Thursday, May 05, 2005

The €uro – A currency union at risk? Revisited.

On Tuesday in my post The €uro – A currency union at risk? I discussed and linked to the Financial Times editorial - A currency Union needs markets - The editorial may go under subscription in which case I am happy to mail out a saved copy for educational purposes.

Briefly the FT argued, in respect of EMU, that the need for political union to back up currency union was without a definitive answer, but that a market economy was essential to making the currency union work. I argued that without the political structure and inclination in place such a transition was impossible to achieve. There is also a good post entitled ECB: Plus Ça Change? by Edward over at A Fistful of Euros that also explores the issues surrounding EMU.

Today in a letter to the Financial Times, responding to the FT editorial, Michael Woolfolk, of Bank of New York, argues that:

Until recently, it appeared that economic and monetary union was largely an economic project aimed at improving the competitiveness of Europe to counter-balance the ascendancy of the US and to thrive in the new global economy. It now appears that Emu is increasingly becoming a political project as the costs associated with the economic project are becoming higher than many are willing to pay.

........ What is needed at this important juncture is the political courage and leadership to see beyond the current transition costs. Without it, Emu will not succeed. It may end up that signing on to the euro currency will require the move to a market-based economy. This will certainly not be easy for welfare-based economies, and it may not ultimately be possible politically. The inability of founding eurozone members to adhere to the fiscal deficits of the Stability and Growth Pact suggests that the political will to implement the basic necessities of an optimal currency zone does not currently exist. If this remains the case, there appear to be only two choices looking forward: political union to maintain the euro, or disband the euro to maintain sovereignty.

In this light, it is not surprising that France is having strong reservations about passing the EU constitution referendum later this month. Perhaps the referendum is being viewed as a choice between sovereignty and the euro. Moreover, France may not be the only EU member with such concerns. If so, the sustainability of the euro needs to be reconsidered and financial markets need to take heed.

From - Choice between Euro and Sovereignty
One point that I take issue with is that it has always been made clear that EMU, and indeed the EU, is a political project and the last Commission President, Roman Prodi, stated as much on a number of occasions - is this fact really only just starting to dawn on Americans??? That aside, the costs associated with EU and Eurozone membership are indeed rising. The letter casts doubt as to whether there is the political will, especially in France and Germany, to implement the necessary structural reform to enable transition to a fully free market economy – what Chirac calls the “new communism”. I think this is a correct assessment.

Where I part company is where the letter states that:
In your editorial you argue that eurozone politicians must explain that a monetary union is not a way to escape the market, but rather that the market is a way to secure a more prosperous future. As you point out, Germany's unit labour costs have fallen dramatically against France's and Italy's since 1999, as the German private sector equips the country to cope with the challenges ahead. Such structural changes are occurring throughout the eurozone, and the costs borne by the average European are substantial. Therefore, it is not surprising that Mr Muntefering believes that the transition to a market-based economy endangers democracy and that two-thirds of Germans support him. The German economy has stagnated, unemployment is near a postwar high and the current welfare model is in jeopardy
I can see that during the transition period there might be the opportunity for politicians to engage in populist rhetoric, something to which people like Muntefering, Schroeder, Chirac etc. are no stranger. Indeed the populist "anti-capitalist" rhetoric of the vote seeking German SPD politicians is at present doing much to whip up divise sentiment, and discourage business from investing in Germany at a time when the country needs every job and scrap of business investment it can get.

Nevertheless I am at a loss to understand why anyone thinks that the transition to a full free market economy endangers democracy. In the past 15 years eight of the ten member states that joined the EU last May have been making just a such a transition, and they have also moved from dictatorship to democracy. In these states free market economics and democracy go hand-in-hand - granted the tranistion has not always been easy, but at no point has democracy been under threat; if anything the free market has assisted the cementing and solidification of democracy.