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Through a workshop held at the International Institute on November 12, 1999, the Center for European Studies (CES) sought to inform academics, students and interested citizens about the unification of European currency and its wider sociopolitical implications. Participants and support came both from within the University (economics, public policy, the Business School, the Davidson Institute, the Center for International Business Education, the Office for the Vice President for Research, the Center for Russian and East European Studies and the International Institute) and from without (the Delegation of the European Commission in Washington, Tufts University and the University of Trento, Italy). Readers can find the schedule of the conference and transcripts of the proceedings on CES's web site: www.umich.edu/~iinet/ces and www.umich.edu/~iinet/ces/euroconference.
On January 1, 1999, 11 countries — België/Belgique, Deutschland, España, France, Ireland, Italia, Luxembourg, Nederland, Österreich, Portugal and Suomi/Finland — adopted a single currency, the euro, and gave sole responsibility for monetary policy to the European Central Bank (ECB). Skeptical observers who believed this would never come to pass were confounded. American citizens, poorly informed by the media, woke up to a Europe suddenly more tightly knit. Since then, the progress of integration has only accelerated and deepened. Talks about a European force of intervention are underway. A newly confident Parliament forced the European Commission to resign en bloc in March. The participation of Jörg Haider‘s Freedom Party in Austria‘s ruling coalition has prompted a vigorous reaffirmation of ‘European values,‘ which do not include anti-immigrant sentiments and expressions of sympathy for members of the Waffen-SS.
All this happened despite the uneven performance of the new currency. From a high point of $1.18 on its birthday, the euro slipped for the first time below parity with the dollar on January 27, 2000. But the euro, like European integration itself, is a process that Fernand Braudel would recognize as one of moyenne durée. For over 50 years, 15 western European economies and societies have been slowly converging. Eleven of them (except Great Britain) now share the same currency and the same macroeconomic policy. The countries of euroland have thus agreed to grant a supranational, supposedly technical agency sovereignty in what had been the jealously guarded domain of individual nation- states. The EU has grown politically thanks to economic integration. So if the economy does not work, the political will is thwarted. To assess the chances for the euro‘s success means to assess the political will to make it work.
The game of mirrors between politics and economics was the leitmotif of the CES conference. Economists weighed the pluses and minuses of the euro experiment. Sociologists, historians and political scientists set the new currency within its highly complex institutional and social contexts. The conference attracted about 80 people, many from the non-academic world. Its success appears to have proved the organizers right: more accurate information on the euro and the European Union is sorely needed in the region.
Steven Whiting, director of CES, emphasized in his opening speech that the euro experiment is the boldest in a series of steps that aim at deeper integration of the Union. Monetary union thus emphasizes that a new political entity is in the making. This entity — for which all existing labels sound inappropriate — is being created through the most interesting constitutional experiment since the founding of the American republic, according to Whiting. European integration has generated Euroskeptics as unification of the 13 colonies generated antifederalists. Two centuries apart, their arguments sound alike, as Whiting showed by reading a passage from the Baltimore Gazette of 1788 that, mutatis mutandis, might have been written by Margaret Thatcher. Euroskeptics may well be proven wrong; but what would it take to derail monetary and political integration and prove them right?
Several contributors emphasized the dangers. While the ideal moment for currency unification would surely never have presented itself, the differences among the 11 countries of euroland are definitely greater than one might wish.
As a frame of reference, Michael Klein (Tufts) suggested the analysis of economist Robert Mundell. According to Mundell, Europe is not an optimal currency area because quite suddenly countries that used to be partially insulated from one another by different monetary and exchange policies will have to sing the same tune. And euroland lacks the adjustment mechanisms necessary to substitute for movements in the exchange rates in the face of differential economic performance. In the United States, a high degree of labor mobility and the federal tax and transfer system help absorb the shocks of varying boom and bust cycles in different regions of the country. In Europe, the labor market is more rigid; historical variations among countries and regions are greater; linguistic barriers hinder workers‘ mobility. And protective legislation, as Frank Stafford (U-M) pointed out, makes European workers reluctant to move in search of new jobs. They prefer to stay home, even at the price of less than optimal occupational opportunities.
The existence of a truly national economy in the United States and an imperfect continental economy in euroland constitutes the major hurdle for the latter. Despite their recent economic convergence, differences between, say, Portugal and Germany remain huge. Asymmetrical economic cycles are thus likely to characterize the European economy for years to come: smaller and/or less rich countries — Spain, Finland and Ireland — have been growing at a much brisker pace (four percent, five percent and nine percent, respectively, in 1998) than bigger and more established economies — Germany and Italy (2.8 percent and 1.4 percent, respectively). Even more worrisome, German and French economies, which usually proceed in tandem, have been "decoupling" recently, with Germany losing ground (0.5 percent at the beginning of 1999) and France gaining it ( 2.1 percent).
