On to political union?
FRANKFURT – Seven years after launching the new European currency, an old question nags: How much political union is needed to make monetary union work more effectively? Juergen Stark, the Bundesbank vice president nominated to join the European Central Bank’s inner circle in June, raised the issue at his European Parliament hearing this week, bringing into focus the limits of what the euro currency can achieve. The ECB has succeeded in launching a new currency and has gained widespread credibility in markets for its inflation-fighting mettle and monetary policy strategy. But the 12-nation euro region remains mired in slow growth around 2 percent a year or less than half the average global rate, and high unemployment above 8 percent persists. This disappoints those who had hoped monetary union would catapult Europe into the ranks of the world’s dynamic economies and spur it toward ever closer political union. «It is still an open question» whether greater political unity is needed for the eurozone, said Eric Chaney, chief European economist at Morgan Stanley. Right now a malaise hangs over the eurozone and uncertainty over what economic direction it pursues – witness violent youth protests over French labor law reforms, near stalemates in Italian and German elections, and the watering down of the European Union plan to open the massive service industry to competition. This follows last year’s rejection of the EU constitution in referenda in France and the Netherlands. «The EU currently is in a critical phase,» Stark told European parliamentarians on Tuesday. He added to the litany weakening budget strictures and rising nationalism in Europe. «I am concerned about these trends because monetary union… needs a common political foundation and a political commitment to function smoothly,» Stark said. For a central bank mandated to fight inflation, there is only so much it can do about these problems and sluggish growth. It must rely on politicians to push through the economic reforms that they all largely agree are needed in the Lisbon agenda in 2000 to lift the region’s growth rate. This means opening national markets to outside competition, tearing down treasured job protections and cutting budget deficits. Reforms are happening gradually, notably in Germany, but they regularly hit road blocks with the electorate. Stark has suggested that boosting the political dimension of the eurozone project could cut through the barriers. To be sure, Stark’s remarks are standard Bundesbank orthodoxy. German leaders from Chancellor Helmut Kohl onward have long espoused European political integration and seen monetary union as a first step along that road. What is unusual, though, is for European central bankers to plunge into this charged debate. Stark is expected to join the ECB Executive Board from June. President Jean-Claude Trichet usually deflects questions on political integration and fixes attention instead on the ECB’s mandate of price stability. Perhaps the political question is returning to the fore because the ECB is emerging strong and healthy from its infancy. The 1990s were consumed with countries sprucing up their economies to qualify for monetary union and the mechanics of a single currency. From January 1999 onward when the euro was launched, the ECB’s major task was to establish its reputation as a credible central bank. Secure in these achievements, the ECB is entering a third phase – how to make monetary union work better. «The task now is how does the eurozone become an optimal currency area, which not even the United States has. Within that lies the question of political union,» said Gabriel Stein, director at the economic analysis group Lombard Street Research. A federated Europe would help by allowing for budgetary transfers, which would ease the pain caused by widening economic differences among eurozone countries where a one-size-fits-all monetary policy never suits any country perfectly, he said. Casper de Vries, finance professor at Erasmus University in Rotterdam and analyst for the watchdog group EMU Monitor, said political union also would break logjams where one EU country can veto economic agreements, such as the services directive. «There is a lot of stalemate because of lack of political organization,» he said. Clearly, Stark also believes more political engagement is the way forward, though he gave no details. «We need more than the technical framework that props up monetary union, we need a higher political commitment,» he said. All politics are local But analysts, just like European politicians, are deeply divided over the degree of political harmony needed, let alone its urgency. Few dispute that in the long run political union is preferable to ensure a smooth functioning eurozone economy. But would it really solve the current malaise? Daniel Gros, director of the Center for European Policy Studies, called it a «false hope.» «No one has convinced me that closer political integration would help,» Gros said. The real question is how national governments muster the political will to adopt the reforms. «I still have no proof that political union will bring that about,» he said. Eric Chaney at Morgan Stanley agreed. «It’s back to local politics. The federal dimension of Europe is more in the background than in the 1990s, and individual countries are becoming more important.»
