Placing Bets on a Single Europe Currency

A year after it was pronounced all but dead, the European Monetary System has defied projections and embarked on a tentative but definite revival.

The revival has rekindled hope among advocates of closer European integration that a single currency could become a reality throughout the European Union--if not by the end of the century, then in the early 2000s.

The prospect was set out in the 1991 Maastricht Treaty, and its importance is rarely disputed. It is widely believed that the proposed European Monetary Union would not just simplify trade and other business activities but would quickly drive EU member countries into a true political union.

“If the political will is there to push forward with EMU, then you don’t have to worry about anything else--because EMU is the fastest way to derive political union,” declared Stanley Crossick, chairman of the Belmont European Policy Center in Brussels. “Conversely, if EMU looks like (it’s) falling apart, there will be serious political consequences.”

It was in September, only a month after the EMS had escaped its deepest crisis, alive but seriously weakened, that British Prime Minister John Major said publicly what many others believed but dared not speak.

“I hope my fellow heads of government will resist the temptation to recite the mantra of full economic and political union as if nothing had changed,” Major warned. “If they do recite it, it will have all the quaintness of a rain dance and about the same potency.”

It was difficult to dispute Major’s flip analysis of the prospects of the EMS. Over a few midsummer days, currency dealers had basically blown apart the system that lies at the heart of Europe’s efforts to achieve greater unity.

Put simply, the dealers had bet billions--and won--on their conviction that the nine national currencies involved in the system’s exchange rate mechanism could not stay within the narrow bands of fluctuation that tied them together.

To save the system itself, exhausted and defeated European Union finance ministers met in Brussels and surrendered to the markets, loosening the narrow bands from 2.25% (6% for Spain and Portugal) to a startling 15%.

The move eased speculative pressure, but it seemed to be the death knell for eventual monetary union. The architects of a single European currency had always envisioned that their goal would be reached by a gradual narrowing of fluctuations, then a freeze and the eventual imposition of a single currency.

This defeat--followed by the 1992 departure of the Italian lira and the British pound from the exchange rate mechanism and the distinct cooling of Germany, the EU’s biggest country, toward the idea--seemed to spell the end of the single currency dream.

Today, the lira and the pound (and the Greek drachma) remain outside the exchange rate mechanism, and German doubts on EMU persist, but an unexpected stability of the new, looser exchange rate mechanism has brightened prospects. Instead of trying to push for competitive advantage through fluctuations of near 15%, most central banks have kept the value of currencies in close contact with each other.

But the real test is whether this commitment is strong enough to meet the tough fiscal criteria necessary to begin the final stage of a monetary union. As detailed in the Maastricht Treaty, these would require countries to cut budget deficits and reduce total debt. At present only Luxembourg would qualify as prepared for the final step.

However, advocates of European integration insist the necessary political will is there.

Brussels Bureau researcher Isabelle Maelcamp contributed to this article.

Marking the Changes

British pound and Italian lira, which are outside the European Union exchange-rate mechanism, are fairly volatile compated with currencies within the mechanism.

German mark against the British pound, 1994: 2.42

Italian lira against the German mark, 1994: 1002.9

Source: Banque Bruxelles Lambert

Common Ground

Although support for a common European currency among citizens of European Union countries has wavered a bit, support for a common foreign policy and defense policy has grown and remains strong.

Support for:

* A Common Currency

1994: 53%

* A Common Foreign Policy

1994: 68%

* A Common Defense Policy

1994: 75%

Source: Erobarometer