Countries such as Spain and Italy have viewed European monetary union as a means of achieving low inflation which their national monetary authorities are insufficiently credible to provide, while others, such as France, have sought to increase their national monetary authorities' influence at the European level. In Discussion Paper No. 842, Research Fellow Paul De Grauwe maintains that such a union will therefore be most unattractive for Germany, which stands to lose both its reputation and its dominant influence. Hence it has an overriding interest in restricting the union's size and thus continuing to dominate Europe's monetary policy-making, while the other countries' primary concern is to ensure that the monetary club is large enough to include them.

De Grauwe notes that this conflict of political objectives underlies the Maastricht Treaty's gradualist approach to the transition, with entry conditional on the fulfilment of convergence criteria. There is now a widespread consensus that there is no economic rationale for extending the transition period, which rather serves the political objective of postponing conflict among member governments. Nor are the Maastricht convergence requirements based on economic analysis, since monetary union could be achieved in the short run without them if it were desired: the convergence criteria merely serve the political necessity of allowing Germany to restrict the number of participating countries and maintain its dominant position in monetary policy-making. De Grauwe concludes by noting that the main risk facing Germany is paradoxically that a significant number of other countries may fulfil these requirements in 1999. In this case, a crisis will ensue as the conflict in EC member countries' political objectives surfaces, but it is unclear today how this will be resolved.

The Political Economy of Monetary Union in Europe
Paul De Grauwe

Discussion Paper No. 842, September 1993 (IM)