Some quick remarks for the discussion about the EMU on the list.
1) You can find - a bit schematically - two very different types of
criticisms of the euro-project in the many European countries,
varying in strength:
i) a left critique of the social consequences, the undemocratic
character (see for instance the Open Letter of 331 European
economists reproduced below for those who missed it at the time);
ii) A right-wing critique in various brands, i.e. for nationalist
reasons or criticizing the Maastricht criteria as not tough enough
(not neo-liberal enough), fearing that the euro will not be as strong
as the German mark or Dutch guilder or... (note: the reverse is to be
feared, as the mighty European Central Bank will want to proof
its anti-inflationary credentials to the financial markets). In
Holland, for example, leading members of the right-wing liberals (in
government with social-democratics and 'left-wing' liberals) state
that we should not throw our strong guilder away, that we can not
trust the Italians will keep their deficits down and don't want to pay
for their pensions, etc.
2) I agree that the euro-project (not a project for a common currency
in itself, but this one with these criteria, set-up, etc.) is a major
tool to neo-liberalize the EU. Countries give up instruments for
economic policy (exchange rate, interest rate, fiscal policy
restricted by Maastricht and the Stability pact) so in case of
asymmetric shocks and with few fiscal transfers on a European scale
adjustments will have to go through the labour market. That's why in
the EU you have a drive to deregulate and flexibilize the 'rigid'
labour markets: international organizations like the IMF and OECD
(and journals like the Economist) emphasize again and again that the
euro can not function if European labour markets are not flexible.
Another aspect, which at least in Holland is only in discussion since
a year or so, is that with greater transparency of prices and the
loss of instruments for economic policy there will be an increase
in policy competition, i.e. European countries competing more with
each other who has the cheapest welfare state, on taxes (some
economists predict that taxes on profits in the EU will go down even
further), on not too expensive ecological demands on companies, etc.
3) Don't forget the stability pact, because that prescribes that all
countries joining the euro have to cut their budget deficits to
'close to balance'. This implies first of all that the austerity
policies since the signing of Maastricht will continue in many
countries, and secondly that the whole project is pro-cyclical in
at least the coming years: when entering a recession, euro-countries
will have to make sure that their deficits don't exceed 3% of GDP
(apart from exceptional cases there are penalties). Because many just
reached the 3%, they will have no room to manoeuver or even have to
cut expenses even more to pay for social security when unemployment
rises. The pink newspaper was therefore once again right when it
wrote recently in an editorial that the difficult part of the euro-
project is not behind us but starting.
Robert Went
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Open letter from European economists to the heads of government
of the 15 member states of the European Union
Europe, 12 June 1997
On 16 and 17 June you will be in Amsterdam in order to discuss European
integration. You will consult with one another about the progress made
towards the Economic and Monetary Union. Many questions are still
unanswered. Will the EMU begin as planned at the end of this century? Which
countries will take part in the euro from the beginning? Will all the
Maastricht Treaty criteria be met? These are important questions, but they
do not address Europe's essential problems.
You know that Europe is contending at the moment with high unemployment,
poverty, social marginalisation and ecological deterioration. The current
design of Europe's economy does not provide adequate prospects of reining
in these problems. The member states' national policies are clearly
insufficient. The key question is whether the current plans for further
European integration, and in particular for the EMU, will bring us closer
to solutions.
Your economic advisers have told you that the EMU, as laid out in the
Maastricht Treaty (December 1991) and further regulated in the Dublin
Stability Pact (December 1996), will bring Europe more jobs and prosperity.
We, economists in the EU's member states, are afraid that the opposite is
true. This project for economic and monetary integration not only falls
short from a social, ecological, and democratic perspective, but also from
an economic one.
This is a missed opportunity. A single European currency could be very
advantageous and help to find the way to full-employment with good quality
jobs and social security. This and other relevant objectives could be
reached through a common budgetary and fiscal policy favouring sustainable
economic growth, and through the convergence towards high labour standards
on wages, working time and work conditions. But this EMU is not a starting
point for a modern European welfare state; instead it institutionalises the
dismantling of the public sector in the member states and reduces the
maneuvering room for active social and fiscal policy. The following six
points lay out briefly the basis for our concern.
SIX CRITICAL POINTS
1. According to the Maastricht Treaty, the member states must fulfill
five convergence criteria in order to take part in the euro. Along with
requirements in the areas of long-term interest rates, inflation and
national debt, another norm is that a state's budget deficit may not be
higher than 3 percent of its Gross Domestic Product (GDP). Almost none of
the member states now meets this requirement. Without regard to economic
conditions, they have been put under great pressure to pass the EMU test:
many among you have experience by now with the draconian austerity
programmes that must be put in place in order to do so.
What is remarkable is that this norm, which is doing so much social
harm, has absolutely no economic basis. Not only economists like us see
this. One of your hosts in Amsterdam, Dutch Minister of Finance Zalm, said
in March 1992, when he was still director of the Dutch Central Planning
Bureau (CPB): "The norms for government finances in the EMU treaty have no
solid economic foundation."
The reasoning behind these convergence criteria is drawn from
monetarist doctrines that are not accepted by the majority of economists.
