4. THE EUROPEAN UNION II: EMU & EASTERN ENLARGEMENT

1. The Money Changers: TV programme excerpts2. Pre-history of EMU3. Who did it?4. Why did they do it?5. Why then (1989-91)?6. EMU: Will it last? Three views7. Conclusions on EMU8. The Eastern enlargement: Process, issues, prospects9. Overall conclusions

EUROPE’S PERILOUS FUTURE AFTER THE COLD WAR

‘Bipolarity, an equal military balance & nuclear weaponshave fostered peace in Europe over the past 45 years …

The prospects for major crises & war in Europe are likelyto increase markedly if the Cold War ends & this scenario

[of the dissolution of the Warsaw Pact & the NATO]unfolds … If the Cold War is truly behind us, the stability

of the past 45 years is not likely to be seen again in thecoming decades’

John Mearsheimer, ‘Back to the Future: Instability in Europe after the Cold War’,International Security 15:1 (Summer 1990).

2. PRE-HISTORY OF THE EMU

• Barre Plan 1968/69: response to currency instability

• EU heads of govt agree on EMU at The Hague 1969

• Werner Report 1970, approved by COM 1971

• Heads of govt Oct 1972 confirm goal of EMU by 1980

• EMS (European Monetary System) 1978/79

• EMU goal declared in Single European Act 1987

• Project launched at European Council 1988

3. EMU: WHO DID IT?

• The key actors have been France & Germany: * France has always been the ‘motor’ of EMU * Germany has been divided & ambivalent (Bundesbank & public opinion against; FMs & Chancellors for).

• Other member states appear to have been marginal: * Britain could not derail EMU, but got an ‘opt-out’ * Most other member states for EMU - in some cases at a price (Cohesion Funds!) * Important Italian intervention on timetable

A CHILD OF THE FRANCO-GERMAN ‘COUPLE’!

4. EMU: WHY DID THEY DO IT?

• Growing ‘monetarist’ consensus in the EU, but above all:

• France wanted to break the Bundesbank’s domination of European monetary policy & to tie Germany more closely to Western Europe

• German political leaders also wanted to tie Germany as closely as possible to Western Europe - to reassure Western allies while pursuing their Ostpolitik & to avoid being diplomatically isolatedEMU IS PRIMARILY A POLITICAL PROJECT!

EMU: MITTERRAND’S MOTIVES

‘For a long time, I was opposed to a EuropeanCentral Bank … But France will have a strongerinfluence on the European bank than it has today

on the Mark …

‘The Germans do not sit in the UN Security Council.The Mark is their only diplomatic weapon’

To a meeting of Socialist ministers, January 1991,Quoted in: Eric Aeschimann & Pascal Riche,

La guerre de sept ans (Paris: 1996), p. 91.

EMU: KOHL’S MOTIVE

‘Helmut Kohl said already in 1988 when he visited theCentral Bank Council [of the Bundesbank]: “On

monetary union, we must make a concession to France;you have to accept this as you have to accept the

weather …” A former member of the Central BankCouncil commented: “We thought that, if need be,

he’d sell the Bundesbank for this purpose’

Dieter Balkhausen, Gutes Geld, Schlechte Politik(Duesseldorf: 1992), p. 70

5. EMU: WHY THEN (1989-1991)?

• Despite 1988 decision, EMU could have suffered same fate as previous attempts - no timetable or details …

• Decisive momentum supplied by German unification:

* FM Genscher’s support for EMU motivated by Ostpolitik (East European policy) objectives * Mitterrand demanded ‘proof’ that united Germany would still be pro-European & West-oriented * Kohl gave it so France would not oppose unification

• Kohl acceded to French pressure to set concrete dates for IGC (1990) & EMU introduction (1999)

WHAT FRANCOIS MITTERRAND SAID TO PERSUADEGERMANY TO GIVE UP THE DM: GERMAN VERSION

“… There has to be parallel progress in European integration. If Western integration marks time, it would fall behind. However, in this case things in

Europe would change fundamentally, and new allianceswould emerge. It wouldn’t even be excluded that wewould fall back into a situation where the same ideasprevailed as in 1913. If German unification were to occur in a Europe that really hadn’t progressed any

further, then the European partners, who’d befaced in the future with 80 million Germans, would

look for new means of balancing Germany”

Hans-Dietrich Genscher, Erinnerungen, p. 678

WHAT MITTERRAND SAID TO PERSUADE GERMANY TO GIVE UP THE DM:

FRENCH VERSION

‘The president … said to Genscher: “Either Germanunity takes places after European unity, or you will

find yourselves faced with the Triple Alliance [France,Great Britain, Russia], and that will end up in a war.

