Can a Monetary Union Survive without an Economic Union?

, by Guido Montani

All the versions of this article: [English] [français]

Can a Monetary Union Survive without an Economic Union?

To overcome the Greek crisis the EU needs more integration.

The menace of a Greek default shows that there is something wrong in the institutional architecture of the European Union. In the Maastricht Treaty, the EU’s member states decided to create an Economic and Monetary Union (EMU). Today this acronym is interpreted as meaning “European Monetary Union”. The Economic Union aspect is forgotten. Indeed, during the euro’s first decade European citizens experienced an effective monetary policy implemented by the ECB but the EU was unable to implement a parallel economic policy for growth and employment. As a result the EU now faces a dramatic dilemma. According to the Treaty a bail-out for Greece is forbidden; but if the EU does nothing, a Greek default will endanger the entire Monetary Union.

The root of the dilemma lies in the Maastricht Treaty itself for, while it established a well-designed Monetary Union, it was almost silent on the governance of the European economy. The widespread “Brussels consensus” was based on the assumption that only a “minimum government” was necessary. In effect, the EU budget was not increased to provide more convergence and social cohesion. The reasons for a minimum European government have been well explained by a German economist who signed a declaration in 1999 to delay the creation of the euro. “Europe’s single market and currency set countries in competition with each other on the basis of their economies and institutions,” Mr Wim Kösters said recently. “Germany largely rose to the challenge. Now, it is up to Greece and the others to do the same” (The Economist, February 20th, 2010).

Let us consider what “competition” means in a Monetary Union. Euroland is split in two parts: weak and strong countries. If we look at the OCDE data concerning the Current Account of the Balance of Payments, we can see that Germany, the Netherlands, Luxembourg, and Belgium have been able to maintain a structural surplus which, in the case of Germany, is substantial. France has a small deficit. But the so-called PIGS – Portugal, Italy, Greece and Spain: i.e. the Club Med countries – are in permanent deficit. In Portugal and Spain this amounted to almost 10% of GDP in 2007. No surprise about that. People know very well that the PIGS have serious problems with their public administration. Some, like Italy, are not able to promote structural reforms, nor to fight effectively against corruption and the mafia, and all have excessive deficits and debts.

But these problems existed before the Maastricht Treaty and indeed the creation of the EMU was seen as an opportunity for these countries to overcome their structural problems. As it turned out, the creation of an Economic Union was no more than wishful thinking. In 1994, just after the Maastricht Treaty, President Jacques Delors launched a plan for Growth, Competitiveness, Employment, but the national Finance Ministries considered their own domestic reforms to be the main priority and did not provide the necessary financial support for the Delors plan. Even now, 15 years later, the Economic Union is still wishful thinking.

Let us recall two major failures of the European project. The first is the failure to complete the internal market. Important sectors such as the advanced technological industries, energy and services are still regarded as the domain of national governments which take pride in their “national champions”. France and Germany, for example, are strongly opposed to the creation of a single market for energy although it is clear that the Commission could deal more effectively with OPEC countries, Russia, etc. if allowed to consider energy as being like any other commodity, for the EU is stronger in international politics than any one of its members. The consequence of a disunited Europe is that the weak countries of the Club Med are obliged to compete not only with the giants of the global market, like China, India, Russia, USA, Japan, etc., but also with the stronger members of the EU itself, such as France and Germany which protect their own national champions. Is this fair competition? Les dés sont pipés. The process of European integration is not accomplished.

The second failure concerns the EU strategy for growth and employment. In 2000, the European Council launched the Lisbon strategy in order to transform the European economy to become by 2010 “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment”. We are in 2010, and we are obliged to take note – bitterly – that the Lisbon Strategy is another promise not kept. The reason is simple: the open method of coordination gave national governments the freedom to realise – or not – the agreed goals such as a certain level of investments for R&D, a certain participation rate for the workforce, etc. Therefore, when the national budgets are discussed, the national lobbies get what they want, which is usually not the European goal agreed in the framework of the Lisbon strategy. The moral is that it is impossible to provide European public good by national means. Indeed, the failure of the Lisbon strategy actually obliged every EU member country to follow a national strategy for growth and employment and, obviously, the stronger countries of the Union have more opportunities for growth than the weaker. Moreover, since structural reforms are difficult and costly without growth, or with only a low growth rate, the weaker Club Med countries are unable to catch up with the stronger states of the Union. In such cases, one could even claim that competition is unfair because a level playing field does not exist. Les dés sont pipés.

Europe needs more integration with the European Commission becoming its democratic government, endowed with genuine financial and foreign policy competences.

To conclude, it is right to ask to Club Med countries to make every effort to modernise their political systems, their administration and their economy. But France and Germany should also understand that in the new global world of the 21st century there is no future for purely national foreign and economic policies. France and Germany may cultivate the illusion of being stronger than the other, weaker states of the Union but in reality they have no chance of competing successfully with a global player such as China. The EU, on the other hand, can act effectively on the world stage.

Europe needs more integration with the European Commission becoming its democratic government, endowed with genuine financial and foreign policy competences. The reform of the European budget, at present underway, offers a good opportunity to create a real federal budget, financed by euro-taxes and with the Commission endowed with the power to issue Union-bonds, as Delors himself proposed back in 1994. The “EU 2020 Strategy”, proposed by the Barroso Commission, can become a reality only if the Commission can acquire the powers needed to realize these goals. The EMU as it stands, if not followed by an Economic Union, risks creating a harsh level of political divergence among its members – witness the present tension between Germany and Greece – which could lead to its eventual collapse.

This article was first published on Europe’s World.

Image: Euro sign, source: google images

Your comments
  • On 12 March 2010 at 22:57, by Jakub Kratochvil Replying to: Can a Monetary Union Survive without an Economic Union?

    Such Economic Union (euro-taxes, bonds) would lead to strong political union for which Europeans will never vote in next 20 years! The author of the article should come down to earth. I agree that to overcome the Greek crisis the EU needs more integration but as it is now unthinkable, we should rather start seriously thinking about creating FME.

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