Despite a number of obstacles it is now looking much more likely that European Monetary Union will go ahead as planned on 1 January, 1999. This will be the dominant theme for the Amsterdam summit of European leaders scheduled for June this year.
During the build-up to monetary union there has been a marked tendency by policymakers and the media to concentrate on the political roadblocks, focusing on the policy divergences rather than the convergences. But this serves a critical purpose: it has concentrated the minds of policymakers and led them to develop strategies to deal with the problems and bring economic policy into line with the criteria set by the Maastricht treaty. In Germany, which is central to a successful monetary union being launched on time, the political commitment of Chancellor Helmut Kohl is unwavering and he is to stand for another term of office to see the process through.
Just as important, the president of the Bundesbank, Hans Tietmeyer, now privately accepts that Germany has made enough progress on the fiscal deficit and debt criteria required by the Maastricht treaty for Germany to be part of the process, despite concerns arising from the budgetary costs of high unemployment. The main criteria for joining monetary union are an annual budget deficit not exceeding 3 per cent of gross domestic product and accumulated national debt below 60 per cent of GDP.
Many of the mechanical and legal steps necessary for monetary union to take place were put into place at the Dublin heads of government summit in December 1996. In particular this meeting put in place the 'Pact for Stability and Growth,' which gave substance to the Maastricht Treaty's provisions for dealing with excessive budget deficits. Over the longer haul this pact can be expected to underpin EMU by forcing greater fiscal and eventually political integration.
Furthermore, the agreement in Dublin on regulations establishing the legal framework for the euro - the single European currency - helped to resolve uncertainties, especially those surrounding the 1:1 proposed exchange rate for the euro against the existing European currency unit (ECU).
The summit also sought to move the process of establishing the single European currency from the technical to the populist level with the issue of the first specimen banknotes. Although the design has subsequently had to be adjusted to accommodate the use of real architectural features like bridges instead of abstract ideas, unveiling the banknotes was a Europe-wide unifying act.
Economic performance in the current calender year will determine the initial shape of monetary union. This year's performance will be used by the heads of government, the European Commission and the European Monetary Institute to judge which countries have met the convergence criteria sufficiently to go ahead to monetary union in the first wave. This will not simply be a matter of squeezing their annual budget deficits into the corset of 3 per cent of GDP at the time that qualification is decided. It will require those countries joining to show they can stay within the limits and have policies in place which will lower the deficit further, thus enabling them to bring down overall debt.
Early in 1998, the countries which meet the criteria will gradually transfer monetary authority to the new European Central Bank in Frankfurt. On 1 January 1999 monetary union will begin. There will be an irrevocable locking of conversion rates among the first wave countries; the euro will become the single currency; a single monetary policy among the members of monetary union will begin; and all new issues of government debt will be denominated in euros.
Wholesale financial activity is expected to move to euros and Target, the new European-wide settlement system, will start to operate. Europe's air carriers can be expected to start pricing tickets in euros.
There are a number of political tests ahead for EMU. A dispute between France and Germany over the amount of autonomy ceded to the European Central Bank has still to be resolved, but this is not insurmountable as the Germans are ready to accept a degree of democratic accountability. The Italian government, which is unlikely to make the first wave despite a spirited effort to meet the criteria, will be devastated by its omission.
The European Commission, under the leadership of the current president Jacques Santer, remains convinced that the conditions for moving ahead to monetary union on schedule are improving. In its 1997 annual report it notes that technically convergence is taking place rapidly. On this basis it is reasonable to expect that among the main economies Germany, France, Spain, the Netherlands and (perhaps) Belgium would be eligible. Italy would miss out. Britain will probably be out for political reasons.
The Commission notes that Europe has now seen widespread easing of monetary conditions and increased budgetary austerity. Also, there has been a substantial devaluation of the German mark and other European currencies against the US dollar since the G7 industrial countries sought an adjustment in April 1995.
Even the Commission, the main enthusiast for EMU, acknowledges that structural unemployment remains a serious problem which afflicts the prospects for EMU. Over the period 1991-6 employment across the Union has fallen by an average of 0.4 per cent per year, with 4.5 million jobs lost since 1990 - almost half of the 10 million jobs created in the 1986-90 period of expansion. This Spring, unemployment in Germany rose to 12 million and the Europe-wide strikes at Renault car plants exemplified the struggle which corporations are having with restructuring key industries. But these changes also signal the resolve of governments and business not to miss the deadline for monetary union.
Alex Brummer
Source: Airline Business
