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Goodbye to a United Europe?


When the leaders of the twelve members of the European Community signed the Treaty on Monetary and Political Union in Maastricht in December 1991, the project of a United Europe, which began in 1950 under the inspiration of Jean Monnet, seemed to be making spectacular progress. A single currency, a common monetary policy, and an independent central bank were to be established in stages before the end of the century, thus bringing to its logical conclusion the design for a single European market that had been proposed in the mid-1980s. 1 The powers of the Community were also to be extended to deal with a broad range of policies concerning health, consumer protection, the environment, crime, immigration, labor relations, diplomacy, and defense. Even though Britain had refused both to accept the new social provisions of the treaty and to join the full monetary union, agreement on so vast an expansion of community activities was hailed as a great success.

Yet the signing of the Maastricht treaty marked the beginning of a serious crisis, which has led to a new wave of pessimism about Europe’s future, both on the Continent and in the US. The pessimism comes from a variety of different troubles. Every Western European economy is stagnant, the result both of the worldwide recession and the huge costs of German unification. Partly as a result, the main European governments are concentrating on their domestic difficulties and programs. Two other sources of the European malaise may be more difficult to deal with in the long run. One is often referred to as the Community’s “democratic deficit,” the much-resented distance between the bureaucracies that administer the EC and the European voters who are affected by it. Perhaps the deepest problem of all concerns the relation of the traditional nation-state to a new United Europe.

The ambitious plans that are now falling apart were the product of another recession—the one that hit Western Europe after the oil crisis of 1973 and resulted in years of “Europessimism,” fluctuations in exchange rates, and stagnation in the development of the Community. Even Britain’s entry into the EC didn’t help, since the British spent, in effect, ten years—between 1974 and 1984—renegotiating the terms on which they had been admitted. In 1978, the French President Valéry Giscard d’Estaing and the West German Chancellor Helmut Schmidt took the initiative to set up a European Monetary System (EMS) that would create monetary stability by narrowing the range of exchange rate fluctuations among the members’ currencies. This seemed one of the more striking European successes of the postwar period. Devaluations and reevaluations of currency were not ruled out, but they became increasingly rare. Britain, which had at first stayed out, finally joined the EMS in 1990. The EMS was to be the basis on which a full monetary union, ultimately with a common European currency—an objective toward which Jaques Delors, the president of the EC’s Commission, had been working for years—was going to be built.

Progress toward monetary union, as defined at Maastricht, required that the members’ economic and fiscal policies would converge with regard to inflation, interest rates, deficits, debts, and currency stability. The treaty set up guidelines that participants in the enterprise were to meet, and, as has been the case during the 1980s, these corresponded to the preferences and policies of the German Bundesbank. Maastricht was supposed to continue the process by which both Britain and (after the grand reversal of the Socialists’ economic policy in 1983) France pursued economic strategies, including high interest rates, that aimed at monetary stability and at reducing inflation. Even when the American recession began to reach Europe, these policies continued.

But German reunification, beginning in 1989, destabilized the EMS. Chancellor Kohl’s decision to establish a one-to-one exchange rate between the Deutsche mark and the Ostmark and to accept wage parity between the workers of the Federal Republic and the far less productive workers of the former Democratic Republic led to enormous reductions in income, employment, and production in the East, and obliged the German government to transfer huge amounts of public funds there. Kohl’s reluctance to raise taxes resulted in large borrowing and a big deficit; the rise in Germany’s inflation (which had preceded unification) worsened. The independent Bundesbank reacted by raising its interest rates by six percentage points in five years in order to combat inflation. But this obliged Germany’s partners in the EMS to raise their own interest rates in order to prevent an outflow of funds from their countries to Germany and to preserve the stability of their own currencies, the result being lower economic growth and higher unemployment.

In Britain and France, politicians, economists, and businessmen (such as Jacques Charvet, the head of Peugeot, in France) began to question the wisdom both of sacrificing growth to sustain artificial exchange rates and of following the dictates of the Bundes-bank, which had become the de facto European Central Bank, yet acted only according to its view of the German national interest. Also the international money markets, computerized and deregulated, began to sell gigantic amounts of currencies that appeared overvalued, such as the peseta, the lira, and the pound. The central banks that tried to defend their currencies by purchasing large amounts of them on the market simply did not have the reserves to succeed in doing so. The daily turnover in currency markets reached $900 billion, while the reserves of the G7 nations amounted to less than a third of this sum.

In early September 1992, the European governments failed to agree on an official currency realignment that would have slightly adjusted the value of currencies in relation to the market. The French objected because of possible negative effects on the difficult campaign to get the French public to vote for the Maastricht treaty, the British because they insisted, in vain, that the Germans reduce interest rates. This led to the uncontrolled devaluation of the pound, the lira, and the peseta, and to Britain and Italy’s withdrawal from the EMS after the Bank of England’s failure to support the pound even after spending half of its reserves.2

The EMS is not dead. With much help from the Bundesbank, the French were able to resist the markets’ onslaught on the franc, and thus to keep their currency within the margins of fluctuation required by EMS. As long as EMS is alive, there is a chance for monetary union, but it is clear that Britain, now embarked on a policy of reduced interest rates and monetary autonomy, will not rejoin it in the near future. Nor will Italy, Greece, and Spain, among others, meet the “convergence criteria” set up by EMU. There will be increasing pressure on the Bundesbank, particularly from the French, to lower German interest rates so that these rates can be lowered in France and elsewhere, and the way opened to more growth and reemployment.

