In the intensifying debate over the prospects for European economic and monetary union, there is danger of losing sight of the most fundamental fact about EMU. Like everything else in the push for European integration, it is essentially a political undertaking. To underline that truth is not to deny the compelling economic rationale for EMU but to emphasize that there is more at stake.

The economic rationale is based on the inherent logic of Europe's single-market strategy; EMU may well be essential to the single market's survival. But it has also become a test of both the European Union and the political commitment of its 15 member states, one that goes beyond the technicalities of the project. If Europe fails the test, the consequences for integration will be serious.

Assuming that monetary union will begin as scheduled on January 1, 1999, it is still too soon to know which of the EU's member states will qualify to take part in the first wave; that decision will depend on how each nation's key economic indicators develop. But there is already a growing sense that it could be a substantial minority, perhaps even a significant majority, of the member states.

EMU’s critics continue to argue that it is a bad and damaging idea. But the skeptics have changed their tune. They no longer claim that monetary union will be a failure because most member states will be unable to meet the criteria for economic convergence that the 1991-92 Maastricht treaty set for admittance; they instead predict that the member states will realize that EMU is vital to the political enterprise of European integration and cannot be allowed to fail, and will therefore fudge or even disregard the criteria. Either way, in their view, the result is the same: something called EMU will happen, but it will be botched, and will prove to be a grave mistake for the European Union.

The critics maintain that EMU will not work because the member states will fail to reform their rigid labor markets and burdensome welfare systems. Such reforms are exceptionally difficult, to be sure, and will be resisted by vested interests. France's current attempts to solve structural problems relating to social security and public employment and Germany's push to modify pension and sick leave benefits are meeting the resistance one would expect. But predicting that those efforts will not succeed seems unnecessarily pessimistic. Their inevitability is widely recognized, as evidenced by privatization programs under way virtually everywhere in Europe. There is also new realism and a sense of the need for constructive engagement on these issues among many of Europe's trade unionists.

Above all, the competitive liberalization of the global economy will require such reforms even absent EMU. Would the social partners in the German economy, for example, choose to commit collective suicide rather than carry out such reforms? Or would the German body politic be more reluctant to engage reform with European Monetary Union than without it? Anglo-Saxon economists have written off the German economy so many times, and so prematurely, that it seems foolhardy to do so once again. No doubt the liberalization and deregulation of the German economy, like similar efforts in France or Spain, will be less than ideal. But it is unreasonable to assume that they will not occur.


The member governments adopted the EMU project because they were persuaded that it was based on a sound economic and monetary rationale. Specifically, they were convinced that the single market, including the free movement of capital, was not compatible with stable exchange rates and stable monetary policy, except with a single currency. Having tried several schemes to stabilize exchange rates, all of which stopped short of a single currency and all of which failed, they decided to aim for a single currency. It is almost inconceivable that they would have embarked on an undertaking of such ambition and inherent uncertainty had they not been persuaded of the project's political efficacy as a means for furthering integration.

By the same token, however, both governments and central banks have been dogmatic in their pursuit of the Maastricht convergence criteria, and their treaty-driven efforts to control inflation and cut budget deficits may have unnecessarily aggravated the recessionary tendency in the economic cycle. But they have had to tread a narrow path, maintaining the Maastricht process' credibility while dealing with difficult social and economic issues. After all, what is involved is a secular change in economic policy, economic behavior, and, above all, public opinion. Economic and monetary union will not occur at all unless the Bundesbank, the Bundestag, and the German people all believe that the new currency is as good as the deutsche mark. Economic and monetary union will not work well unless the public in each participating country is persuaded that low inflation is inherently desirable and that the new low-inflation policy is serious and permanent. The Bundesbank and the Banque de France may have been conservative in their strict pursuit of the Maastricht criteria, but if they had appeared to have had only a conditional commitment to the policy of low inflation during this critical period of transition to the single currency, they could have jeopardized the credibility of the entire enterprise.

Once the single currency arrives, Europe will be in a different ball game. Government deficits will have been reduced, automatically easing recessionary factors. Moreover, if the practice of low inflation has been established and accepted, central bankers will feel more confident that they can lower interest rates without triggering inflationary reflexes. Once Europe is through the white water of the transition and achieves single currency, the balance of constraints in the system will significantly change: the European Central Bank and the national governments will together have to ensure a constructive tradeoff between fiscal and monetary policy, so as to combine low inflation with reasonable growth. But the nightmare scenario -- that Europe's central bankers will bear down ruthlessly hard on inflation while the Maastricht criteria bear down on demand management, driving the entire European economy into permanent recession -- is implausible.

European governments are shooting for monetary union not as a mindless act of dogma but as an act of political will. When the member states decide, in the first half of 1998, which of their number qualify for EMU, they will apply the Maastricht criteria in such a way as to give monetary union the best possible chance of survival. After that, the countries taking part in the first wave will be required to do whatever is necessary to ensure that monetary union works properly. I believe this is fully understood and accepted.


Two of the key qualifying criteria in the Maastricht treaty are that government budget deficits be less than 3 percent of GDP, and government debt less than 60 percent of GDP. But nobody is under any illusion that there is something magical about those numbers. Some experts believe that a deficit ceiling of 2 percent of GDP would have been better; others hold that 4 percent would have been reasonable enough and more acceptable at the low point of the economic cycle. The German Finance Ministry has argued that eventually the target ceiling should fall lower still -- 1 percent of GDP or even less. Nevertheless, on judgment day the member states will measure performance against the yardsticks of 3 percent and 60 percent, the figures prescribed in the treaty.

