No Euro without Europeans.

1. What is the purpose of analysing such unlikely events as the collapse of the Economic and Monetary Union (EMU) ?

« Scenario planning » is often used by companies as a way to improve their strategic decision taking. Under this procedure, one analyses all possible scenarios to identify facts that announce a change of trend and to adapt the company’s strategy accordingly. After :
· The interruption of the implementation of the Stability and Growth Pact in November 2003 ;
· The lack of progress with regards economic governance in the euro-area ;
· The polls showing a continuous drop in public support for European integration, and
· The results of the last European elections,

even convinced Europeans must question the sustainability of the euro and the European Union (EU).

David LASCELLES’ and Joachim FELS’ texts are shocking less by the analysis of an unlikely scenario than by their firm believe in its realisation.

2. What would be the impact of renewed inflation on EMU ?

It would seriously threaten countries with high public debt (Belgium, Greece, Italy) and those which are unable to contain their public deficits (France, Germany,…). LASCELLES and FELS are right to doubt that European solidarity would come into play if financial markets were to shake the credibility of one of these countries. Note, however, that despite the recent lowering of the rating of the Italian debt (from AA to AA-), its reference interest rate remains close to the average of the euro zone. FELS’ threat that national reference interest rates in the eurozone would differ significantly is not for tomorrow.

As to the capacity of the European Central Bank (ECB) to resist policial pressure, it has so far managed to contain price rises closely to its target of 2%. Admitedly, this happened in a period of economic downturn and the ECB still has to prove it also dominates the scene in periods of rapid growth. Nevertheless, as indicated in PROMEURO’s illustration 6b of the « Nouveau programme éducatif », inflation remains well below levels of the early 90’s and the ECB’s monetary policy has received well deserved acclaim.

3. What are the implications of the breakdown of the Stability and Growth Pact ?

Surely, the suspension of the application of the Pact in November 2003 weakens the international credibility of the euro. The main EMU promoters’ denial of the most visible expression of their solidarity does not build up confidence in the common endeavour. Their decision has certainly contributed to the Swedes’ refusal to enter EMU. It corresponds to an attitude of « benign neglect » toward excessive public expenditures . In this sense, Europeans are no better than the Americans who are unable to contain their excessive level of private debt. A better use could be made of European savings by investments in Small and Medium Enterprises or developing the Continental Europe’s lagging risk capital market. Such a policy is not incompatible with a more social Europe financed by balanced budgets as demonstrated by Denmark and Sweden.

Michel CAMDESSUS, the former Director General of the International Monetary Fund saw in the euro the primary hope for a more balanced international monetary system. This hope was based on the assumption that member States of EMU would continue their efforts to balance their public finances and free capital for the development of the less advanced nations in particular in Africa. In November 2003, the Finance Ministers of EMU have shattered this hope.

Economists, however, differ in their opinion on the soundness of exceeding the 3% limit of public deficits in periods of economic slowdown. EMU is also too young to verify the determination of member States to balance their public budgets over a full economic cycle. Furthermore, the Pact is not dead : the Council recalled its importance and has asked the Commission to present new proposals, a position reinforced by the recent decision of the European Court of Justice. LASCELLES’ and FELS’ warnings are appropriate but their conclusion at best premature.

4. Is a political union indispensable for the euro’s survival ?

Previous European monetary unions that were not accompanied by political unions did not survive their 60th birthday. EMU was basically a political project with its monetary component managed under a federal structure and the economic component remaining subject to intergovernmental decision making. The monetary component of EMU is a success, the economic performance a failure. One no longer counts the number of personalities having expressed their misgivings with the excessive dispersion of the economics decision making process of EMU (Alan Greenspan, Alexander Lamfalusy, the European League of Economic Cooperation, …..). The economics of EMU do not necessarily need a structure as integrated as that for the monetary side but only a common political structure can decide on a common “policy mix » and impose the structural reforms needed by the Continental economies to regain their competitiveness. That cannot be achieved as long as broad economic policies of EMU remain in the hands of autonomous Member States with a right of veto.

That governments could finally agree on a European Constitution in June 2004 shows that Europe is less disunited than FELS likes to think but one must be very optimistic to imagine that the text finally adopted – assuming it is ratified by the 25 member States – will generate an adequate political cohesion to avoid future crises affecting the euro.

5. What needs to be done to stimulate political union ?

To stimulate greater political unity in the EU, one needs more Europeans. Polls show that European citizens remain a small minority, the large majority of them (80%) prefer their national allegiance or completely ignore Europe. It is too easy to blame politicians for their lack of European commitment. In a democracy, one has the politicians one deserves.

It will not be possible to achieve greater political unity as long as the large countries and most notably France and the United Kingdom entertain the illusion that they can maintain their economic sovereignty outside the EU. Indeed, the British £ represents officially 11% in the Special Drawing Rights but weighs actually much less since a large share of UK’s trade is labelled in €. Inward investments in the UK are dropping fast. On the other side of the Channel, the needed structural reforms, particularly in the overly centralised France, can come only from Europe. Europe needs another Jean Monet to reconcile the former world powers as well as :

· The Southern States who tolerate high public deficits and levels of corruption which are unacceptable to the Northern States;
· The need for deregulation and economic growth promoted by free enterprises with the tenants of a Social Europe guaranteed by greater State involvement.
· The dominating world ambitions of large countries with the priority granted by small countries to the well-fare of their people (as already evoked by Alexis de Tocqueville);
· Federalism applied in several European countries with inter-governmentalism defended mainly by France and the United-Kingdom.

To create a common vision among Europeans is a long term task requiring special training of the youngsters of 15 to 25 years – the age when one decides its civic belonging. Il for the European elections of 2009, absentee voting and the preference given to nationalist parties of the extreme right, it is time now to launch such programmes. It is noteworthy that Europe is absent of the teachers’ training programme in most member States. Education on European citizenship with a common content all over the EU member States is necessary to develop a certain degree of adhesion to a political process of such historical significance.

5. In conclusion, will the euro be wrecked ?

No, not in the nearby future. But this does not protect it against potential failure in the future. If EMU remains unable to create faster growth, and reduce significantly unemployment while reducing public debt, the euro will face the prospect of failure. The euro would be considerably strengthened if France and the United-Kingdom could agree on tighter economic governance of EMU and closing progressively the gap between their economic cultures, opening the prospects of the £ joining EMU.

At one of his last public appearances, Pierre Werner thrashed out at speakers who doubted the ultimate success of the euro. He who had to wait 30 years to see his plans for a European monetary union come true, would have agreed with Robert Mundell.

This does not allow us to rest on one’s laurels. If we want to continue to benefit from the euro’s advantages, European citizens had better recognise their obligations linked to the possession of an international currency and to the opening up of their economies to the world market. A common currency requires a common economic culture, that can be obtained only under a federal political system. Hence, no lasting euro without Europeans.