Friday 6 December 2019

Colm McCarthy: Now we're asked to trust the guys who screwed up EMU originally

Are Germany and France up to the task of leading the way to true monetary union?

HOPING FOR A BETTER 2013: Fireworks explode over the Parthenon during New Year celebrations in Athens last week.
HOPING FOR A BETTER 2013: Fireworks explode over the Parthenon during New Year celebrations in Athens last week.
Colm McCarthy

Colm McCarthy

The year ahead will be critical for the project of European integration which began when the Treaty of Rome came into effect in January 1958. Since that time there have been three great European initiatives: enlargement, the single market and the common currency. The first two have been impressive success stories. The third has been an unmitigated disaster.

The first expansion of the EEC, or the Common Market as it was misleadingly called, was delayed until 1972 due to French opposition to UK membership. The UK, Ireland and Denmark joined the original six members on that occasion.

When Croatia accedes to membership in July next year, the European Union will have 28 members. At the time of the EEC's formation in 1958, central and Eastern Europe, including a large slice of Germany, lay behind the Iron Curtain. Non-members in Southern Europe included dictatorships in Spain and Portugal as well as an unstable Greece which succumbed to military takeover in 1967.

The successful absorption of these countries, including two components of the former Yugoslav Federation where a major war ended as recently as 1995, into the modern system of European states is a historic achievement. The construction of liberal democracies to the East and South of the EEC would have been immensely difficult without the prospect of joining Europe's most prestigious institution. The European Union was awarded the Nobel Peace prize last year and deserved it for the enlargement project alone.

The initial 1958 agreement to phase out tariffs and quotas for manufactures was eventually complemented with the establishment of free movement for capital and labour, truly free trade in services as well as goods, resulting in the single market. This too was a major achievement.

In the late Eighties, dissatisfaction with the system of fixed-but-adjustable exchange rates led to pressures for monetary union, or at least for a common currency, which is not quite the same thing.

The negotiations leading to the launch of EMU (Economic and Monetary Union) in 1999 were bedevilled by French and German domestic political concerns and the institutional structures eventually implemented have been found wanting. Centralised bank supervision was resisted, for example, in order to preserve political rights-of-interference and is still being resisted for the same reason and by the same countries. It is noteworthy that both of the successful European initiatives, enlargement and the single market, enjoyed enthusiastic British support. The common currency did not, and Britain (as well as Denmark and Sweden) declined to join. Ireland unwisely took the plunge.

Economic and Monetary Union is a misnomer. Europe does not have a proper monetary union. The eurozone is just a common currency area, lacking the institutional architecture to avoid and survive crises.

The latest person to acknowledge this unhappy state of affairs is German Finance Minister Wolfgang Schauble. Writing in the Wall Street Journal in December, he admitted: "Riddled with design flaws, the eurozone came close to collapse a mere decade after its launch."

If there are design flaws, they were put there by French and German politicians, who were the principal designers. The need for centralised bank supervision, for example, was promoted by the Bank of England through the early Nineties before Britain took the political decision to stay out. Powerful lobbies in the French and German banking/ industry nexus lobbied successfully against effective banking union, as they continue to do.

The weaknesses in the 1999 design were pointed out at the time, mainly by US commentators. They were naturally familiar with the workings of the monetary union of the United States and aware of the critical role in its stability played by centralised bank supervision, bank resolution and deposit insurance. But they were loftily dismissed, especially in France, as 'Anglo-Saxon' economists who could safely be ignored.

Herr Schauble's admission that the eurozone was "riddled with design flaws" contrasts with the early phase of the crisis, when Chancellor Angela Merkel, President Nicolas Sarkozy and a deluge of spokespersons from the European Central Bank insisted that the problems were due entirely to undisciplined budgetary policy in the newly designated "periphery"

Schauble's admission is welcome, overdue and should have been accompanied by an apology on behalf of the designers, of whom he was one. He was a senior ministerial colleague of Chancellor Helmut Kohl at the time. Instead, his admission was accompanied by the following bromide: "To make monetary union crisis resistant, we need deeper economic and political integration, which means strengthening our existing institutions, creating new ones when needed and reinforcing their legitimacy, if necessary, via a reform of the European treaties."

Having, on Herr Schauble's own admission, failed to design EMU competently, the unapologetic leadership of the European project is to be trusted with a new (and thus far unrevealed) design involving deeper political integration. Legitimacy is to be conferred through treaty revisions.

Here's an alternative route to legitimacy. Since we now understand that the EMU project was "riddled with design flaws", why not a dispassionate inquiry into how such a crucial project was so catastrophically mishandled? Who, precisely, is responsible for the failures of design? It can hardly have been the Greeks, who did not even join the euro at inception, or the Irish, or the Portuguese.

As has been documented painstakingly in an avalanche of recent books on the genesis of EMU, it was mainly the handiwork of French and German officials and politicians. The construction, from the ashes of the euro debacle, of political legitimacy for yet further political integration and further surrenders of sovereignty, requires explanations from all concerned, many of whom are still active in European politics. Is Herr Schauble content with arguing, in effect, "Trust us, we are the guys who screwed up the last time"?

In addition to the design flaws which rendered the common currency vulnerable to crisis, the policy response, led again by France and Germany and their delegates at the European Central Bank, has been characterised until recently by legalism and procrastination, to the unconcealed displeasure of the International Monetary Fund and the major non-European economies.

Whether treaty revisions are necessary to create a proper monetary union is a moot point. Technically it may not be necessary but perhaps it is the best way to proceed politically. If there has to be a new treaty, it will have to be adopted by, at least, the eurozone members, by referendum in some countries.

If it involves substantial further concessions of sovereignty to a European leadership which has delivered the eurozone debacle (without apology), what precisely are the consequences of a failure to ratify?

The flaws in EMU Mark I have had their greatest costs in Cyprus, Greece, Ireland, Portugal and Spain. Is it reasonable to expect these countries to go along with EMU Mark II, especially from the design team that brought you the first version?

The effects of the ill-starred common currency project on political cohesion in Europe are already evident in strained relations with the United Kingdom. The UK is not a member of the eurozone and chose not to accede to the recent fiscal compact treaty. There are serious differences in approach to a new banking policy, with the UK keener to see higher bank capital standards.

There is also a long-standing fear in the UK that some Europeans envy the status of London as Europe's only global financial centre and would manipulate any new financial supervision arrangements to Britain's disadvantage.

In domestic politics, the rise of the Europhobe UK Independence Party is threatening Conservative votes and seats. Prime Minister David Cameron is seeking a renegotiation of the terms of UK membership, to be put to referendum. The odds are that a deal will be done and the referendum carried, but these things can go wrong by accident and opinion polls regularly show that the British public is far less enthusiastic about Europe than the professional politicians.

Irish public opinion is headed in the same direction. During 2010, the Irish Government was bullied and harassed by the European Central Bank, acting beyond its powers, into bankrupting itself through paying off foreign investors in bust banks. This ECB policy was supported by France and Germany. Commitments on debt relief made to the Irish Government in June 2012 have not been honoured. The damage to European solidarity caused by the mismanaged common currency project needs to be addressed, with humility, and 2013 could prove to be the final opportunity.

Sunday Independent

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