Will an EMU Ever Fly? A Macroeconomic Study of the Proposed European Monetary Union
Abstract
The 1993 Maastricht treaty provides that the countries of the European Union will
exchange their national currencies for a new, supra-national European Union currency,
the euro, by the year 2002. If successful, it would be an economic phenomenon of
unusual proportions whose epiphenomena would affect the world's nations many times
over. Sadly, in the years since 19931ittle progress has been made. If the treaty was to
fail, negative repercussions of a similar magnitude would be produced.
The economic details of converting to a common European currency are
extensive. This paper takes a macroeconomic approach towards understanding and
evaluating the Maastricht treaty's proposal and the associated details. This means that
the focus will be on the European Union and its member countries as a whole rather than
on specific firms and consumers. Though both the macro and microeconomic
approaches are important, I believe that the Maastricht treaty should predominantly be
considered from a macroeconomic standpoint.
Although European Union political bodies are undoubtedly important, their specific
natures and interrelations can be confusing. I have, therefore, purposefully avoided
references to the European Council, Parliament, and Commission, focusing instead on
the involved core economics.
Section two of this paper is a brief introduction. Section three provides a short
history of the post-World War II economic associations that have preceded the European
Union. The European Economic Community, European Community, Single European
Act, Maastricht treaty, as well as the expansion of the European Union are all outlined.
At the core, it is obvious that supra-national European associations are continuously
growing and tend to focus mainly on economic policies.
Section four gives an overview of past European monetary systems. These often
have much in common with the Maastricht treaty's edicts. Of note, the section discusses
the Bretton Woods system, the "Snake" systems, the old European Monetary System,
and the current European Monetary System. Underlining the discussion is the notion that
proposals for European currency cooperation have deep roots and indeed seem to be a
tenacious thorn in the side of European economic planning.
Section five attempts a "crash course" introduction to monetary economic
frameworks. The section revolves around the IS-LM macroeconomic paradigm and deals
with both the short and the long run. Exchange rates, the Mundeii-Fieming model, and
rational expectations are also incorporated. Unfortunately, the constraints of this paper
do not allow for a simple or in-depth discussion. Therefore, a fair amount of economic
knowledge is a prerequisite for this section. At the very least, one should gain from this
section the idea that monetary transaction can be scientifically quantified, albeit, in an
often confusing manner.
Section six exemplifies the use of several of the frameworks given in section five.
Here, a more detailed analysis of the unexpected and detrimental shocks that damaged
the European Monetary System in 1992 and 1993 is shown. Important in this section is
the idea that many variables and entities can affect monetary policy.
Section seven explains some of the benefits that the Maastricht treaty could
provide, were it successful. These include: increased market and production efficiency,
better investment, trade, and growth opportunities, greater economic stability, lower
inflation levels, improved member state relations, more efficient regional policy, and lower
market entry costs for small businesses. The section also discusses some alleged
benefits (predominantly at the microeconomic level) that prove to be somewhat dubious
upon macroeconomic inspection. Important is an understanding of the many tangible
benefits that have motivated the Maastricht treaty.
Section eight deals with the increased risks and costs that could result if the
Maastricht treaty were seen to fruition. Chief among these is the fact that a European
Union state will lose the power to autonomously conduct economic policy if the single
currency, the euro, is adopted. Other alleged microeconomic costs are then shown to be
more ambiguous when viewed macroeconomically. The section attempts to impart the
knowledge that significant concerns accompany the Maastricht proposal.
Section nine is on optimal currency area theory. Optimal currency area theory
attempts to identify those types of regions that would be aided by the adoption of a
common currency and those for which it could be detrimental. Several criteria are
identified and then the state of the European Union is briefly evaluated. Of note is the
fact that the European Union might not be a good optimal currency area due to: a lack of
price and labor market flexibility, European Union-level fiscal power, and economic
convergence. Also important is the idea that a "core" of central western European
countries might qualify as an optimal currency area, whereas other periphery areas might
not.
Section ten examines the Maastricht treaty in greater depth. Its five main criteria
and the controversy that surrounds them, as well as possible bias in the treaty are
discussed. The future of the criteria and the three stages until the euro is adopted are
also discussed. Important is the idea that the Maastricht treaty's provisions and timeline
are not above criticism and are possibly biased towards "core" countries.
Section eleven outlines current European Union government action on the
monetary front. Here, some political maneuvering is discussed in a general way. The
important developments at the recent summits in Dublin and Amsterdam, as well as from
the time interceding them are touched upon. The important realization is that states are
acting more in opposition than unison. Trickery and errata are also running somewhat
rampant in EU states.
Section twelve amalgamates many viewpoints and opinions about the Maastricht
treaty and its subsequent developments. A partial explanation for the "core's" bias
against some periphery countries is given. Also discussed are problems about how
exactly to implement the treaty and problems that delaying the Maastricht treaty's
implementation could produce. Several of the European Union's primary options as well
as political problems are also spelled out. Among the many potential pitfalls, the lack of
democratic support for the euro and lack of goodwill at the state level are of note.
Section thirteen is a brief discourse on the fate of European Union countries that
may not be part of the euro currency system. It is important to note that such countries
could experience severe economic damages. Section fourteen provides concluding
remarks.
Although a persistent inclination throughout history, the Maastricht treaty's
movement towards a common European Union-level currency has significant
weaknesses. Undeniably, converting to a common currency is an extremely complex
task; nonetheless, the treaty and European leadership leave much to be desired. The
treaty was drafted atop an ivory tower and then entrusted to irresponsible, uninformed
leaders. The proposal could surely work in some form; however, the increasingly naive
and Panglossian approach in the European Union endangers this.