A young EMU looks toward Central Europe

M O N E T A R Y   U N I O N:
Why Do It?

Rob Smith

This is a continuing series in Central Europe Review, and, as the series deveolps, it will provide an expanding guide to the commercial and cultural implications of European Economic and Monetary Union (EMU) for Central and Eastern Europe. For the first article in the series, click HERE.

In our second article in the series, we address how EMU came to be the essential next step in the development of Western Europe. With its huge dominance of European trade, the EMU zone, (comprising Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg, Portugal and Spain), has a significant impact on development throughout Central Europe. It is only with a clear understanding of where EMU is leading that the countries of Central Europe can prepare adequate plans for their possible participation.

The EU itself was originally envisaged to put an end to 1,500 years of intermittent warfare. By combining the political and economic infrastructures of each member state, the intention was to make nations truly interdependent, thus making war unlikely. At the same time, it demonstrated how a collaborative approach to the development of national interests could make war unnecessary. The fact that there has been peace between the member states in the intervening 50 years goes some way to proving the success of this ideal.

The development of an economic unit larger than the USA, with over 370 million inhabitants and a combined GDP in excess of 7 trillion euro does not happen overnight. From the initial faltering steps of the European Coal and Steel Community (ESCS) in 1951 to the completion of the EMU transition in 2002 has taken over 50 years of struggle, compromise and dogged determination. It has been a continuing process of closer and closer economic harmonisation and trade dependency. With each step, benefits have been consolidated and new structures and relationships identified.

It took six years for the member states of the ESCS (Belgium, France, Germany, Holland, Italy and Luxembourg) to also form the European Economic Community, (EEC) in 1957 and a further ten years before the two were consolidated together with the European Atomic Energy Community in the European Community. Six years later, the number increased to nine by including Denmark, Ireland and the UK. Greece joined in 1981, Spain and Portugal in 1986 and Austria, Finland and Sweden in 1995.

In 1991, the Maastricht Treaty was signed creating the European Union, with an understood commitment to ever closer union and joint foreign and justice policies. The next step was the introduction of the single currency and the harmonisation of economic and monetary policies within EMU. Only eleven of the fifteen member states took this last step, however, with Greece, Sweden, Denmark and the UK not participating.

There remain many sceptics regarding the wisdom of EMU, most of whom reside in the non-participating EU member states. The alternative is to either accept that the current state of market integration was the limit of members' aspirations or to attempt to force through a political integration against possible voter rejection and political in-fighting. Lured by the possibility of creating the world's largest economic region, the politicians went ahead with the economic side, but decided to avoid the riskier route of forcing through the change at a political level. By combining the monetary policies and eliminating exchange risk, the bureaucrats and politicians let loose the economic market forces that would inevitably sweep the changes through.

These economic and market forces work in two directions. The first of these is the recognition that a single market with a single currency replaces the need for national industries with European ones. There are many sector examples where the number of European companies significantly exceeds the number in the similarly sized US market place. Clearly, there will be an extensive period of market consolidation, mergers, alliances and acquisitions. The creation of European champions drives the need for common commercial legislation and a fiscal and accounting framework to support them. The alternative is fiscal competition between member states. This discussion is already well developed.

With common economic, monetary and commercial structures in place, the completion of the process of political integration is much easier. This is the long term aim of EMU.

The second direction of the economic and market focus affects national economic regulation. With common monetary policy, economies are forced into harmonisation or driven to extremes. Irish economic overheating and the stagnant German economy are examples of the effects of being significantly different from the average. Both governments are working towards bringing their markets closer to that average.

The complexity of this harmonisation should not be underestimated. Economic management remains a national tool, but is aimed at a shared objective. The closest analogy is of eleven people trying to drive to a place they've heard about by each controlling one aspect of the vehicle. Three hands on the steering wheel, two on the brakes and another four on the accelerator.

Whether the commercial drivers can force through the necessary changes before the economic stresses exceed the management capabilities remains to be seen.

Rob Smith, 11 September 1999

The author is an independent management consultant.

For more information on preparing for and coping with EMU, have a look at the website of Evergreen euro.