Editor's Note: Eight years ago The Region interviewed
Anna Schwartz, at which time the eminent monetary economist cast doubts
about the viability of a unified European currency. Now, three years after
the introduction of the euro, and on the verge of the new currency's disbursement
into the economy, we asked Schwartz to revisit her views.
What strikes an observer as the date approaches for residents
of 12 European nations to turn in their national currencies
for euro coins and bills is that the political elites who devised
the project to establish the European Monetary Union chose not
to give the masses in these countries the opportunity to vote
on whether they were willing to surrender their national monies
for an untested supranational currency.
The German public has been regarded as the most reluctant among
the EMU masses but is said to have been placated for the loss
of the mark by the location of the European Central Bank in
Frankfurt and the modeling of its structure on the Bundesbank.
This is conjecture. The rejection by Danish voters of the euro
in October 2000 confirmed the elites' belief that a democratic
debate risked the achievement of political union through economic
integration and monetary union.
For political elites, the end justified the means. That is
why they did not provide for exit from the monetary union. Should
a member country decide to leave the union, it will have to
introduce a brand new currency on its own. This is a departure
from earlier experience. When currency boards were the monetary
regimes of colonial countries, they issued their own currencies
backed by the colonial powers' money. With postwar independence,
the former colonial countries abolished their currency boards,
but there was no need to introduce a new currency. They simply
continued issuing the local currency as they had in the former
monetary regimeoften to inflationary excess. Dollarization,
on the other hand, is a monetary regime with no exit comparable
to the European Monetary Union.
The intention of the elites is to extirpate the sentimental
attachment of the average citizen to his native currency and
his native lifestyle. There is something Orwellian in this intention.
The elites seek to substitute an attachment to what is European.
Humanity on this view is infinitely malleable and Big Brother
knows what is best for the average citizen. That is the meaning
of the drive for harmonization of the legal, institutional and
social framework in Euroland. And this is merely the prelude
to the final surrender by the member countries of their political
independence to a centralized authority.
Many have commented on the elites' decision to create a common
currency before political union. The explanation appears to
be a lack of consensus among the elites as to the nature of
political uniona federal state or a community of nation
states. Hence opting for monetary union seemed less problematic,
with political union somehow to follow. Yet political union
has historically preceded the creation of a common currency.
The European Monetary Union is unique in that the European Central
Bank is a single central bank issuing a single currency for
politically independent countries. Some believe that the euro
as a common currency will foster political union and move Europe
away from historically divisive nationalism. In practice, the
reverse may well be true.
The elites apparently believe that a common currency engenders
sentiments in people that lead them to regard foreigners fraternally.
What is the basis for this belief? In monetary history a number
of national currencies attained use beyond their homelands because
of their reputations as sound monies. Examples include the imperial
Venetian gold ducat, used throughout Europe from the 13th to
the 18th centuries, the pound sterling before World War I (as
described in a
well-known passage by Keynes) and the mark and the dollar in
our day. There is no evidence that the economic advantage to
a holder of conducting transactions with a currency issued by
a country other than his own, or hoarding it as a store of value,
has political implications. Why then should one expect that
the use of euros by a German or a French resident would somehow
enlarge their sympathies for the other? Those who urge Latin
American countries to dollarize do so because they believe the
dollar is sounder than the local currencies, not because they
believe the use of dollars will create a political union between
those countries and the United States.
The designers of EMU envisaged the euro as a challenge to the
dollar's current position as the undisputed premier international
currency. To displace the dollar, the euro would need to be
known for the stability of its value attested to by its widespread
use in foreign trade and international financial transactions.
Its role as a store of value, reserve currency, unit of account,
medium of exchange, vehicle currency and intervention currency
would have to be secure. What the time elapsed since its launch
has revealed is that the euro still has to win its spurs.
What is in question is the European Central Bank's credibility.
Can it maintain its independence and commitment to price stability,
or will it instead succumb to pressures to use monetary policy
to achieve low unemployment? It was subject to such pressures
this year as economic growth in Euroland faltered and unemployment,
after earlier declining somewhat in response to measured labor
market reform, began to rise again.
The matter of ECB credibility arises in a broader context that
has been acknowledged since the start of EMU. The ECB's common
monetary policy is inappropriate for some member countries because
on any given date not all members will be in the same phase
of the business cycle or face the same structural problem. Those
in a recessionary phase would be helped by expansionary monetary
policy; those in a business upturn would not. The structural
problem relates to the mixture of high and low unemployment
levels among member countries. Countries with high unemployment
need to reform their labor market rules. Some countries may
argue in favor of monetary expansion rather than labor market
reform as the way to reduce structural unemployment. How will
the ECB respond to dissension among the member countries about
An underlying problem for EMU is that member countries have
different preferences with respect to the level of the long-run
inflation rate. The Maastricht convergence criteria masked differences
in preferences. These differences reflect the degree of pressure
each member will face in financing budget deficits. Budget deficits
may not present an immediate ground for concern, since there
are many restrictions designed to make EU members avoid excessive
deficits. The Growth and Stability Pact, in addition, obliges
them to limit their budget deficits to 3 percent of gross domestic
product and imposes penalties for failure to observe the limit.
Budget deficits, however, loom as a real possibility over a
longer horizon. The principal source of fiscal overruns over
the long term is unfunded commitments by many governments for
Social security expenditures to provide benefits for an ageing
population will exceed social security tax receipts. One option
for governments would be either to reduce benefits or raise
taxes. Governments with a strong preference for noninflationary
economic policy will choose this option. Some have embarked
on this course. A second option for governments would be to
run fiscal deficits with the expectation that the pressure on
the federal level to bail them out would be irresistible. The
central bank in these circumstances would accommodate inflation,
but with increasing disaffection on the part of governments
with a preference for noninflationary monetary policy. Can the
ECB solve this dilemma?
The enlargement of the European Union to include Central European
countries may pose another difficulty for monetary policy. Not
all members of the EU share the wish to bring in new members.
Relatively less-well-off members stand to lose a share of social
and regional transfers to the new poorer countries. Farmers
of the present member countries will have to sacrifice some
of their subsidies from the Common Agricultural Policy to extend
subsidies to farmers of the new member countries. Inflation
may seem a cure-all for these tensions. Will the ECB stand firm?
These uncertainties about future ECB performance account for
the cautious reception of the euro internationally. The euro
will need a credible track record of some duration before it
will win acceptance in world financial markets. How well it
will succeed in Euroland as a medium of exchange once the public
conducts transactions in euro bills and coins will also play
a significant part in determining the euro's reputation.