Everybody knows that these yardsticks do not measure some sacred truth; they only suggest which member states can be counted on to deliver economic policies that are stable, disciplined, responsible, and unlikely to spur inflation. Paradoxically, much of the public controversy over the convergence criteria has focused on parameters that may in some cases be of secondary importance, such as the level of public debt, while little attention has been paid to the most important indicator of all: low inflation. The size of its public debt would apparently exclude Belgium from the first wave of monetary union, but in terms of the more important criterion of monetary stability, it should clearly qualify. Economists may differ on whether the lowest possible level of inflation is inherently desirable, or whether -- as the evidence seems to suggest -- a slightly higher level may be optimal for faster economic growth. But from the business point of view, the prospect of stable and predictable economic policy is EMU’s most desirable characteristic. The target figures in the Maastricht treaty are designed as indicators of the ability and willingness of each national political system to conform to that general objective.

Of course, by the time judgment day arrives, the static and slightly backward-looking quality of the Maastricht convergence criteria will have been complemented, or perhaps largely displaced, by a more rhythmic and forward-looking system, the stability pact first discussed at the EU summit in Dublin last December. Judgment day will thus be more about the future than the past, with member states advancing to the single currency only if they are deemed willing and able to enter into a new contractual system of collective economic discipline.

What is ultimately at stake is a political judgment. The final decision as to who will advance in the first wave of EMU will not be made on the basis of the economic numbers chalked up by the end of 1997. It will instead be a group judgment as to which member states can be counted on to meet the future obligations of monetary union -- in essence, a political judgment on each others' political systems. This is not usually acknowledged in public, largely because the connotations are uncomfortable, even invidious. But it is unavoidable.

If this is the realpolitik of the Maastricht decision-making process, and if monetary union is to have a reasonable chance of working, the first wave of participating member states should be selected carefully. At one end of the spectrum, the most natural candidates for early membership are member states like the Netherlands that are, in a sense, already in the deutsche mark bloc; they are the countries least vulnerable to questions about their ability to compete inside a monetary union. At the other end are member states that are converging on the Maastricht criteria but have not yet established a stable political or economic record of convergence. EMU will be a high-stakes enterprise, and the European Union cannot afford to include member states that can and should be ready for integration in the near future, but are not ready now.

However, there must be no premature rejection of a candidacy. If a member state meets the criteria in a comparable manner to France or Germany, they cannot reasonably be rejected. Furthermore, it is only legitimate to postpone a membership of EMU if that membership would fail to comply with the criteria in a sustainable manner, thus damaging the system.


France will, of course, be monetary union's most critical test case. French participation will be politically vital for a successful launch of EMU. With a year to go before judgment day, it is too early to know whether France will succeed in bringing its deficit below 3 percent of GDP or its public debt below 60 percent of GDP. But it is important to understand the consequences of failure. If France fails to meet the criteria by a wide and indisputable margin, the European Union will face a triple dilemma of crisis proportions. If other member states were to turn a blind eye to the French failure, they would be jeopardizing the monetary credibility of the entire EMU system; if they were to put the single currency on hold, the temporary delay could become indefinite; if they were to press ahead with the single currency, but without France, the political partnership between France and Germany, symbol and engine of the European enterprise, would be rocked to its very foundations.

It seems obvious that the other member states will and should be anxious to give France the benefit of the doubt, provided that its budgetary figures are not too far from the Maastricht targets and that it is moving in the right direction. The French policy of low inflation and currency stability, maintained for a dozen years under successive governments of both left and right, lends credibility to the French establishment's political commitment to EMU. In addition, President Jacques Chirac has resisted the populist temptation to revert to the old Gaullist model of French nationalism.

But even if the member states are irreproachably rigorous in determining which of their number qualify for the first wave, the European Union has a vital interest in developing the entry process for those member states left to the second wave. It can do so by building strong institutional links between the "ins" and the "not-yet-ins" on matters both of currency stabilization and macro-economic policy management. This is the logic of recent negotiations between European finance ministers and central bankers. If successful, those negotiations should help blur the sense (or fear) of political discrimination among the "not-yet-ins" without jeopardizing the credibility or stability of the monetary union itself.

There is, of course, another paradigm among the member states: the United Kingdom. Britain has a strong and stable political system, which ought to promise predictability of policy. In principle, it should also be able to meet the Maastricht criteria, if not quite in time for the January 1999 starting date, at least not long thereafter. In practice, it seems unlikely that a Conservative government would even advocate membership in EMU. And it cannot be taken for granted that a Labour government would be an early candidate.

Under Tony Blair, the Labour Party is adopting a more positive tone, toward the European Union in general and toward economic and monetary union in particular. It is possible that after the general election a Labour government would seek membership in EMU. But Labour is committed to holding a referendum before joining the single currency, and this would require a powerful campaign of persuasion, since strong support for monetary union does not yet exist. Public opinion could be brought around to the idea; what is in question is whether it could be brought around in the nine months or so between a British election and the moment of decision in Brussels. The real trouble is that Britain has an uninterrupted record of resisting the political implications of closer European integration in general, and of monetary union in particular.

For the majority of the EU member states, the ultimate rationale of monetary union lies in its contribution to the larger political strategy of European integration. Those who wish to be part of economic and monetary union should make clear to their electorates that this is a profoundly political act. It is time to come to terms with the essential nature of the European integration process; it's not about losing one's nationality, but it is about sacrificing some degree of sovereignty. The evidence suggests that an overwhelming majority of the EU's current members are willing to take the next step, and that even the laggards will soon follow suit.’

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  • Peter Sutherland is Chairman and Managing Director of Goldman Sachs International. He was Director General of the World Trade Organization from 1993 until 1996 and European Union Commissioner from 1985 until 1989.
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