Meeting global challenges with radical solutions

Date: 19/02/1998

Never, since 1945, has the need for a positive political vision of European integration been greater, argues Peter Sutherland IN THE last ten years, the extent of change in Europe - and indeed world-wide - has continued to present the continent with challenges no less daunting but radically different from those which confronted the EU's founding fathers nearly 50 years ago.

The Union is currently striving to accomplish two formidable tasks: economic and monetary union and enlargement eastwards.

The consequences of each are different, but interrelated.

EMU sets out to deepen the Union significantly, with member states agreeing to share sovereignty in areas hitherto considered the exclusive competence of national governments and independent central banks.

Enlargement eastwards aims to widen the EU to include as many as 25 to 30 member states by early in the next century. Some who are intent upon slowing or even reversing the integration process openly advocate enlargement for that very reason.

Never before, in the post-war period, has there been a greater need for a positive political vision of European construction. That vision must be one which, while respecting the importance of the economic, is more than economic and which, while respecting national identity, is more than intergovernmental.

Many of the arguments against the process are calculatingly nationalist.

Some of them are, indeed, xenophobic, stoking embers of fires we hoped were dead.

Those who extol the virtues of the nation state should recognise that it has failed to provide stability in the past.

Since 1945, approximately 80 wars have taken place outside Europe involving the deaths of many millions of people, while in the western part of this continent - once the great cockpit of warfare - unprecedented peace has prevailed. It is just too glib to dismiss this reality as being no more than the airy rhetoric of supporters of European integration.

The danger of division in Europe is particularly real at a time when we feel insecure. Today, as we strive to adapt to a new world of global competition and real changes in social welfare systems which have long been taken for granted, we do feel insecure. This creates an atmosphere in which extremism can thrive.

The real challenge of EMU has never been to make it happen. It is to make it succeed. Even its most fervent supporters must accept that it is not without risk. It is just that we see the risks of not proceeding as being even greater.

The arguments about 'localised recessions' or 'asymmetric shocks' are well-known. What will happen when, say, one country suffers from a serious event requiring a rapid stimulus to its economy? It will not be provided with EU funds for, relatively speaking, there will be none, and it will not have the safety valve of labour mobility which allows workers to move elsewhere.

Critics of EMU point out that by surrendering important powers to a European Central Bank and EU institutions, individual member states will effectively lose control of economic policy.

However, in this age of ever-greater economic interdependence, no government or central bank in Europe can hope to control the flows of capital on foreign exchange markets.

Even the strongest should realise that participation in European integration gives much more effective sovereignty than individual national action. In a world where European currencies are defined by the markets in relation to the deutschemark, surely it would be better to have a credible arrangement for the joint determination of monetary policy rather than a European policy effectively determined by the Bundesbank?

As for concerns about a loss of flexibility in monetary and budgetary policy under EMU, these largely reflect national governments' reluctance to accept responsibility for long overdue structural reforms which might be unpopular in the short term.

Furthermore, it should be recognised that competitive devaluations have always been a source of tension among member states and have seriously threatened to undermine commitment to the single market.

There is little doubt that until Europe's currencies are irrevocably fixed, the single market - which lies at the heart of the European integration process - will not be secure and thus the foundations of our economic policy are at risk.

It is clear that convergence exists among a core group of countries and that all of them badly need the stimulus for restructuring and change which EMU will bring.

The principal economic benefits of increased trade, increased investments, increased gross domestic product, lower inflation and lower interest rates will all contribute to a stronger, more vibrant European economy.

Europe is facing dramatic economic change of a kind never previously experienced. The familiar litany of factors contributing to globalisation - such as the reduction of international trade and service barriers, the world-wide free movement of capital, the general acceptance of the market as the basis for economic policy and technological advances - has faced us with the force of revolution. Europe must meet these pressures. Indeed, the time has come to embrace them.

The conventional wisdom is that job creation in Europe is dependent on labour market deregulation to eliminate high non-wage costs, excessively protective lay-off restrictions, lack of labour flexibility and failure to match the supply of skilled labour with market demand.

But that is only part of the solution.

Deregulation of products and services is equally crucial. The European Commission has taken the lead with the development of the internal market and the demonopolisation of air transport, telecommunications and energy in the teeth of opposition from most member states. But there is still a long way to go.

Then there are the European capital markets - and this is where EMU will have the greatest effect. The availability of risk capital, through private or public debt or equity, is one of the US' greatest advantages. How will EMU allow Europe to replicate such deep and liquid markets?

One of the primary catalysts will be the restructuring of our pensions system. With an ageing population and woefully inadequate pay-as-you-go government pension-funding plans, the rapid development of private pensions is crucial if a funding crisis sooner or later is to be averted.

Pension reform will contribute to the growth of European public equity markets. Today, 70-90% of European pension fund reserves are invested in domestic assets, as a result of the need to match liabilities. With a single currency, all assets of participating countries should qualify within matching rules.

EMU will eliminate the currency risk of investing intra-region, while at the same time reduced levels of government borrowing and lower yields will encourage fixed income fund managers to consider lower credit quality corporate bonds, accelerating the emergence of a European high-yield market.

In addition, cross-border consolidation and corporate restructuring are being fuelled by an increasing focus on shareholder value.

The new European financial environment will, in turn, accelerate the process of rationalisation and consolidation in corporate Europe where, post-EMU, being number one or two in a domestic market will not be good enough.

The dramatic changes which I envision in the European economy will not come about overnight. Those who attempt to predict Europe's future would be well-advised to do so at very short intervals.

I do believe, however, that there is a confluence of factors which leads inevitably towards radical change.

Finally, there has been a reluctance among many political leaders to admit openly that while EMU has significant economic and monetary consequences, these are dwarfed by its huge political implications for the Union and its member states.

The single currency is fundamentally a political project with a specific objective, namely the creation of an ever-closer union among the peoples of Europe. It is arguably the single most important project in the history of European integration since the Treaty of Rome was signed 40 years ago.

However, to acknowledge this truth does not diminish its compelling economic rationale. Whatever one thinks of EMU, the introduction of structural reforms aimed at achieving low inflation, low interest rates, sound fiscal policy and exchange rate stability can only be considered good economic policy.

But something far greater is at stake. EMU has become a test of both the EU and the commitment of its 15 member states that goes beyond the technicalities of the project. Failure would almost certainly plunge the Union into a crisis which could signal the end of the integration process.

Peter Sutherland is chairman of Goldman Sachs International and BP plc.

From 1985-89 he served as European Commissioner with responsibility for competition policy. From 1993-95, he was director-general of GATT and of its successor, the World Trade Organisation (WTO). This article is based on a speech he gave at a Transatlantic Policy Network (TPN) dinner last month.

Author says that Europe has a great need for a positive political vision of European integration.