The future of the euro: an outsider's view.

• Author: Klaus, Vaclav

My perspective on the European Monetary Union and the future of the euro is based on a special combination of three elements: (1) my strong belief in the standard economic argumentation summarized in the well-known theory of optimum currency areas, (2) my citizenship in a small Central European country that has just joined the European Union and will at some point be a member of the EMU, and (3) my current political role that forces me to reveal my position on my country's EMU membership.

Basic Arguments

I am convinced that the driving force behind European monetary unification has been strictly political, not economic. This often-used argument can be supported by my own experience based on numerous explicit conversations about it with key European political leaders. The economic arguments have been marginalized or taken only very superficially. The political ambition has been quite dominant. The euro has always been considered to be a useful instrument for the creation of the European political union.

Many statements of that kind can be quoted. European President Romano Prodi, in an interview on CNN (January 1, 2002), explicitly stated: "The introduction of the euro is not economic at all. It is a completely political step. . . . The historical significance of the euro is to construct a bipolar economy in the world." Two years before that, in the Financial Times (April 9,1999), he said: "The two pillars of the national state are the sword and the currency and we changed that." Gerhard Schroeder, in March 1998, still an opposition leader, said that "the Euro is a sick premature infant, the result of an over-hasty monetary union." After eight months as a German Chancellor, he made a different statement: "Our future begins on January 1, 1999. The euro is Europe's key to the 21st century. The era of solo national fiscal and economic policy is over." Spanish Prime Minister Felipe Gonzales said in May 1998: "The single currency is a decision of an essentially political character.... We need a united Europe. We must never forget that the euro is an instrument for this project." I can quote indefinitely but the words will be almost the same.

I believe that the largest part of the positive economic impact of European integration (as well as of EU enlargement) has come through the liberalization of trade and investment and has been already obtained. The marginal contribution of further economic or noneconomic unification will be close to zero, if not negative. Because of that, the birth of the euro and the enlargement of the EU in May 2004 do not represent any breakthroughs. I agree with Patrick Minford (2002: 36) that "trade patterns are determined by comparative advantage, not by monetary factors." I also agree with him that the role of the exchange rate risk as a factor determining foreign investment and the cost of capital is relatively small (Minford 2002: 29-32). Trade does not need to have the same currency on both sides of the transaction.

To look at the economic performance of the eurozone in the first years of the euro's existence, even the pro-European activists must admit that the overall expectations of an economic boost and the claims that the introduction of the euro would speed up economic growth have not been fulfilled. This is not a surprise for me and, to be fair, not everyone had such expectations. Rudiger Dornbusch, always sharp and consistent, whom we miss very much...