All for one or none at all

Date: 14/12/1995

By Alison Cottrell

That EMU enthusiasts nowadays speak in less strident tones than in headier pre-devaluation, pre-reunification or even pre-Santer times, is understandable and arguably sensible. But an EU summit at which a major achievement is to be the choice of name of the single currency betrays a lack of self confidence so extreme as to be touching.

A preference for procrastination is evident also in the progressively downgraded scope of next year's Intergovernmental Conference (IGC) - if not to vanishing point, then certainly to a weight unlikely to place undue strain on 'core' European axes.

When former UK Ambassador to the EU Sir John Kerr alluded to the IGC as a 6,000-mile service, not a new car, he was regarded as being deliberately downbeat. In retrospect, he may have exaggerated.

Ostrich-like behaviour would matter less, were the subjects avoided in polite conversation not quite so fundamental; were the conversion of slot-machines not taking preference over the merits of EMU itself.

Not, of course, that head-burying is impossible to understand. Electorates lack confidence in their governments, while governments lack confidence in each other. Were the latter already secure in a mutual unshakeable commitment to the Maastricht path, German Finance Minister Theo Waigel's 'stability pact' would not have seen the light of day -Machiavellian plots to 'let in' potential deficit transgressors, precisely to fund the EU budget via lost deposits, aside.

This new litmus test of fiscal correctness is indicative less of German dominance than of intra-European weakness. National governments are happier to discuss the details of their wedding dress than to question whether they really want to get married. It is hardly a match made in heaven, perhaps, but with the church booked, and the date pencilled in the diary (just over 1000 days to go), what awaits the happy parties?

The devaluations of the mid-1990s have helped clarify at least one issue: that the 'happy parties' will be drawn from more than the de facto deutschemark (DM) bloc. To 'core' governments, Italian car showrooms filled with German purchasers was a more convincing argument than any amount of Commission rhetoric on the necessity for any monetary union to be broad.

The view of Gerhard Schröder, a prominent voice in the German Social Democratic Party - that EMU needs Italy and preferably the UK - is echoed well beyond Lower Saxony. In an age where 'unfair' devaluations 'steal' jobs rather than exports, an EMU which leaves large exporting neighbours free to devalue is less than appealing.

A broad EMU, with all parties meeting the convergence criteria, is clearly not on the cards for 1999. Even a DM bloc with France attached (not necessarily acceptable to the latter), plus an ERM-style relationship for the remainder, would demand a high degree of convergence for the Bundesbank to sanction European Central Bank (ECB) intervention.

The 'also-rans' may, for their part, see greater advantage in as flexible a relationship as possible with the core, and the outliers will certainly not be a homogenous group. While some will be willing to join EMU, but unable to do so, others will be able, but unwilling. One framework for an Exchange Rate Mechanism (ERM) Mark II is unlikely to suit all.

As theory adapts to reality, EMU is likely to be postponed on the face-saving grounds that no two members qualify.

Forget fears that the convergence criteria will be interpreted too loosely. Instead, the rules are likely to be enforced rigorously so as to ensure that nobody gets in until (almost) everybody (large) gets in. For core governments facing elections, the sheer political convenience of postponement, without renegotiation, should not be underestimated. With even Germany skating close to the debt limit, this should not be too difficult.

If EMU is unlikely before the next century, this does not mean that Europe will, or should, have nothing to show for its efforts in the interim. Progress has been made, and - cliché though it has become - the 1990s really are different.

The convergence criteria have become the economic orthodoxy. In conjunction with both independent central banks, and financial markets ever quicker to respond to any divergence from the straight and narrow, they form a disinflationary triangle around policy makers' necks. The result is a low inflation Europe with asymmetric bias towards restrictive policies.

Within this sluggish context, a shift by a 'core' group towards tighter currency bands, Dutch-style (ie bilateral agreements between central banks, rather than common agreement between governments) cannot be ruled out. French President Jacques Chirac in particular, required by the Maastricht criteria to behave 'irrationally' from the point of political self-interest, will - if he stays the fiscal course - certainly need a trophy (stuffed with interest rate reductions) to present to his electorate. A bilateral Banque de France/Bundesbank 'understanding' would be helpful, a vote of confidence from the Bundesbank being akin to the Nobel prize for credibility.

From an even broader perspective, EMU postponement could see policy priorities shift back from deepening to widening. Maastricht has provided both reason and excuse for putting expansion on the back burner.

If, however, the year 2000 is not to see a single currency, European leaders will quickly seek alternative ways of entering the history books.

Five central European countries have already applied for membership, five more are likely to do so, and Cyprus and Malta will begin negotiations once the IGC has been concluded.

It should not take too long for “A new Europe for a new millennium” to emerge as the sound-bite for the decade.

The problems associated with widening are immense and, given the differences in living standards between existing and potential members, on an entirely different scale to what has come before. Institutional reform, voting procedures, internal security, the Common Agricultural Policy, regional transfers, and the position of the WEU, all become even greater headaches in a wider Europe; while the prospect of an EU bordering on the ex-USSR is sufficient in itself to push any ostrich's head a little deeper into the sand.

The Maghreb, meanwhile, will not have gone away and, even within the existing EU, the incorporation of increasingly vociferous regional and/or nationalist units ('Belgium' itself, the letterhead on a million EU missives, is scarcely the nation it once was) demands more of what George Bush would describe as “the vision thing” than has yet been forthcoming.

The need to rebalance EU finances between northern contributors and southern beneficiaries, while funding expansion to the east and promoting stability across the Mediterranean, poses a formidable and, some might say, impossible challenge.

Ambitious initiatives rarely come easily and weak governments prefer to be pushed rather than jump.

But, in admitting that a 1997 start date is unrealistic, a first and vital taboo to recognising the obvious has been broken. As more sacred cows of the Maastricht timetable are dispatched to the nearest McDonald's, attention can shift to wider matters (such as patching up intra-European and transatlantic rifts over European security, preferably before NATO forces eventually withdraw from Bosnia).

Finally, and importantly, Euro-enthusiasts should take a deep breath and speak up for themselves.

We are talking about the postponement of the implementation of a treaty designed in, and for, a continent which no longer exists, not about the abandonment of the integrationist goal itself. Furthermore, the 'F' word will, of necessity, feature even more prominently in fiscal negotiations than it has in monetary.

Just when it looked safe for Eurosceptics to go back in the water...

Alison Cottrell is a senior international economist at investment bank PaineWebber International.