Economic and Monetary Union sets Europe on the wrong path

The impending Economic and Monetary Union does not lay the foundation for a modern European social and welfare state. On the contrary, it will lead to more unemployment and social tensions...

SEVENTY ECONOMISTS February 13, 1997

WITH INCREASING alarm the undersigned (all Dutch economists) see the moment drawing near

when the European Economic and Monetary Union (EMU) will enter its third phase. The

Maastricht Treaty, which came into force on 1 November 1993, contains many shortcomings,

especially in the areas of democracy, employment, income distribution, environment and the

fight against poverty both within and outside the Union. Moreover, it is based on dubious

economic assumptions.

A few years further, nothing has changed. On the contrary, the introduction of the EMU comes

with a high price tag, particularly in the form of rising unemployment and social tensions. The

EMU appears to be little more than a monetarist project.

The 'stability pact' agreed in Dublin has sealed this course, and even reduced the choices in

fiscal policy, particularly for social and environmental purposes.

The EMU is not the start of a modern European social welfare state, but creates the institutional

framework for a further dismantling of national social and fiscal policies and the European

public sector. From a social, environmental and democratic perspective, this is undesirable. And

its economic return is disputed.

In itself a common currency could have its benefits, but with this project the European Union is

choosing the wrong path. It is time for reflection, reconsideration and a critical debate on the

economic agenda for Europe.

According to the Maastricht Treaty, the Member States of the European Union (EU) should meet

five nominal convergence criteria in order to join the EMU and adopt the euro, the single

European currency.

In addition to requirements regarding long-term interest rates, inflation and national debt, it

was prescribed in 1993 that the deficit of a government should not go beyond 3% of national

income.

It was only at the Intergovernmental Conference (IGC) that people started to think seriously

about how the EMU was meant to function. The interpretation of the EMU became clearer in

December 1996, when the leaders of the 15 Member States agreed upon the Stability Pact in

Dublin.

Essentially, the pact meant that Member States have an obligation to meet the 3% requirement,

even after joining the EMU, and must further reduce their budget deficit to 1%. This is to ensure

a rock-solid euro, in compliance with the guiding thought.

Attempts to meet this requirement have already led EU countries to implement drastic cuts in

public services, which have affected the most socially disadvantaged segment of the

population. The process of budget cuts will continue with the introduction of the EMU and the

euro over the next decade.

And in the not-so-hypothetical-possibility that Europe will once again have to deal with a

recession in the coming years, the rigid "Dublin demands" will lead it further down the spiral of

austerity and rising unemployment. In that case it is unlikely that the new European Central

Bank (ECB) will undertake a European stimulation policy After all, its duty is to give absolute

priority to price stability. Moreover automatic stabilisers at a European level are

lacking. Incidentally, European central bankers cannot be reprimanded, because the ECB

operates fully autonomously.

It is claimed that all of this might be a hindrance from a social point of view, but an economic

necessity, for which a general consensus exists among economists. That is not the case. There is

no scientifically sound economic underpinning for the requirements of the EMU and the new

course and position of the ECB as laid down in the Maastricht Treaty is not undisputed

among economists. In short, the economic philosophy behind the EMU fits in with monetarist

doctrines that are not shared by many economists. Moreover, it has a great affinity with a neo-

liberal ideology, which is met with growing criticism.

According to the monetarist vision the reduction of the public budget deficit will lead to lower

inflation, and lower inflation will automatically lead to higher economic growth and

employment. A cautious monetary policy should also continue to support this low inflation.

Economic research shows that this argument cannot be substantiated in a convincing manner

Based on research in over 100 countries over the period 1960-1990, R. Barro, professor at

Harvard and a proponent of anti-inflation policy, concluded that an inflation increase of 1%

yields a decrease in growth of 0.03 %t at the most, (Bank of England Quarterly Bulletin,

1995). In the Cambridge Journal of Economics (1993) researcher W. Stanners, who investigated

the development of 12 leading countries between 1950 and 1987, drew an even stronger

conclusion: the assertion that low inflation leads to high growth, cannot be proved.