The constitutional structure of the European Central Bank itself may exacerbate this problem — a refrain we heard from Jim Adams (U-M), Klein and Robert Franzese (U-M). The "Growth and Stability Pact," which establishes the ECB‘s tasks, is dangerously rigid, according to Klein. Inflation may not exceed two percent a year, a very ambitious target even in these times of low inflation; public deficits may not exceed three percent of GDP, under penalty of a fine. The ECB, which is even more independent than the Federal Reserve, is solely responsible for setting the exchange rate for the 11 euro-countries (now at three percent). In March 1999, a skirmish broke out with Oskar Lafontaine, then finance minister of Germany, who wanted the ECB to lower interest rates. In order to prove its independence, the ECB refused, despite a sluggish European economy. As soon as the minister lost his job, however, the bank adopted precisely that course of action.
In the presence of substantial asymmetries, countries will be affected differently by the ECB‘s setting of a blanket exchange rate for euroland as a whole. Deprived of two classical tools of macroeconomic policy — tax rates and currency management — governments can only rely on raising or lowering taxes to stabilize the economic cycle.
If the major problem lies in the differentials among euroland countries, does the solution lie in stepping up harmonization of pensions systems, tax systems, educational structures and so forth? Joel Slemrod (U-M) underscored the difficulties of harmonizing the tax system. To be sure, there are discussions in Brussels about withholding 20 percent tax on euro-savings; even Lafontaine‘s idea to tax profits at 30 percent to 40 percent is under consideration. Right now, however, with the exception of the Value Added Tax (VAT), which all European countries (plus non-European ones) have adopted, tax regimes vary greatly, especially with regard to income taxes. Domestic and foreign investors are treated differently. Thresholds for establishing taxable income vary. The elimination of border controls on trade and capital movement will induce firms to locate production in the country where tax rates on profits are the lowest, as Ireland‘s remarkable economic growth bears witness. If there were to be a rush toward ever lower rates (zero being the absolute limit), how could countries manage without those revenues? And what could the Union do to face off the political repercussions of such a race to the bottom?
As if these hurdles were not enough, there are social, institutional and political difficulties. Some are the product of history, but others arise from the process of integration itself.
Adams offered an illuminating example of the questions arising from the interaction between European institutions on the one hand and society at large on the other. Only keen observers of communitarian matters are aware that the European Court of Justice has been an active policy maker, in a role similar to that played by the U.S. Supreme Court after World War II. By enforcing on individual countries, sectors and firms the laws approved at the level of the European Community (now Union), the Court has profoundly affected long-standing national practices. In the exemplary case chosen by Adams, the German beer market, regulated since the Middle Ages by strict purity laws, was suddenly thrown open to producers following looser practices. As typical of judicial decisions, the Court was not concerned with the question of what rules ensured the production of the best beer (provided no harm to consumers would ensue, of course); it merely weighed different legal principles against one another. The Court thus decided that the principle of free movement of goods and services in Europe trumped local German norms, because these de facto created a protected market for German producers.
What role is the Court going to play when it comes to "enforcing" monetary union? asked Adams. Thanks to the single currency, competition will increase. Fluctuation in exchange rates and the associated economic risk to producers and traders have been eliminated together with currency exchange fees. Prices will be reduced to the sum-total of the costs of production and distribution, which will increase competition. (As Robert Stern reminded the audience, there may be some residual price "stickiness," meaning that firms will keep prices higher than they should be, out of inertia.) Why should the prices of two more or less equivalent TV sets vary by, say, 30 percent in two euroland countries? Will countries where the costs of production are higher be tempted to protect their national markets? Will foreign producers or consumers resort to the Court of Justice if they come to believe that nation-states are adopting tax regimes aimed at favoring national producers? After all, as Slemrod suggested, fiscal policy can be used to help national investors, thus affecting prices in the same way as tariffs on imports or currency adjustments can. Not only will the Court have to adjudicate disputes in the market place. The European Central Bank itself can be suspected of adopting policies that favor one country or set of countries over another. And as confirmed by Eric Stein (U- M), both individual countries and the Commission are entitled to sue the Bank. It is no surprise that observers — be they European citizens or not — feel lost in the maze of continental policy and politics. Can the introduction of the euro simplify matters, at least when it comes to economic and financial markets?
