|
At a Stockholm joint discussion meeting with Studieförbundet Näringsliv och Samhälle ( SNS) on 18 May, Paul De Grauwe argued that the strategy proposed by the Maastricht Treaty can never lead to European monetary union. De Grauwe is Professor of Economics at the Katholieke Universiteit Leuven and a Research Fellow in CEPR's International Macroeconomics programme. His remarks were based on his article, `Towards European Monetary Union Without the EMS', in issue 18 of Economic Policy, April 1994. The views expressed by Professor De Grauwe were his own, however, not those of SNS nor of CEPR, which take no institutional policy positions.De Grauwe noted that the European Monetary System had worked well as an asymmetric arrangement dominated by the Bundesbank so long as its member countries believed that following the leader served their own national interests. This was the case for most of the 1980s, when countries such as France, Italy and Belgium viewed the EMS as a useful tool in their pursuit of low inflation. By the early 1990s, however, their inflation rates had fallen to historically low levels and the recession became their major policy problem. The inherent asymmetry of the EMS then exerted a deflationary bias resulting from two self-reinforcing phenomena: first, Germany underwent a boom in 1990 as the other members were moving into recession; second, the EMS forced all its member countries to adopt restrictive monetary policies to enable Germany to reduce its domestic inflation (which reached 4% at its peak). De Grauwe noted that most fixed exchange rate systems had suffered from a lack of credibility and the EMS had proved no exception. Differences in the EMS countries' preferences over the relative importance of inflation and unemployment led to conflict over the appropriate monetary policy stance which raised doubts about its members' commitment to their fixed exchange rates. This is confirmed by the strong correlation between measures of the System's credibility and the average unemployment rates of its member countries. The EMS was not recession-proof; it barely survived its first recession in the early 1980s and did not survive its second. Many economists had pointed out that the Maastricht strategy requiring the convergence of inflation rates, interest rates and fiscal policies and fixed exchange rates for at least two years prior to full EMU would prove unstable. On balance, this approach obstructs progress by requiring the imposition of nominal convergence criteria as conditions of entry to the union that can probably be fulfilled only after it has been formed. While the collapse of the EMS has resurrected the spectre of monetary instability and beggar-thy-neighbour devaluations, De Grauwe maintained that renewed pessimism about monetary union and European integration in general is misplaced. Progress towards EMU may paradoxically be technically easier to achieve now than under the former EMS. The adoption of wider bands has eliminated the uncertainty and the possibility of speculative crises arising from agents' expectations of a final realignment immediately preceding the implementation of monetary union, which may allow a less turbulent transition to take place. EMU may also be easier to achieve if viewed as a monetary reform rather than a fixing of exchange rates. Simply declaring that such a reform will take effect on a particular date removes the need for exchange rates to be fixed for the two years before that date or for national interest rates to converge. EMU nevertheless still faces formidable obstacles: the European Union as a whole is not an optimum currency area, and German opposition to the abolition of the Deutschmark must still be overcome. De Grauwe suggested that the political obstacles that still stand as major impediments to further progress may best be overcome if the European Union simply declares that monetary union will begin, say, in January 1996 and leaves each country free to join or not. This approach would lead to a multi-speed EMU, with non-member countries remaining free to join later, but it has one major disadvantage. Countries that have been tolerant of high inflation will always want to join to `import' anti-inflationary credibility and reap the efficiency gains from monetary union, but this makes membership unattractive to Germany. This problem could be resolved, however, at least in principle, by prior agreement to model the new European monetary authorities on the current German authorities, regardless of the union's membership. This still carries the risk to Germany that the monetary authorities may tolerate high inflation in practice in spite of their constitutional obligations, but this risk is also present under the Maastricht strategy. |