Over the years, I have voted on the European Monetary Union twice – or even three times, depending on how you count: The 1992 Maastricht referendum in Denmark, the 2003 EMU referendum in Sweden – and technically speaking the 1993 Danish referendum on the Edinburgh agreement also included the issue of Denmark’s relation to the future monetary union. Among us, I will admit to having voted “yes” both (all three) times even if I had become more critical of the project over the years.
The EMU raises a number of political and economic issues. Basically, there were two arguments for the monetary union: First, it should facilitate trade in the EU; second, it should help create a common identity. The question here is if the EMU and the single currency were and are necessary conditions for reaching either goal – even if we should also be critical of developments on the financial markets, they have come up with a number of instruments designed to lower the costs of currency fluctuations during the past thirty years and as for bank notes as a means of creating identity, well, yes and no. The Deutschmark-nationalism is a well-known fact.
Back in the early 1990s, I found the technicalities of the entire adventure hard to grasp even if I actually attended a lecture where Niels Thygesen explained the process and the institutional set-up. Maybe I was theoretically challenged, maybe Thygesen wasn’t a master of didactics or maybe there was some kind of flaw in the political set-up. Still, all things considered I thought the Maastricht package was better than letting what was then the EC go sideways.
In 2003, I had some more specific issues with the EMU. In 2000 the Danish Economic Council had more or less destroyed the basis of the “yes”-campaign by pointing out that joining the EMU had no economic benefits for Denmark – an important part of the reason was that the Danish currency had been pegged to the D-Mark and later the proto-Euro since 1982 – and that membership was a purely political question. We would have expected Danish politicians to receive this conclusion enthusiastically but the problem is that Danish EU-politics in general has relied on de-politicising issues related to Europe. Similarly, monetary policy has been depoliticised in most Western countries since the 1980s by handing over competences to the national reserve banks.
The situation in Sweden was – and is – slightly different, as the Swedish currency has been floating since the mid-1990s so technically Sweden has some degrees of freedom with regard to monetary policy which Denmark do not have.
In any case voters are a curious bunch: They do not like “politics” but on the other hand they do not like the idea of not having any actual influence on central political issues – such as economic growth and employment.
And this was one major problem with the EMU: It is copied on the (West-)German post-war tradition of fiscal and monetary policy which basically states that employment and economic growth are subordinate to price stability, so if you adopt the EMU, you also make a political choice which not everybody would agree in.
Another problem is that EMU assumes that economic development in all member countries follows the same economic cycle. This raises the question what happens when some countries are going through an economic slump while others are in a boom. The EMU does not have the instruments to deal with this situation, except banning countries with weak growth from boosting their economies. There are more problems, but this will illustrate the political-economic-institutional corner the EMU countries risked painting themselves into.
Finally there was the question about governance in the EMU. Having guidelines is all very well, but problems arise when they are not followed. A more thorough examination of Greece’s political and economic institutions would probably have kept the country out of the EMU to the benefit of both Greece and the EMU. Similarly, France and Germany forced the EMU to bend its rules with regard to deficits and debt in the early 2000s.
Add a major global economic slump and the EMU vehicle is very likely to hit the wall in a violent matter. We are now in a situation where four or five EMU countries are facing a choice between a decade of severe austerity and slow (if any) growth on the one hand or leaving the EMU suffering the penalties of the financial markets. This is a recipe for severe social disorder: 2012 may not be 1932 but politicians and bureaucrats would still do well to remember the name “Heinrich Brüning”, the German chancellor whose technocratic austerity policies led Germany to the brink of civil war.
At the same time, politicians are slowly recognising that the existing political-economic institutions are inadequate and have to be amended. But, first, passing institutional reforms in the multi-level EU system is notoriously tricky, and, second, the process has already revealed the cracks in the relationships between EU countries. It is not outlandish to consider the possibility of the UK leaving the EU or the Eurozone breaking up into two or more parts.
So to conclude: What the EU needs now is not another patchwork agreement (even if the Union has to muddle through in the short and medium term) but a reassessment of the raison d’être of a political and monetary union and the adequacy of its institutions.