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ECONOMIC AND MONETARY UNION (EMU): The Currency without a State

Sixten KorkmanAalto University, Spring 2014

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Objectives of the course on EMU Getting familiar with the basics of the EU

Achieving a good understanding of the EMU- background, history, rationale

- institutions and policies- problems and reforms- debate

Main emphasis on the policy issues; elementary open economy macrotheory to the extent that it helps set out the policy issues

General references (on the EU/EMU in general): - Richard Baldwin and Charles Wyplosz (2009): ”The Economics of European

Integration”, McGraw-Hill (mainly chapters 1-3,9-11, 16-19); - Paul de Grauwe (2012): ”Economics of Monetary Union”, Oxford University Press; - Sixten Korkman (2005): ”Economic Policy in the European Union”, Palgrave (chapters 1-4).- Sixten Korkman (2013): ”Euro: valuutta vailla valtiota”, Taloustieto- lots of articles in, for instance, Voxeu

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Main elements of the course on EMU1. The EU: history, identity, rationale

2. The EU: institutions, areas of competence, decision making

3. The EMU: genesis

4. Policy issues in the EMU: theoretical considerations

5. EMU: experiences during the first decade

6. The euro area debt crisis

7. Reforming EMU: the debate

8. Fiscal and Political union: towards the United States of Europe?

9. Exit the euro area?

10. The future of EMU

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1. The EU: history, identity, rationale

1.1 EU: early intellectual precursors

1.2 EU: milestones of its history

1.3 EU: definition

1.4 EU: rationale

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EU: early intellectual precursors

• Willian Penn (quaker and later founder of Pennsylvania): ”The present and future peace in Europe” (1693, in the light of the horrors experienced in Europe during the 30 years’ war)

- a European parliament (of kings and princes) with compulsory arbitration powers- a rotating presidency, qualified majority voting, a specific allocation

of votes,a two-language regime of Latin and French (in many respects a construction quite similar to the EU of today) - the ”Turks and the Moscovits” were assumed to participate

• Charles de St Pierre: ”Le projet de paix perpetuelle” (1713)- peace should be assured by a European confederation with a

permanent arbitration council, gave some inspiratin much later for the League of Nations

• Aristide Briand: ”Mémorandum sur l’organisation d’un régime d’unon fédérale européenne” (1930)- a plan for the United States of Europe with economic collaboration

and provision of security to Eastern Europe against Soviet threats- prime minister of France 11 times and received the Nobel peace price, but nothing came

of it as the Nazis got power

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EU: milestones of its history (1)

• The devastating consequences of world war II, death toll: the Sovjet Union more than 20 mion, Central and Eastern Europe over 9 mion (of which Poland more than 6 mion) and:

- Germany 6 363 000- France 505 750- Italy 355 000- United Kingdom 325 000- Austria 525 000- Belgium 82 750- Netherlands 250 000- Finland 79 000- Norway 10 250- Denmark 4 250- Sweden 0

NB: Unfettered nationalism was blamed (Konrad Adenauer: ”Nationalism is war”), rather than Germany (lesson from WWI) or the capitalist system (the Sovjet view)

NB: The postwar political constellation was such that the US and UK supported European integration because of the cold war, France saw it as a way of countering UK-US influence, Germany as the route towards re-establishing Germany as a ”normal” nation

NB: Only Finland, Sweden and the UK were never occupied (?)

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Dresden February 1945 (more than 1200 heavy bombers dropping almost 4000 tons of high-explosive bombs

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EU: milestones of its history (2)

• 9.5.1950: the Schuman declaration, based on ideas of Jean Monnet, proposing the pooling of French and German steel production under a single joint authority with supranational powers to make war between these historical rivals ”not merely unthinkable but materially impossible” and as ”a first step in the federation of Europe”

• 1951: The European Coal and Steel Community (ECSC) is set up with six members (Germany,

France, Italy, Benelux)

• 1957: the European Economic Community (EEC) is set up by the six with a wide remit (customs union, single market, common agrcultural policy)

• 1986: the Single European Act generalized qualified majority voting (QMV) and set the deadline of 1992 for completing the internal market (through the abolition of physical, fiscal and technical barriers)

• 1992: the Maastricht treaty with a blueprint and timetable for the EMU

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EU: milestones of its history (3)

• Subsequent treaties have extended the role of the EU in some areas (such as justice and home affairs) and have made institutional adjustments to pave the way for enlargment to the east

• The latest treaty, the Lisbon treaty (2007), introduced changes related to institutions and governance (as a follow-up to the failure of the ”Constitutional treaty” to be ratified in France and the Netherlands)

• The EU has successively been enlarged from the original six to by now 28 members:– 1973: the UK, Denmark and Ireland – 1981: Greece– 1986: Spain and Portugal– 1995: Austria, Finland and Sweden– 2004: the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia, Slovenia, Malta, Cyprus– 2007: Bulgaria, Romania – 2013: Croatia

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EU: definition

The EU defined (shorter version): The EU is an instrument for pursuing common European interests, basically by supranational means

The EU defined (longer version): The European Union, based on a community of values, is a system of governance for pursuing the common interests of European states and citizens, through integration by common policies and coordination of policies, within a framework of common institutions, upon which member states have conferred supranational powers in the treaties. (Korkman (2005))

NB: To state that the EU is more than an international organization but less than a federative state (as is often said) is correct but not very informative

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Comments: community of values

• Europe is a geographical entity, with contested borders, but it is also a cultural community: it rests on shared values based on its history and culture

• The heritage of European civilization includes, e.g., classical antiquity, Christianity, the Enlightenment; cf. Ernest Renan: ”Europe is Greek in its thought and art, Roman in its law, and Judeo-Christian in its religion”

