Our European leaders took a step too far, too fast when they introduced monetary union argues Anand Menon.
European integration has, in many ways, proven to be an unparalleled success. If its founders, desperately attempting to fashion a system to foster peace between the six original member states, had known that one of the most vexing problems of the early 21st century would be the need to persuade Germany to contribute more troops to foreign wars, their disbelief would have mingled with pride. Success, however, can breed inflated expectations, particularly when combined with a penchant for misleading historical analogies. The dangers inherent in this were revealed all too clearly by the crisis in the Eurozone.
The origins of European integration lie in the fear and uncertainty that plagued western Europe following the Second World War. Because fear of the Soviet Union trumped fear of Germany, cooperation with the latter became the only option open to France. Yet because fear of Germany was real, shared management of the crucial materials for war making – coal and steel – was considered essential. Hence the European Coal and Steel Community, the precursor of the EEC and EU, was born.
Flash forward to the late 1980s. Once again fear and uncertainty stalked the continent. The prospect of a unified Germany was not one calculated to reassure that countrys neighbours. By the 1980s, European integration had, for some forty years, proved its worth as a way of managing relations between former adversaries. Hardly surprising, then, that some saw in it the solution to their latest problem.
History, wrote Mark Twain, does not repeat itself. But it does rhyme. The German problem of the 1990s was eerily reminiscent of that of the late 1940s. This time, however, the Deutschmark and not the Wehrmacht was the source of the concern. The abandonment of national currencies represented an unprecedented concession of both practical and symbolic national sovereignty. Yet, as history rhymed away, uncertainty proved a driver as it had in the 1940s.
History, wrote Mark Twain, does not repeat itself. But it does rhyme.
Fear, however, is not a sound basis for economic policy making. Fatuous analogies with the 1940s led to a wholly intemperate rush towards a monetary union the EU was never equipped to undertake.
This was evident, first, in the design of the policy. Whilst monetary policy arrangements are rigid – a shared currency with a single exchange rate – those for fiscal policy are largely non-existent. National fiscal policies remain national and the Union has only a very small budget. All of which called into question, from the launch of EMU, the ability of the Union to respond in the event of a serious economic downturn, and particularly of asymmetric shocks that affect some parts of the eurozone more than others.
Insofar as rules were created, moreover, they were flouted. The Stability Pact was created to prevent free riding by member states. Specifically, it was intended to restrain member states tempted to spend lavishly in the knowledge that the implications of the subsequent inflationary pressures would be shared by all Eurozone members. However it is difficult to impose binding rules on sovereign states.
Thus, when France and Germany found themselves in breach of the terms of the pact in 2003, the rules proved unenforceable. Little wonder the spendthrift Greeks thought that cooking the books whilst breaching all the Unions fiscal rules was a rational policy choice.
Simply put, there are stark limits to what we can expect from European integration. Creating a market is one thing. Certainly even this can involve sensitive matters of public policy – witness the furious rows over the proposed liberalisation of the services sector. Yet in general, member states have proven willing to sacrifice a degree of national control in the interests of creating what is now the largest single market in the world.
Problems arise, however, when it is assumed that member states will be equally sanguine when it comes to still more sensitive areas of public policy. The experience of the Stability Pact illustrates all too clearly that they will not. Having an EU competence in a policy sector where member states will not respect this represents the worst of all worlds.
A single currency was a step too far for an organization that, whilst more than a traditional international organization, nevertheless does not possess the coercive power or authority of a state. The EU should focus on those tasks for which its constituent member states are willing to give it the tools to act effectively. This is the real lesson of the Greek crisis.