not quantified. Finally, it insists that the fiscal positions have to be sustainable. The critical judgement call will hinge on the issue of sustainability.

Signaling a very early concern to place this issue at the core of the debate, the Germans proposed the stability pact aimed at ensuring a normal budget position of budget balance, or at least a budget deficit significantly below the 3% Maastricht ceiling. After a lengthy debate in all the European institutions, the Dublin II Summit agreed the general outlines of the pact for stability and growth as well as appropriate Council Regulations for dealing with excessive deficits, which were subsequently initialed at the Amsterdam Summit. This pact asks member states inter alia to commit themselves to respect the medium term budget objective of close to balance or in surplus set out in the stability programs to be submitted annually with the commencement of Stage III.

The prompts the conclusion that deviations from the reference values are likely to be granted only sparingly. Moreover compliance with these values should be interpreted as a necessary but not a sufficient condition for entry. Sustainability is the key requirement. Thus, another strategic political triumph of the EMU debate has been the generation of a community-wide political consensus on the core role of sustainability, adding further fuel to the momentum behind the regime change.

The Decision-Making Calendar

Member states whose establishment arrives at the decision-making table in the 1998, exhausted from the rigors of creative accounting or self-deluding mini-budgets designed to improve deficits in one year by shifting expenditure backwards or bringing taxation forwards, will soon realize that just making the cut in 1997 does not suffice. That is why neither the Commission nor the EMI will publish their reports prior to the end of March 1998 in respect of the state of convergence of member states in 1997. The delay is occasioned by the insistence on having definitive economic data for 1997 and the full budget data for 1998. Thus, the figures for 1997 will be real, not estimates, and the budgetary data for 1998 will indicate whether these are genuinely sustainable.

Both the Commission and the EMI will adopt their reports and publish them as a package on the same day. The divergence of emphasis which attended such publications in the past will not repeat itself on this occasion. Both institutions, on my current understanding, will list which states fulfill the criteria. This package of reports will then be transmitted for the attention of national parliaments and the European Parliament whose opinions will feed into an EcoFin Council. This Council meeting will then make its recommendations to the European Council which will meet over the same weekend, perhaps even the same day, and announce the definitive list of participating states as of and from 1 January 1999.

This outline calendar is now unanimously agreed. No political concession is evident in this timetable. No delay scenario is being examined at this stage. None is likely to emerge. The political commitment is to deliver EMU on time.

Pat Cox, from Cork, Ireland, has been a Member of the European Parliament (Munster) since 1989 and is presently the Vice President of the European Liberal Democrat and Reform Group. Previously, Mr. Cox was a television journalist and a lecturer of Economics at the University of Limerick.