Several contributors to the conference touched on this point. Günter Dufey (U- M) and Klein pointed to the absence of speculative currency movements in Europe since the introduction of the euro. It is easy to overlook the absence of a negative effect. But if we look back just two years, we can easily remember the roller coaster movements upsetting European currencies, even when they were more or less tightly pegged to one another (with the Deutsche mark as the central currency). Since its introduction, the euro has lost value. It may have been set too high to begin with. Undeniably, the ongoing expansion of the American economy, accompanied by higher interest rates, makes the dollar more attractive. There are also some "speculative" movements, if only in the sense that the euro "should" be higher, since the fundamentals of the European economy have been getting better for a while. Perhaps, as The Economist recently suggested, financial markets are reacting to mixed signals from the German government with regard to economic policy. But compared to pre-euro speculative frenzy, recent oscillations would seem to reflect normal market reactions to a variety of stimuli.
The euro has thus brought some stability to financial markets. Besides reducing costs, the single currency is truly creating a single market, where resources will move much more easily and much faster. A study by Engle and Rogers on prices in 55 European cities and 11 countries, Stern said, showed that exchange-rate variability accounted for a very large proportion of the observed price differences. Stern also emphasized that gains would come from larger economies of scale, as the sudden spike in merger and acquisitions already shows. These are cost-saving devices, which should make products cheaper. And according to Dufey, this holds true even though some mergers reflect an attempt to circumvent communitarian anti-trust policies and even though transborder mergers are few, especially in the financial sector. Both Dufey and Klein agreed that European financial markets are already "deepening": last year alone, the number of issues in euro fixed-income securities doubled, and the volume in euro is now greater than the equivalent volume in dollars. This increase should change the pattern of corporate finance, which in Europe has relied heavily on banks.
Can we express in terms of (potential) economic growth the advantages ensuing from the creation of a single market, the simplification of trading and payment procedures and the increase in capital available outside the bank system? Some indicators suggest that we can. For example, Stern cited a study which concluded that exchange-variability alone may have depressed trade among the 15 members of the European Union by as much as eight percent between 1970 and 1995. Even granting that only 11 countries belong to euroland, we should expect a significant increase in trade and, therefore, economic growth, for those countries trade mostly in goods and services that they themselves produce.
However, while the euro simplifies some matters, it complicates others. As already mentioned, with currency management now assigned to the ECB, governments may resort to levies, both to protect national producers and to attract foreign investments. But the rigidities in the "Growth and Stability Pact" are even more troubling because high unemployment rates persist in Europe. Franzese persuasively showed that the transfer of macroeconomic tools to the ECB will prevent national governments from using those very same tools in their employment policies. De facto, European countries relied heavily on deficit spending to create jobs, or to subsidize the unemployed population. Since this is no longer an option, how can unemployment be reduced in euroland? Here, opinions differ sharply. Stafford, representing the consensus of American economists, stressed that an inflexible labor market is largely responsible for high levels of unemployment.
Paola Villa (Trento) countered that European economies have adopted more flexible labor market policies since the early 1970s, with no appreciable results. In her opinion, the move to a more integrated Europe will only make matters worse. Lack of job creation — that is, lack of investments — is largely to blame for high unemployment. If that be so, then why is the European economy no longer able to create jobs? Because of the high cost of labor, burdened with heavy fiscal contributions? Because the shift from a manufacturing economy to a service economy is incomplete? Because Europe is late in adopting information technology? As in real life, so too during the conference, this fundamental question remained unanswered. But Klein suggested that the question of unemployment is likely to be the crucial one for the European Union. As the nation-state once gained legitimacy with the population at large by launching massive redistributive policies, so too solving the problem of unemployment may well gain legitimacy for the Union among citizens still staunchly attached, if the polls are correct, to their national identities.
Since the euro is leading to a more integrated Europe, what kind of collective identity will emerge from this process? To what extent is Europe becoming one for its citizens? Can the nation-state path to a shared identity be reproduced on a larger scale? Does the multiplication of local and regional identities all over the continent bode ill for an integrated Europe?
Our contributors offered ambivalent answers. In many ways, Europe remains an abstraction. The euro coins and banknotes, chosen by Robert Howse (U-M) to illustrate this very point, are devoid of any concrete reference. Portraits of great men, monuments and battle sites would inevitably remind people that what for one country is a national achievement may be a debacle for another. Abstraction is much safer. But do abstractions have the power to unite people? If not, how can Europeans feel they are one? According to Howse, this is an issue if we regard the nation-state as the only available model. There may be alternatives to linking citizenship with nationhood. Allegiance and a sense of shared values might provide a sense of belonging predicated upon acting in concert toward common goals, rather than upon a common past or the myth of national blood.