Moreover, research by economists Akerlof, Dickens and Perry, published in Brookings Papers

on Economic Activity (1996) shows that in the United States, a decline in inflation from 3 to 0%

would lead to a rise in unemployment by 2.6%. It is only with an inflation of 8% or more that

negative impacts can be measured on growth, IMF economist Sarel concluded in 1996 based on

research in 87 countries over the period 1970-1990. The effects of an inflation rate between 0%

and 8% are nil or even positive.

Based on this and similar research prominent economists such as Krugman, Summers, Reich

and Nobel laureate Vickrey warned against the danger of rising unemployment as a result of

anti-inflation policy.

One might think that a deficit reduction down to 3% and the national debt to a maximum of

60% of the national income, are not unreasonable demands. Every citizen is in fact expected to

balance their accounts and limit their amount of debts. The interest expenses of the current debt

may hamper the economy in the future.

It is essential, and this is also recognised by advocates of the EMU, that no clear standards can

be set on scientific grounds: what makes a "wise" policy depends on economic conditions. There

are still many structural differences between Member States in the field of social and fiscal

legislation and other institutional arrangements. The requirements of the EMU are arbitrary,

they do not take into account these varying conditions, and they do not constitute any guarantee

for a real convergence.

The state budget deficit is the difference between expenditures and revenues. A deficit can

initially be reduced by increasing revenues (taxes). However, the current policy is focused on

the expenditure side: reduction of public spending. This entails extensive cutbacks, which cause

a great deal of social and economic harm; not least because many Member States are already

caught up in a web of cuts since 1982. There has been no meat left on the bones for a long time

already.

Due to the criteria used, a budget deficit of 3% and a national debt of up to 60%, these

percentages increase or decrease in practice with the evolution of the national income. A decline

in economic growth automatically increases the percent budget deficit. In view of the EMU test,

public spending should be cut even further.

There are good arguments for not cutting and in some cases even letting government spending

rise during times of economic decline. Such Keynesian-oriented policies fell out of favour

because the international interdependence of economies offers less room for national policy.

A common currency is precisely what makes an anti-cyclical spending policy possible, although

one cannot expect it to solve everything. But we see the opposite happening. The criteria for the

EMU and the Stability Pact Regulations are de facto paving the way for a European pro-cyclical

policy. This poses a threat particularly in the development of employment.

Besides, double standards are being applied in the evaluation of funding deficits: public deficits

are "bad", but large deficits of businesses are not mentioned.

The countries that are about to join the single currency will lose important tools for

macroeconomic policy. Within the Union this applies to exchange rate adjustments, which after

all will disappear with the arrival of the euro.

And with interest rates soon to be broadly the same everywhere, cross-border labour mobility

(still) low, and financial transfers lacking, the EMU countries would soon have only one

instrument to absorb economic shocks: public spending.

The circle is complete, because it is precisely the latter instrument that is blocked by the

aforementioned stability pact. Tough sanctions are foreseen for countries that exceed the

maximum budget deficit of 3%. Minister Zalm, co-author of the pact, told the Dutch Parliament

that a 4% budget deficit in our country, which would not be eliminated in time, could lead to a

fine of 2 billion euros. This means that the labour market will be handed the bill of these

economic shocks: in the form of unemployment, wage reductions and continuing flexibility.

This effect is reinforced by the fact that the EMU fuels policy competition between countries, as

much fiscally (see the recent row over the income tax) as environmentally and socially. This

policy competition will also block an ambitious national environmental policy, while a European

environmental policy involving energy taxes for example barely gets off the ground.

Finally, the socio-economic policy will seriously suffer from the asymmetric relationship

between the independent European Central Bank and the national states. The Bank will solely

watch over the solidity of the euro, and as the "only" important European social and economic

policymaking body it will hardly meet any significant opposition.

As a result of the policy competition, national states are facing a loss of capacity to act. Caught in

a monetarist web, they see their problems of unemployment, exclusion and environmental

degradation grow. The (German) fear of a weak euro is unfounded. The opposite is more likely

to be the case.