If the Bundesbank resists French pressures, the French politicians who argue against any further sacrifice of the French economy on the altar of monetary stability will gain influence. Moreover, the entire experience has strengthened the position of those in Germany who oppose the Maastricht treaty, believing that the dilution of the power of the Bundesbank in a European Central Bank, accompanied by a disappearance of the German national currency, would be a mistake. Thus, even a European Monetary Union limited to the stronger currencies among the twelve EEC nations remains at the mercy of the recession. If the recession prolongs the agony of East Germany’s merger with West Germany, which is the cause of the Bundesbank’s reluctance to lower interest rates, and one of the causes of the unemployment crisis in France,3 the chances of organizing a European Monetary Union will be slim. But should the Bundesbank become more lax, Germany’s own ability to meet the criteria for economic convergence would be even more compromised. The great step toward a monetary union planned at Maastricht now appears to have been premature.

What the financial crisis has shown is the impossibility of bringing about monetary union without a close coordination of national economic policies—and the fact that, at present, there is a huge discrepancy between a single, deregulated market set up and monitored by the Community and the tax, labor, monetary, and other economic policies that are still in the hands of the national governments. When these governments are determined to pursue the same type of economic policy—as was the case of France and Germany in the 1980s—the EC can make progress; but when the governments are incapable of pursuing the kind of policy preferred by the Bundesbank (as with Italy) or rebel against it (as with Britain), such progress stops.

Resuming the quest for monetary union will require that the governments of Western Europe put their respective economic houses in order. But if they concentrate on politically difficult domestic issues, such as lowering unemployment, they are likely to give less attention to all the other aspects of European unification, and indeed to become all the more impatient with them.

The governments of the EC’s “big four” have all turned inward. Of these countries, Italy has always been the most strongly and sentimentally enthusiastic about European unification—but also the least capable of enforcing the rules and directives of the EC because its government has been so disorganized and inefficient. Its regional institutions are sometimes more competent, but Italy is the one country whose regions have no representation in Brussels.4 Moreover, the current apocalyptic crisis in Italian politics, which has undermined the entire postwar political leadership and the constitutional system, will only reinforce the need to concentrate on domestic matters. To shift from an increasingly corrupt system of unaccountable public enterprises and patronage to a new, reformed Italian administration will be painful and tricky. Under prodding from a public that has long been complicit and cynical but finally has become fed up, such a shift will have to be carried out by the very people who have become targets of popular wrath, the beneficiaries of the old order. A successful economic reform might allow Italy to rejoin the European Monetary System and to put itself in shape for the European Monetary Union—but this would be an immense task, in view of Italy’s debts and deficit.

The British concentration on domestic affairs and hostility to Europe extends beyond John Major’s government, which decided that British growth must prevail over European monetary cooperation. Along with most conservatives, Major believes that the Thatcherite victory over trade unions has to be protected from the proposed EC labor charter with its liberal provisions on such matters as union rights and powers and factory conditions, which are abhorrent to British employers.

The genteel resentment of Britain’s postwar decline—relative not only to France but even to Italy—which was so evident in the 1960s and 1970s, and which had been among the sources of Mrs. Thatcher’s appeal, has not disappeared. It has only been supplemented by an awareness of the dark sides of Thatcherism (the gap between the richer and poorer parts of England) and of its failures (in industry or education), and by the discrediting of once sacred institutions, including the monarchy. None of this has made the British keener to participate in the EC. Nostalgia for Britain’s “finest hour,” in 1940, and for the days of empire, is still there. The special concessions Major had obtained at Maastricht, as well as the monetary crisis of last September, seem only to have strengthened the British tendency to want to have the advantages of being in the European “club” and the single market, but only as long as they do not clash with American policies and the British sense of distinctiveness. Britain’s enthusiasm for extending the EC to the newly liberated countries of Eastern Europe derives largely from the old and constant British desire to turn the Community into little more than a free trade area with as few common rules and policies as possible.

  1. 1

    See Robert O. Keohane and Stanley Hoffmann, editors, The New European Community (Westview Press, 1991).

  2. 2

    I have relied on the account in David Cameron’s still unpublished paper “British exit, German voice, French loyalty: defection, domination, and co-operation in the 1992-93 ERM crisis,” March 1993.

  3. 3

    There are other causes: the world recession, of course, the unstoppable decline of traditional industries in the mid-1980s, the need to be competitive abroad (a need made more acute by deregulation and the policy of tying the franc to the mark), which led to large-scale layoffs in a country where labor costs are high.

  4. 4

    See Paul Ginsborg, “Lo stato italiano: transformazione o transformismo,” La Rivista dei Libri, March 1993.

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