• The baggage includes numerous isms (ideologies) as well as two world wars in the 19th century only

• The European identity is difficult to identify and diversity is one of its characteristics (but the identity exists and the EU is an expression of it)

• The common weltanschauung inludes values like freedom, human rights, rule of law and democracy (increasingly embraced in much of the world)

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Comments: common interests

• Above all: preservation of peace in Europe (through interdependence, integration and democracy, fostered by and within the EU)

• strengthening the European economy and its competetiveness

• defending the ”European Social Model” and the welfare state

• enhancing environmental considerations in Europe and globally

• ensuring a global role for Europe

• The activities of the EU are indeed wide ranging

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The chicken game

Player A Be aggressive

Player B No Yes Be No 2 (2) 3 (1)

aggressive Yes 1 (3) 4 (4)

The outcome is unpredictable, it all depends. However,serious chicken games on security are inconceivable in the EU, not least because of the large interface of actors.

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The prisoner’s dilemma

Player A Be aggressive

Player B No Yes Be No 2 (2) 4 (1) aggressive Yes 1 (4) 3 (3)

The outcome is conflict, but this can be avoided if the players are playing a repeated game, capable of realising the mutual interst, again, the EU is such a forum for integration

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Comments: states and citizens

• The EU is primarily an entity composed of states

• But it also has the ambition to be a union of people or of citizens

• EU citizens have well defined rights , including but not restricted to those in the charter of fundamental rights

• Community legal norms are to be regarded as the ”law of the land” in member states and may be invoked by individuals before their state courts (the doctrine of ”direct effect”)

• Citisens can vote for members of the European Parliament

• Nevertheless, member state governments are the key actors in the EU

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Comments: common policies and coordination of policies

• Common action is supranational in character and may take the form of, e.g., community legislation or of delegation of power to specific community institutions (such as competition policy to the Commission or monetary policy to the ECB)

• Coordination of policies is intergovernmental in character (is voluntary, member states retain right of veto)

• Policies work mainly through enhancing integration, eliminating barriers to cross-border mobility (”negative integration”) or coordinating or harmonizing policies (”positive integration”)

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Comments: common institutions

• The common institutions of the EU have considerable supranational powers

• The most important are the Council, the European Council, the Commission, the European Parliament and the Court of Justice

• Permanent institutions enhances continuity and effectiveness of action

• The articulation of the relations between the institutions (as set out in the treaty) is quite important

• The allocation of roles in the EU is not easily comparable to the separation of power at the national level (a la Montesquieu) as the EU has a two- or multilevel structure

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Comments: the treaties

• The EU is competent (has power) only to the extent that power has been conferred to it by member states in the treaties (by unanimity)

• The EU has an existence and life of its own (unlike fora for intergovernmental cooperation) but its remits and limits are defined by member states in the treaties

• The EU is therefore a legal-institutional construction created to ensure the rule of law in international relations within the area (an important safeguard for small countries)

• However, the Court of Justice occasionally refers to ”the doctrine of implied powers”, extending powers in favour of the Community where these are deemed necessary for the Community to be able to serve the legitimate ends pursuid by it (implying that the powers of the treaties may be interpreted in a way which de facto increases Community competence if the CoJ so decides!)

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The EU defined: final comments

• The EU (and the EMU) was from its inception meant to be a solution to the ”German problem” (the power of the biggest nation and the wish to avoid it becoming a hegemon)

• NB: there is no predefined ultimate goal, no ”finalité politique” (even if the USE once was)

• The EU is an open construction, open to new members provided they fulfill the ”Copenhagen criteria” (democracy, human rights, viable market economy)

• The appropriate ambitions of the EU are contested issues: some perceive it as a gigantic bureaucratic monster (and criticize it for excessive interventionism), others see it as nothing more than a framework for unfettered market competition (and want it to assume broader responsibilities in, e.g., the social area)

• ”To understand the EU, you should be a genius – or at least a Frenchman” (Madeleine Albright)

• The EU is an institutionalized framework for managing interdependence

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EU: rationale (in the area of economic policy)

Preliminary question: When is there a rationale for economic policy? Answer: to compensate for ”market failures”

Create preconditions for markets (e.g. provide public goods, ensure competitive conditions)

Manage externalities

Exploit scale effects

Handle information failures (asymmetric information)

Improve the distribution of income

Reduce macroeconomic imbalances

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EU rationale (cont.)

When is there a case for international (economic) policy cooperation? Answer: when there is a market failure with an internatonal dimension

Provide international public goods and ensure cross-border competition

Manage cross-border externalities

Exploit scale and network effects across borders

Achieve international redistribution

Strengthen Europe’s international influence

Avoid ”harmful policy competition”

Enhance deeper political integration (the original purpose of the EU)

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EU: questions

What are the roots of the EU?

Main dates of the EU?

Who joined and when?

EU: short definition?

EU: elements of a longer definition?

EU: rationale?

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Part I: Sort of summary The EU corresponds to a historical dream, notably to the vision of European peace and

prosperity

The EU is sui generis, a laboratory for experimentation in cross-border cooperation with significant supranational elements

The EU is complex – but for good reasons: the case for Community competence differs according to the issue at hand

The institutions of the EU are important, as are the treaties, but so is the political will of member states (and the Franco-German relation continues to be of general European significance)

The EU is an elephant, a marriage, a bicycle, a camel, a giant and a dwarf…

The policies pursued at the EU level are a mess (as are policies in member states) and need to be severely criticized – but if the EU did not exist, it would have to be immediately created