We conclude that the current EMU agenda is unsuitable for the Europe of the future. We protest

against the casualness with which the introduction of the euro currency is announced in the

Netherlands. A sufficient reason for this is the very fact that the Union still offers no perspective

of improvements for the 20 million unemployed and 50 million poor citizens of Europe.

The accession criteria have already taken their toll for several years in the Member States

themselves. They make the EU inaccessible in the coming years for most Eastern European

countries. The former EC Commissioner Ralf Dahrendorf already described (TVNZ, December

1995) the EMU agenda as unsound, in light of the current problems in Europe: "The price to be

paid for the EMU is very high." He is likely to be proved more than right.

The Promoters:

Geert Reuten, Amsterdam; drs. Kees Vendrik, Amsterdam: drs. Robert Went, Amsterdam.

The Signatories:

dr. Hans Amman (Amsterdam), drs. Luit Bakker (Rotterdam), prof.dr. Beek RA (Meerssen),

prof.dr. Jos de Beus (Groningen), dr.ir. Marcel Boumans (Amsterdam), prof.dr. Y.S. Brenner

(Bilthoven), dr. Mino Carchedi (Amsterdam), drs. Huub Cleutjens (Eindhoven), dr. A.F. Correlj

(Nijmegen), drs. M. Deblonde (wageningen), prof.mr.drs. Dik Degenkamp (Glimmen), dr. L.

Delsen (Nijmegen), drs. Maurits Depla (Woerden), drs. Frank J. Dietz (Rotterdam), drs. Wilfred

Dolfsma (Rotterdam), drs. Kris Douma (Woerden), prof.dr. Louis Emmerij (Washington),

prof.dr. Jrg Glombowski (Tilburg/Osnabrck), prof.dr. Bob Goudzwaard (Driebergen), prof.dr.

Siv Gustafsson (Amsterdam), drs. W.J. den Hertog (Amsterdam), drs. L. Hoffman (Capelle a/d

IJssel), dr. Nel Hofstra (Rotterdam), dr. Bas Kee (Amsterdam), drs. Andries Klaasse Bos, prof.dr.

Arjo Klamer (Hilversum), prof.dr. Alfred Kleinknecht (Bussum), drs. Edith Kuiper (Amsterdam),

prof.dr. T. Kumpe (Geldrop), dr. Gerard Kuper (Groningen), drs. Nico Lamperjee (Amstelveen),

dr. Fieke van der Leck (Groningen), drs. Raoul Leering (Amsterdam), prof.dr. Coby van der

Linde (Leiden), dr. Marcel van der Linden (Amsterdam), prof.dr. H. Linnemann (Leidschendam),

drs. Harro Maas (Amsterdam), dr. Henritte Maassen van den Brink (Amsterdam), prof.dr.

Angus Maddison (Groningen) prof.dr. J.B. Opschoor (Den Haag), drs. R.H.M. Paping

(Zoetermeer), dr. Janneke Plantenga (Utrecht), dr. Kees van der Pijl (Amsterdam), dr. Joop

Roebroek (Tilburg), drs. Ronald de Ridder (Houten), drs. Gisela Schade (Den Haag), prof.dr.

Hans Schenk (Rotterdarn), dr. Arthur Schram (Amsterdam), drs. Wicher Schreuders

(Rotterdam), prof.dr. Jacques Siegers (Bussum), drs. Bart Snels (Utrecht), prof.dr. Luc Soete

(Maastricht), dr. Irene van Staveren (Rotterdam), drs. Hugo Strikker (Amsterdam), drs. P.

Tassenaar (Groningen), drs. Marcel Timmer (Eindhoven), dr. Rob van Tulder (Rotterdam), drs.

Wessel Visser (Gouda), dr. P.E. Visser (Amsterdam), prof.drs. P.J. Vos (Egmond a.d. Hoef), dr.

Jack Vromen (Rotterdam), prof.dr. Marco Wilke (Tilburg), dr. Thomas Ziesemer (Maastricht).