But to what extent do European actually share values? Wayne Baker (U-M) pointed to the variety of value systems within the Union, and to even more divergent patterns in eastern European countries eager to join. Tradition- and survival-oriented systems, as Baker and Ronald Inglehart label them, could be considered remnants of the past, if we adopted the classical theory of modernization. But they may just as well be reactions against a rapidly changing economy, shaped more by the service sector than by manufacturing and more by the intrusive demands of globalization than by nation- making. Joining the Union will require that eastern European countries move even more quickly toward a post-industrial economy, which may only reinforce defensive ideological reactions. Jan Svejnar (U-M) noted that the Czech Republic, Poland and Hungary are ready and willing to incorporate European Union‘s norms. But this consent remains on paper; the norms are neither implemented nor enforced, in part, one may argue, because of widespread aversion to accelerated change.
The challenge of avoiding defensive postures is further complicated by the growing presence of minorities from countries of the former Soviet Union and from North Africa. Immigration has important implications, in both theory and practice. To forge a practical sense of belonging, Albert van Goudoever (Utrecht, U-M) suggests the concrete step of granting rights of citizenship to all those who work and live in a European Union country. Why don‘t we divorce citizenship from the nation-state, as Howse also indirectly suggested? Let citizenship be a tool needed by all to live secure and responsible lives, not a passport to privileges or an instrument of exclusion. Both van Goudoever and Auke Haagsma (European Commission) reminded us that members of the European Union participate in and enjoy different layers of "citizenship": local, when it comes to getting married, obtaining a driver‘s license or voting for a mayor; national, through which (ideally) historical memory can be reaffirmed and renewed; and continental, which will become increasingly useful as continent-wide phenomena take hold. We should not look at citizenship as a scarce or finite resource that is dissipated if granted to too many people.
The connection between immigration, citizenship and resources brings us to the next point, more strictly theoretical. In poorer times, aversion to foreigners may well have been a response to the relative scarcity of resources. We are not surprised when those who do not have enough wish to keep competitors out and are therefore prone to adopt anti-immigrant ideologies. And yet, if we look at today‘s Europe, we see anti-immigrant ideologies most pronounced in the richer regions of the continent: Lombardy and Veneto with their Northern League, west Germany with its skinheads and neo-Nazis, and, recently in the news, Austria with its Freedom Party. For want of creativity and political imagination, these movements may hark back to the fascist and Nazi monsters of the twentieth century; yet their ideology can more accurately be described as neo-corporatist and defensive, rather than fascistic and imperialistic. These groups exemplify the fragmenting effect that the decline of industrial society has had on social classes, economic strata and ideological worldviews. They do not seem amenable to being molded into "one nation," nineteenth-century style; nor can they give life to the United States of Europe.
Finally, most of our contributors compared the European Union to the United States as a heuristic device — and one especially fitting to an American audience — for the purposes of illustration and description. Even so, listeners might be excused if they left with the impression that one term of the comparison — the United States — was the model of emulation by the other term. After all, the United States came into being as a federation of existing states. Its constitutional structure is enshrined in one document, the Constitution; yet it has proven remarkably flexible. The progressive enlargement of the country, and its relative success at absorbing populations from the four corners of the earth (with the notable exceptions of Native Americans and African Americans, for different reasons and with different trajectories) might seem to point the way for the European Union. But I think that the analogy prevents us from recognizing the specificity of the European situation and from placing l‘imagination au pouvoir.
After World War II, in a decimated and diffident Europe, Jean Monnet, Robert Schuman, Altiero Spinelli and their supporters furthered the integration of western Europe through the slow, piecemeal and adaptive coming-together of economies, societies, and at the time strongly diverging national cultures. They adopted a Polybian approach, for it was the classical historian Polybius who made us aware that Rome achieved its remarkably successful constitutional system not through the master-plan of a great Legislator, Greek-style, but rather through successive adjustments of its institutions in response to changing social, geopolitical and military conditions. We do not know yet whether Europe has inherited the Romans‘ genius. Recent events in Austria show that nineteenth-century-style politics and diplomacy are hard to let go. Rather than engaging in ostracism, why do not EU countries handle die Haider-Frage by taking a further step toward European harmonization, this time in the field of laws regulating immigration? Then national laws would be trumped, and Mr. Haider would find it much harder to adopt discriminatory policies. In other words, we should outflank him, not declare war against him.
Such considerations may bring us a long way from an article on the euro. But that is the tale of European integration — and as Auke Haagsma reminded us, the questions facing the European Union are also the questions facing Europe.
Daniela Gobetti is the program associate for the Center for European Studies. She is a political theorist who received her PhD in political science from Columbia University in 1987.