According to these doctrines, reduction of budget deficits leads to lower
inflation, and lower inflation automatically leads to more growth and
employment. Recent economic research by renowned economists such as
Akerlof, Dickens and Perry (1996), Barro (1995), Bruno (1995), Sarel (1996)
and Stanners (1995) shows that this assertion cannot be verified
empirically.
2. Even if you manage through enormous exertions to bring your budget
deficits under 3 percent in 1998, you will still not have qualified for the
euro. As long as your national debt is above 60 percent of GNP and is not
falling as quickly as is required, you will have to implement still more
austerity programmes. This will certainly be the case if economic growth
continues to be slow, which is not inconceivable given the ongoing spiral
of austerity.
The pressure on your budgets will remain high for still another
reason as well: the Stability Pact that you adopted in Dublin forces
participating EMU countries to reduce their budget deficits still further
in the direction of balanced budgets.
In short, in the years to come all member states will
simultaneously have to adjust their national budgets further. Current and
future recessions will be exacerbated as a result.
3. You may have acted in Dublin under the assumption that the
Stability Pact would leave you some room in which to carry out
countercyclical policies. But it will be many years before you have created
the necessary budgetary maneuvering room: first your budget deficit must be
brought far under 3 percent. Exceeding this 3 percent limit during economic
recessions is virtually impossible: the room left by the Stability Pact for
temporary exemptions is in fact extremely narrow.
4. Although this is often denied, the previously mentioned budgetary
adjustments will take place chiefly through harsh austerity programmes.
Since 'Maastricht' and 'Dublin' included no restrictions on competitive
fiscal policy, tax rates and revenues will be pushed downwards. This
virtually rules out the possibility of member states' reducing their
deficits through additional tax revenues.
Our fear is that policy competition will increase considerably in
other areas as well. The fiscal battles among member states are becoming
steadily fiercer, and the consequences are already visible in the form of
increasingly great income inequality, forced privatisations and social
deprivation. We also foresee in the coming years growing competition in the
area of ecologicaly harmful infrastructural projects (for example, hundreds
of millions of euro's will be spent to build new or expand existing
airports). So policy competition in many different areas will undermine
national revenues and force reorganisation of national expenditures.
5. The policy to be expected from the European Central Bank (ECB) will
worsen the deflationary pressure that results from this merry-go-round of
austerity. The ECB is in fact obliged to aim at price stability, and will
work one-sidedly to watch over the hard euro. The well-known North American
economist Krugman has already expressed fears about the negative effects
that this will have on employment.
As the 'only' significant European body making socio-economic
policy, the ECB will encounter scarcely any meaningful opposition; the
'Stability Council' seems destined above all for a symbolic role.
Parliaments and governments will soon lack any possibility of acting to
correct ECB policies if the bank takes extreme measures to ward off
inflation, because the ECB will act with complete autonomy. As George Soros
recently remarked, the economy is too important to leave in the hands of
central bankers!
6. In sum, the countries that are about to join in a common currency
are giving up important instruments of macro-economic policy. Inside the
Union, this is of course true of exchange rate adjustments, which will of
course become impossible once the euro is in place. And because interest
rates will soon be roughly the same everywhere, the mobility of labour
across European frontiers is (still) slight, and financial transfers have
not been provided for, the countries in the EMU will soon have only one
instrument left at their disposal in order to cushion economic shocks:
government expenditures. But as we have just seen, even that instrument has
been taken out of governments' hands by the Stability Pact. This means that
labour will be handed the bill for economic recessions, in the form of
rising unemployment, falling wages, and still greater flexibilisation.
CONCLUSION
This EMU is, in short, not a good model for extensive European economic
integration. You may have been operating under the assumption that
economists are in agreement about this EMU, and that all the adjustments
might be very distressing from a social and political point of view but are
nonetheless truly necessary from an economic point of view. This is not the
case. There is no solid, scientific foundation for the EMU, and many of us
have drawn attention to this fact in the past in professional journals and
elsewhere.
We therefore call on you to reconsider this EMU project. Not that we ask
you to put an end to European co-operation; on the contrary. A common
currency and monetary policy could offer considerable advantages. But this
EMU is governed by timeless criteria and dogmas. Wise economic policy must
not be replaced by rigid rules, but must be determined essentially by
circumstances. This is also a question of democracy: the framework of the
EMU is wrongly discharging you and your colleagues from your precious
democratic duty to take responsibility for your political choices. Under
the current conditions, this EMU offers no perspective whatsoever of an
adequate response to environmental problems, of improvement in the lot of
Europe's 20 million unemployed and 50 million poor or for the defense and
extension of the welfare state.
As critics of the EMU, we are reproached with putting European co-operation
in danger; we are told that we would do better to keep quiet. We are firmly
convinced, however, that the greatest danger for Europe lies in fact in the
design of this EMU, which has already led millions of Europeans to identify
Europe and the euro with austerity policies and social suffering. It is
high time that politicians realise: the peoples of Europe have the right to
an economy that serves the interests of human beings.
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The general line of this open letter (which has been coordinated by
the Dutch economists Geert Reuten, Kees Vendrik and Robert Went) is
supported by 331 economists in the EU. This letter was published in
several newspapers in the EU
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Drs. Robert Went
Faculty of Economics and Econometrics
University of Amsterdam
Roeterstraat 11, k 9.03
1018 WB Amsterdam
The Netherlands
Tel: 31-20-525.4189
E-mail: [EMAIL PROTECTED]
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