Europe after Maastricht.

• Author: Suttle, Philip
• Position: Maastricht agreement on European integration - International

The problems across Europe in ratifying the Maastricht agreement demonstrate the EC was pushing too hard for monetary union. The delay may benefit the North American economy.

North Americans have some difficulty in following recent monetary developments in Europe with any clear understanding. They find it difficult to see why the move to a single currency at some point in the next 10 years should be at the forefront of European policy-makers' thinking when more immediate issues of recession and unemployment should be grabbing attention. And they are bewildered at the efforts of some European countries to raise interest rates sharply to counter currency pressure even into the teeth of recession that, in some cases, risks turning into outright depression. From a North American perspective, European policy-makers are trying to do too much too quickly for monetary union, while neglecting the more immediate difficulties that face their own economies. The corollary of this view is that, inevitably, the focus of European policy-makers will shift at some point in the relatively near future from one of "competitive disinflation" to one of stimulating growth. In the meantime, the drive to monetary union will be put on the side.

Longer term, however, monetary union is bound to be revived, and, if handled with more flexibility than current efforts, is likely to have significant positive implications for the United States as well as the European economy. By helping to keep European inflation low, any serious drive to monetary union will contribute to low global interest rates. And, by providing a viable alternative to dollars in international portfolios, such a move will strengthen European currencies against the dollar, helping U.S. producers remain competitive.

WHY A SINGLE CURRENCY?

The process of European economic integration snowballed in the second half of the 1980s. The single-market program came at an opportune time when European growth was about to accelerate, and it provided a significant stimulus to investment spending. A mixture of integration euphoria and, later, a desire to restrain Germany within Europe led to a headlong rush to extend the integration of the "real" side of the European economy into the monetary side. This rush was fueled by the stability of the European Monetary System (EMS), the convergence of both long- and short-term interest rates, and the apparent development of an increasingly integrated European capital market. The last was best symbolized by the emergence of the ECU bond market, which an increasingly large number of governments and companies have tapped in recent years.

Few stopped, however, to consider in any detail whether a single currency actually makes sense for Europe--especially the concept of Europe as somewhat artificially defined as the 12 countries that happen to be members of the European Community. Only after the political process to develop a full proposal for monetary union was well underway did the EC Commission produce a detailed study--a study, by the way, that provided extensive details of the benefits of union without much consideration of the disadvantages.

One problem with monetary union is that it tends to generate strong feelings either of support or dissent, most of which are determined...