With 1999 and the date for European economic and monetary union (EMU) drawing nearer, a fierce public debate has sprung up in Germany. Jürgen von Hagen (Zentrum für Europäische Integrations-forschung, Universität Bonn and CEPR) presented an analysis of current German attitudes towards EMU at a CEPR lunchtime meeting on 11 March 1997. He argued that the risk to EMU in Germany at that stage was increasingly on the fiscal side. This was because, in the eyes of the German public, a large monetary union was looking increasingly unlike the ‘stability club’ promised by the German government, with the result that Chancellor Helmut Kohl could be forced to look for a way out of the dilemma by proposing a delay that would, most likely, kill the entire project.

Speaking against the background of his participation in the CEPR research programme on ‘Globalization and Regionalism: Policy-making in a Less National World’, supported by a grant from the Ford Foundation, von Hagen drew attention to a number of significant features impinging on the German debate. He noted first that, ever since the signing of the Maastricht Treaty, Mr Kohl and his finance minster, Theo Waigel, had used every occasion to tout their firm commitment to a strict interpretation of the Treaty’s 3% (of GDP) limit to government deficits. Now it seemed increasingly likely that the German government would be caught in its own trap, as Germany would not be able to meet this fiscal criterion. The government’s fiscal plan for 1997, meanwhile, incorporated a deficit target of 2.9% of GDP. But that plan was based on a forecast of 2.5% real economic growth – a figure that now seemed completely unrealistic. German unemployment had recently reached a post-war record of 4.7 million people, and there was little hope for a labour-market turnaround during the coming year.

The difficulty with this situation, as von Hagen saw it, was that even a minor ‘violation’ of the fiscal criterion would leave the German government with no strong arguments against the participation of Italy and other south European states in EMU. Among the German public, this, in turn, would undermine the credibility of Mr Kohl’s promise that the euro would be as strong as the Deutsche mark. Moreover, a majority of German economists remained sceptical about, if not opposed outright to, EMU. The German financial sector, by contrast, was firmly in favour. The Bundesbank had often warned that monetary union could not succeed without political union, although the vision of political union held by most Germans remained vague. The Kohl government hitherto had successfully avoided drawing up a list of conditions that would define an acceptable form for political union.

Until recently, public discussion of EMU had been virtually non-existent in Germany. When the SPD had tried to introduce the theme in the previous year’s state elections, its local leadership soon recognized the continuing applicability of one of the ‘laws’ of post-war German politics, namely that you cannot succeed with anything that makes you look like a ‘bad European’. Large anti-EMU majorities in public opinion polls notwithstanding, the election campaign against EMU failed to get off the ground.

But all this had now changed, and could change further as EMU drew nearer. If unions and opposition parties succeeded in portraying rising taxes and the removal of the welfare safety net as the price for Mr Kohl’s strategy of political union through monetary union, German resistance to EMU might become more outspoken. Furthermore, while Germans would accept a smaller EMU with France and with Germany’s smaller neighbours, a larger union including states with long histories of soft currencies and high inflation rates would be much less acceptable – hence von Hagen’s view that Mr Kohl could be forced to put the whole project at risk in another way by proposing a delay in implementation.