The Crisis of Europe's Centralized Federalism.

• Author: COLOMBATTO, ENRICO

Ambiguities of a Harmonized Currency Union

Despite their high hopes for spontaneous, widespread popular support for economic integration, the champions of the European Economic and Monetary Union (EMU) are still trying hard to persuade the public of the benefits of the new common currency.(1) Notwithstanding these efforts, many Europeans do not know much about the EMU and remain cautious in their assessment of the new currency. Others are more skeptical (Meerhaeghe 1995). In this article I attempt to expand our understanding of the lack of popular enthusiasm and to shed some new light on the future of the euro. Three issues will be considered.

First, I discuss the implications of the questionable legitimacy of the European Union as a cultural or political entity. In particular, it remains unclear to most why the creation of a new, common currency should be instrumental for harmonizing national cultural traditions and institutions. Nor is it evident why such national traditions and institutions should be harmonized in the first place. Hence, the clamor to strengthen the European ideal from a political, social, and economic viewpoint often leads to apprehension rather than to deep emotional commitment. Many groups are cautious in forming conclusions about the common currency. For the euro has become the symbol of future policies that policy makers have decided should be "common" even before their precise content has been agreed upon, let alone explained to the public. The skeptics include not only those who are suspicious of enhanced (centralized) policy making but also some proponents of extensive policy making.

The second issue pertains to the partial failure to perceive what happened on the way from Rome (1957) to Maastricht (1992) and Amsterdam (1997). By and large, people understood and appreciated the benefits generated by the drive to achieve free trade and free movement of production factors (including capital). It was fairly clear that these efforts would lead to a more efficient use of resources and an increase in consumers' purchasing power. In other words, the notion of a common market was the essence of the Treaty of Rome, which established the European Economic Community (EEC), and enjoyed widespread support because it identified both the instruments and the goals in a transparent way. But the same cannot be said for the European Union, which focuses on broad, hardly objectionable goals, such as reducing unemployment or enhancing competition, but is much less convincing about the instruments. For instance, EU supporters argue that the common currency will eliminate exchange-rate risk, reduce interest rates, stimulate investment, and increase the demand for labor. P. De Grauwe (1997), however, has presented extensive evidence on the lack of causality between investment and exchange-rate volatility. And it is widely accepted that the introduction of a common currency into a less than optimum currency area leads to more, not less, unemployment.(2)

The project for a monetary union is also veiled by ambiguities. The emphasis on the instrument (the euro) is clear, but the objectives are vague. The person in the street cannot help feeling bewildered when told that the EMU is the natural development of the original idea of a common market conceived more than forty years earlier. And rightly so, because a monetary union has little to do with the achievement of free trade and of free markets in general.

The last group of questions I consider here pertains to the uncertainties associated with the perceived meaning of the EMU, and the way that perception has changed during the 1990s. Ten years ago, the EMU was understood to identify the leading countries of Western Europe that aspired to take responsibility for policy making in that part of the world. But as time went by, the elitist features of the union gradually disappeared. The original D-mark core plus France has become a much larger region including eleven countries, and possibly more in a few years. As a result, although many feel nervous about being "left out,"(3) they are still hesitant about the reasons for adoption of the common currency and skeptical about the future role the new structure will play in policy making.

Can the Euro Provide Legitimacy to the European Ideal?

M. Franklin, M. Marsh, and L. McLaren (1994) have noted that as long as the euro was perceived as a monetary technicality with rather remote practical consequences, public opinion in Europe remained by and large indifferent to the creation of the EMU. It is probably more appropriate to claim that although a very large share of the European population remained ignorant about the workings of the euro and of the future monetary union,(4) many were actually prepared to welcome the introduction of the new European currency.

Of course, it is not surprising that support was widespread in those countries with a reputation for high inflation, such as Greece, Spain, and Italy. This consideration also explains why emotions were much cooler in other parts of Europe, where monetary policy and national politicians were held in higher esteem. As documented in many surveys, the public in the former group of countries tended to believe that a European Central Bank (ECB) would provide better protection against inflation and that the EMU would serve to reduce the discretion of local politicians.(5) People in the D-mark area, on the other hand, tended to regard the euro as a threat to that area's tradition of monetary stability but viewed the EMU as an opportunity to weaken the links with the economies that would fail to meet the admission requirements.

Overall, and in sharp contrast with historical precedents,(6) the euro was not perceived as the symbol of a common European identity, either at the beginning of the 1990s or back in the 1960s, when the project for a European common currency was first conceived and the Soviet threat could have been a compelling argument for (Western) European unification.(7) In fact, in the 1960s the support for a common currency came from the weakness of the dollar and the collapse of the Bretton Woods system, and that support led to the European Monetary System (EMS) and the European Currency Union (ECU)/In contrast, in the early 1990s the support came from the desire to replace discredited national policy makers with foreign, allegedly independent technocrats or from the Franco-German desire to establish political hegemony (Feldstein 1997).

Support is not the same as legitimacy. According to Anthony de Jasay ([1985] 1998, 77-78), an institutional arrangement can be considered legitimate if it is accepted in the absence of sanctions or incentives. This condition applied to the former ECU, which was introduced as an alternative currency, but certainly not to the euro, which will make all the existing EMU currencies illegal means of payment. This dearth of legitimacy was not troublesome at the end of the 1980s, when the euro proposal was discussed mainly in technical circles. On the one hand, the legitimacy of technicalities tends to be relatively difficult to analyze, hard to question, and almost impossible to transform into a topic for public debate. On the other hand, the euro proposal tended to be assimilated to a matter of monetary coordination, a concept with a long tradition and little effectiveness in the European debate. It is hardly surprising that public opinion regarded the common currency as something vague and temporally remote, by and large ignoring its implications for centralized policy making.

The questionable legitimacy of the euro became apparent, however, when the EMU idea evolved into a political issue.(8) In other words, in spite of persistent backing from the media at large, caution vis-a-vis the euro started to build up when euro supporters attempted to associate the technical concept of monetary union with the rather ambiguous objective of "harmonization" promoted by the EU in general and by the EMU in particular. Harmonization is of course a euphemism for centralized law-making, whereby the rules of the game (legislation having direct economic consequence) should be roughly the same throughout the area.(9) In practice, the EU authorities are to enact legislation stating the principles and minimum requirements that the national authorities should take into account and include in their national law-making process. The EU authorities are then responsible for evaluating whether such principles and requirements have been adopted within the prescribed deadlines and guidelines and, when necessary, for imposing modifications. Furthermore, harmonization and subsidiarity together can lead to direct local intervention by central authorities, bypassing the national authorities.

At first sight it may be tempting to discuss the introduction of the euro and the principle of harmonization separately, as if they were two different matters. But they are not independent in the EU context, where the euro has ceased to be a mere monetary technicality and has become a political matter because of harmonization. The issue of harmonization raises doubts among those who believe in free-market ideals as well as among those who advocate significant government intervention.

We must recognize that the EU is far from being an optimal currency area (OCA).(10) As its members are exposed to changes in demands and supplies, they may suffer severe economic imbalances (Schwartz 1997 and, more generally, De Grauwe 1997). Furthermore, given current conditions, the economies belonging to such a union can take divergent paths even in the absence of asymmetric shocks, as a consequence of their different tax systems, overall legal frameworks, and political conditions.(11) Therefore, the public interest cannot be pursued only by having a European monetary union per se, because it would not be an OCA. Nevertheless, such a monetary union could still be desirable if it is...