If German unity takes place after the European,we will help you”’

Account of Mitterrand & Genscher’smeeting of 30 November 1989, in: JacquesAttali, Verbatim III 1988-1991, pp. 353-4

6. EMU: WILL IT LAST?

I. Benjamin Cohen

History suggests multinational currency unions survive if:

1. There is a hegemonic state (‘willing to keep arrangement functioning effectively on terms agreeable to all’); &/or

2. States linked by a ‘well-developed set of institutions’; &/or 3. They share a ‘genuine sense of solidarity - of community’

II. David McKay (see ‘A Bleak Future for the Euro?’)

POLITICS & ECONOMICS OF MONETARY UNIONS

‘Political factors must weight at least as heavily aseconomic issues in the calculations of govts … Theremust be a strong political incentive, driven by either

domestic politics or foreign policy, to persuade govts tomake the firm commitment that is demanded … Thatcertainly appears to be the lesson of history: … “Not a

single monetary union in the past came about because ofa recognition of economic benefits .. In all cases the

integration was driven by political objectives”’

Benjamin Cohen, The Geography of Money,p. 84

WILL THE EMU LAST?

‘The failure of three previous attempts doesnot give an abundance of reasons for

confidence. Europe continues to profess its determination to share monetary

sovereignty. At the time of writing, however,the jury remains out and we have no

final verdict’

Benjamin Cohen, The Geography of Money (1998), p. 77

6. EMU: WILL IT LAST?

III. Michael Bordo & Lars Jonung

• It is important to distinguish between multinational monetary unions (independent states having permanently fixed exchange rates without a single central bank) & national monetary unions (single central bank, with union normally corresponding to boundaries of nation-state)

• NMUs are more durable than MMUs

• EMU, with its single central bank, corresponds more closely to NMU than MMU, but has emerged differently to most of the latter, because monetary unification has preceded political

6. EMU: WILL IT LAST?

III. Bordo & Jonung (Contd.)

• It doesn’t matter that the EU is not an optimal currency area - NMUs develop ‘as a result of the political process’

• EMU will be hit by major shocks, but NMUs typically survive such events

• EMU will be a ‘flexible’ MU: mechanisms & institutions will be created to deal pragmatically with defects of the EMU as they currently exist

• EMU is based on will to political unity & will last as long as members share common political goals

CAN THE EURO SURVIVE WITHOUTA HEGEMON?

‘The political economy of the EMU will primarily bedetermined by the major powers among the members

of the monetary union. If there should be tensionbetween, for example, Germany & France, this willincrease the risk for the EMU to become unstable.

the EMU requires one dominating player or astrong coalition to function well’

Michael D. Bordo & Lars Jonung, ‘The future ofEMU: What does the history of monetary

Unions tell us?’ (unpublished paper, 1999),p. 33.

7. CONCLUSIONS ON EMU

• The single currency is a long ‘story’ that has been written mainly by France & Germany

• It is a primarily political project - about power over economic policy in the EU & long-term foreign policy goals • German unification accelerated it & made it more likely

• It is a risky project with few historical parallels … but: * The EU has in any case no real historical parallels * The political will behind EMU is very strong * There is a long history of close cooperation (‘institutional linkages’) between its members

8. EASTERN ENLARGEMENT: I. THE PROCESS

• EU has always been enlarging, but never have so many & so many poor & mostly such small states wanted to join simultaneously

• 13 states have applied for membership (Poland, Hungary, Czech R, Slovenia, Estonia, Latvia, Cyprus, Lithuania, Slovakia, Bulgaria, Romania, Malta & Turkey)

• EU is now negotiating entry terms with all except Turkey acquis communautaire (no. increased after Kosovo War)

• Member states & EP must approve new entrants

8. EASTERN ENLARGEMENT: II. ISSUES • Financial costs (‘Agenda 2000’): * Regional & agricultural policies * Overall EU budget (conflict between net- contributing & net-receiving member states)

• Immigration/free labour movement

• Reform of the EU institutions (DM process): * Limit on no. of Commissioners * More QMV in Council * Redistribution of votes towards big states • Applicants’ adoption of acquis communautaire * Very expensive

8. EASTERN ENLARGEMENT: III. PROSPECTS

• The incapacity of the EU to make radical, expenditure- cutting reforms is likely to delay enlargement (to 2005/6?)

• Enlargement is likely in any case to be staggered (even current front-runners will probably not enter at same time)

• Much use may be made of transitional arrangements (new entrants may be ‘partial members’ for some time)

• Several member states & Commission oppose enlargement without prior institutional reforms to avert gridlock

• Failure to agree reforms at Nice Dec 2000 would provoke crisis & jeopardize enlargement

9. OVERALL CONCLUSIONS

• Contrary to some predictions, the EU has not begun to fall apart after the end of the Cold War; it has so far reconciled closer integration with ‘widening’

• Eastern enlargement without major prior reforms would incapacitate the EU

• Enlargement will probably accelerate moves towards a ‘multi-speed’ EU with France & Germany at its core – NB. Speeches by German foreign minister, French president, May & June 2000!

• Strong FGR is guarantor of closely integrated EU