The European Union Explained: Institutions, Actors, Global Impact

13. Economic and Monetary Union

13 Economic and Monetary Union The introduction of a single European currency and the coordination of economic and monetary policies are perhaps the most ambitious aspects of European integration. Without historical precedent, the launch of the Euro in 1999 was awaited with much euphoria, but also some skepticism. This chapter establishes the reasons for launching EMU and points up the criteria that member states must now meet in managing their national economies. The discussion then turns to an analysis of the advantages of having a supranational EMU while also focusing on the potential and real shortcomings. The key issues are the following: What are the economic and political benefits and costs of EMU? 1. Why did the member states embark on an EMU? 2. What are the implications of a more or less independent European 3. Central Bank? 14-EUE Ch13 (112-20).indd 112 9/24/08 9:11:14 AM Economic and Monetary Union · 113 Political-Economic Challenges Economic and Monetary Union is a classic example of political economy and how public authorities manage a state’s economic and social well-being through political , economic and fiscal policies. Of the many approaches to political economy, the theories of John Maynard Keynes have long been the most influential in driving Western governments to adopt proactive, economic policies moderating the societal effects of alternating recessions and economic booms. Keynesianism was adopted successfully in the United States by President Franklin D. Roosevelt in the 1930s, at the height of the Great Depression. During this world economic crisis, the Roosevelt administration undertook massive public works projects to create jobs.1 Roosevelt calculated that a growth in employment could boost the economy, since people simply would have more money to buy products. According to Keynes, the money required for such massive public projects would eventually be recuperated by increased tax revenues arising from the subsequent economic upturn. He referred to this investment by the state as deficit spending and argued that governments should adopt a so-called anti-cyclical policy, meaning that in a time of recession state authorities should act as if the overall economic climate was positive.2 Keynesian principles were questioned in the 1970s as a result of a steep increase in oil prices, a devalued U.S. dollar, and widespread recession across many Western countries. One of Keynes’s chief critics, Milton Friedman of the University of Chicago, argued the opposite of Keynes. Instead of being a proactive actor, the state should not intercede in the economy but should retreat and concentrate only on providing a stable monetary framework within which market forces could freely interact. This so-called monetarist theory is based on the principle that governments should never act to moderate business cycles but should concentrate on stabilizing the value and supply of money.3 Governments have various instruments with which to fine-tune and manage their economies. To name just two, interest rates can be regulated4 as can minimum bank reserves.5 Apart from these monetary instruments, a government’s tax policy—directly through income taxes or indirectly through sales taxes and on duties imposed on tobacco, petrol or alcohol—can also be effective, as it directly affects consumers’ disposable income. Every government is also an employer, and so setting wages naturally has an impact on the amount of money that can be spent on cinema tickets, restaurants, and holidays. The key economic objectives that governments must attempt to meet are growth, high employment levels, and price stability and trade balance. Governments often find it difficult, however, to keep all four objectives in balance. For example, if a positive investment climate increases employment and therefore economic growth, inflation may result as prices often rise when businesses attempt to profit from higher disposable income. Inflationary tendencies, in turn, may lead to a negative trade balance, as exports become more expensive. The end result may be 14-EUE Ch13 (112-20).indd 113 9/24/08 9:11:15 AM 114 · Policies reduced employment as companies lay off staff, which then would lead to a decline in economic growth. Clearly, therefore, societies that attempt to reform their monetary and economic systems face potentially monumental changes. This chapter describes how EU member states approached this delicate balancing act by focusing on the instruments, provisions, and institutions that now determine monetary and economic matters in the EU. The process was quite daunting: to merge different national policies for...