The Ever More Rocky Road to European Union

The nascent European Monetary Union is in trouble and, with it, world prosperity and stability, not to mention the dependence of U.S. foreign policy on a strong and coherent transatlantic ally. The trouble may be a failure to achieve monetary union with its European Central Bank and single currency, the “Euro,” by the target date of Jan. 1, 1999; or it may be success, which could be worse, yet.

Germany and France are in the center ring. German economic power is the keystone of the EMU but without at least one of Europe’s three other major economies, the union would be meaningless. Britain is unlikely to become an immediate candidate even under its prospective Labor government. Italy is still finding itself. That leaves France.

The Europundits’ focus is on the criteria for national eligibility, the chief one being a budget deficit no larger than 3% of gross domestic product in 1998, the decision year. The original assumption was that Germany would, of course, make it, and would have to find some way to squeeze France in, too. Now Germany itself is in doubt. What remains likely, however, is that if the statesmen of the two countries want to begin EMU on time, they will find a creative way to adjust either the criteria or the starting date.

They want to. EMU is the next giant step in the integration of Europe. Failure would be dangerous because it could reverse the hopeful political and economic measures of the last four decades.

Democratic statesmen are also politicians, however, and both Germany and France will elect new national legislatures and governments in 1998.

Many Germans remain unhappy about the demise of the sacred deutsche mark, but they will grudgingly accept the Euro if they are assured that the new Central Bank will continue the anti-inflation, tight-money conservatism of their Bundesbank. Such assurance is the purpose of the “Stability Pact,” designed by German Finance Minister Theo Waigel to enforce conservative monetary policies by the Central Bank and conservative budget policies by member states after EMU comes into being. The pact will probably ensure German acceptance, particularly since all three major political parties favor membership.

But the Stability Pact is likely to work in reverse in France. The French problem is unemployment--13% and counting. The center-right government of President Jacques Chirac and Prime Minister Alain Juppe espouses conservative monetary and budget policies both to meet the EMU criteria and to solve unemployment by squeezing rigidities and uneconomic benefits out of the French economy. Such reconstruction is a long-run necessity, but the government’s monetary and budgetary conservatism will increase unemployment in the short run. The 1998 election is in the short run, and the electorate is very unhappy. So are unions, whose attempts to preserve and increase the benefits the government wants to cut have caused major disruptions. The government’s stunning defensive tactic--giving in--has certainly not helped reconstruction.

EMU’s requirements are now being injected into the debate by such respectable members of the Chirac-Juppe majority as former President Valery Giscard d’Estaing and National Assembly President Philippe Seguin. The issues they raise may slow down the drive toward union and could even bring about another referendum. The first squeaked through in 1992; EMU’s popularity has not increased since.

Looming in the background is the fascistic Front National of Jean-Marie LePen. Although not represented in the National Assembly, it has been rapidly gaining strength in local elections. If this trend continues, the Front could end up in the role of spoiler or even holder of the balance of power.

There exists a significant chance that EMU will not pass through the politics of France and Germany. Failure, however, might be preferable to passage, including a strongly enforced Stability Pact. That would set in stone the conservative policies that have increased French unemployment. Indeed, it would perpetuate high unemployment throughout the EMU, including Germany--roughly 10% on average. That would not be a stable situation for Europe or the world.

This could conceivably lead to a way out of the dilemma. Germany increasingly resembles France in its high unemployment and government attempts to cut accustomed benefits. Unemployment has risen toward the French level; unions are making threats, and voters could reverse course and demand reorientation of EMU toward expansion rather than conservatism. More likely, however, fear will lead the Germans to batten down the hatches and insist on keeping control of their own future by retaining the deutsche mark.

The best possibility for EMU is a political muddling through: redefining the criteria so that both Germany and France will squeeze in or realistically postpone the date; giving enough lip service to the Stability Pact to reconcile the Germans; enforcing it loosely enough after passage to enable the French to attack unemployment. That would at least steer between the Scylla of European disunion caused by the collapse of EMU and the Charybdis of an integrated Europe leading the world into the Great Depression of the 21st century.