Banking on Reform: Political Parties and Central Bank Independence in the Industrial Democracies

Chapter 8. Europe’s Commitment to the Single Currency

CHAPTER 8 Europe's Commitment to the Single Currency After more than a decade of stagnation, the European Community enjoyed a revitalization in the 1980s. The 1986 Single European Act made concrete plans for the completion of the internal market, a goal established in the 1950s, by the end of 1992. Unlike any European initiative before it, the"1992 program" captured the public's imagination and generated widespread excitement. Buoyed by this enthusiasm, Europe's leaders looked to take another big step toward full political integration. So in December 1991, in the Dutch town of Maastricht, they signed the Treaty on European Union, committing themselves to the creation of an Economic and Monetary Union with a single currency for all participating countries. The treaty laid out an explicit timetable for the transition to the single currency-by January 1999 at the latest. It required member states to meet specific economic performance indicators, the "convergence criteria;' by that time in order to qualify for participation. These criteria set limits for inflation rates, interest rates, budget deficits, the level of government debt, and exchange-rate stability and were designed to ensure that participating countries would have sufficiently similar economies to guarantee a successful transition. The treaty also included an "opt-out" clause, which allowed member states not to join the single currency if they did not desire to do so. Finally, the treaty called for a single European central bank, independent of direct political control, to manage monetary policy. Yet instead of solidifying public acceptance of European integration, the treaty met with widespread skepticism. Difficulties with ratification and a currency crisis within the EMS quickly eroded confidence in the plan. Moreover, the convergence criteria prolonged a Europe-wide recession throughout the entire 1990s. Despite sluggish economic growth and rising unemployment, memberstate governments were forced to pursue fiscal restraint to meet the targets for 155 156 Banking on Reform budget deficits (no more than 3 percent ofGDP) and debt levels (no more than 60 percent of GDP). In turn, the popularity of member-state governments suffered. As a result, the single currency remained in doubt throughout the 1990s: Would member states follow through on the plan? Which member states would qualify under the convergence criteria? What countries would choose not to participate? As late as 1997, one observer wrote, "The Treaty of Maastricht sets a clear timetable: a single currency will come into being no later than 1999. It may seem that all that remains is to watch the countdown before liftoff . Nothing is further from the truth. Power in the boosters is not assured; last minute checks reveal a number of blinking red lights; and politico-economic pressures are building up to dangerous levels. Public support for the euro is lukewarm at best" (Wyplosz 1997, 16). Nevertheless, politicians in Europe remained committed to the Maastricht plan. And in January 1999, the single currency, the euro, came into existence. Eleven of the 15 member states participated (Britain, Denmark, and Sweden opted out; Greece was judged not ready to join). In light of the uncertain consequences of the single currency, the short-term political costs of complying with the convergence criteria, and the economic slump, this commitment is remarkable . Why did politicians adhere to the single currency? I argue that this commitment reflects in part the incentives and constraints faced by political parties in western Europe. With the diversification of constituent policy demands and decreased policy discretion under the EMS, the political value of controlling national monetary policy had declined in the 1980s. Instead, politicians perceived that delegating monetary policy to the European level could help manage intraparty conflicts over economic policy and allow them to rebuild social coalitions. The promise of these domestic political benefits helps explain the commitment to the single currency. This chapter first reviews traditional explanations of the origins of the Maastricht Treaty, which focus on international and state-level interests. The second section explores the debates and uncertainties surrounding the Maastricht Treaty during the 1990s. The third section discusses how the single currency can help political parties win and retain office. The fourth section explores the implications of the single currency for the future of the EU. Origins of the Single Currency Political economists studying the EU have used the traditional frameworks of neofunctionalism, intergovernmentalism, and international state competition to explain the move to a single currency.l Europe's Commitment to the Single Currency 157 Neofunctionalism...