House of Lords - European Union

Select Committee on European Union Eighteenth Report

PART 7: SOME REMAINING QUESTIONS

152. Mr Padoa-Schioppa, a member of the ECB Executive Board, has frequently referred to the euro as a lonely currency without a country. This will remain an issue.

153. According to Dr Duisenberg, the "unprecedented combination" of a single monetary policy co-existing with separate national fiscal policies had "led some critics even to question the possibility of success of Monetary Union"[145]. In an article asking the question: "Europe: common money—political union?"[146], Dr Issing suggested that the Maastricht Treaty had created a "unique, historical asymmetry":

status quo

In his view, "it remains indispensable for the success of Monetary Union and the maintenance of price stability that congruent institutional arrangements and appropriate behavioural patterns can now develop".

154. But, as Dr Duisenberg added, to suggest that political union was necessary "is in my view, a wrong perception. What is crucial in the context of the single currency area is that participant countries come to a common view on basic principles". This they had done in the Treaty, supplemented by the Stability and Growth Pact[147]. According to Mr Trichet, the SGP was the response to the criticism that a "federal currency" was impossible without a federal government to ensure an appropriate policy mix (Q 106). Reminded that the Bundesbank had argued for the need for a government as a counterweight to the ECB, the Governor of the Bank of England responded that he did not see any evidence so far that a lack of co-ordination between fiscal and monetary policy had been an important part of the weakness of the euro (Q 271). The German Ambassador said: "I once asked Hans Tietmeyer, who always used that term [political union], what it implied. He took a very narrow definition: for him, political union implied a co-ordinated fiscal and economic policy of the euro area members. I think the last two years have confirmed the need for closer co-ordination" (Q 315).

155. References to the single currency sometimes obscure the fact that participating Member States agreed not just to Monetary Union, but to Economic and Monetary Union. The Chancellor of the Exchequer has said that "to share a common monetary policy with other States represents a major pooling of economic sovereignty"[148]. But others have painted a less dramatic picture. Mr Trichet pointed out that for participating Member States accounting for two-thirds of the GDP of the euro-zone the adoption of a common monetary policy was "not a brutal, dramatic change", because they had already been in a de facto single currency area for thirteen years before that through the ERM (Q 111). Some of our witnesses from participating Member States supported that view. As the Irish government put it, the disadvantage of pooling sovereignty "is probably felt more keenly in larger Member States as the discretion about monetary policy enjoyed by smaller Member States such as Ireland was always considerably less" (p 73). The Irish Ambassador said, "for 56 years … we were part of a de facto monetary union with the United Kingdom … We had absolutely no influence on United Kingdom monetary policy during that period" (Q 238). For the Belgian government, yielding monetary autonomy was "a relatively minor step" because the Belgian franc had been linked for so long to the German mark (p 114). Similarly, for the Finnish government "the loss of monetary policy was not regarded as indispensable. In an environment of free capital flows, countries, in particular small open economies, cannot pursue a dramatically different policy from other countries, even if they have the theoretical possibility of doing so. Indeed, it can be questioned how much independence a small country enjoys under any exchange rate régime" (p 42). On the contrary, as the Finnish Ambassador said, "we have a feeling that in the European Union now, after five years of membership … we have had more influence than our people and our nation have ever had in the history of our country. We have had a far more important role to play, for instance, during our Presidency of the European Union, than we have ever had in the development of European affairs" (Q 127).

156. But some of our witnesses argued that stronger union would be needed if EMU was to work. Mr Power thought that ultimately there would have to be a system of fiscal federalism, as in the United States: "in other words, you have a large central budget, and Brussels effectively would set the budget for the 11 member countries" (Q 187). And according to Professor Minford, without sufficient "political glue" the effects of a major shock could shatter the single currency:

"Given that there are at the moment 11 sovereign States, if there are divergences of taste and the situation in response to such a shock, the question arises why individual nations should carry on being a part of it. There must be a strong temptation, for example, if one State has very high unemployment, to become separate from this thing, to cut interest rates dramatically in dealing with a shock that produced that sort of high unemployment. What mechanism is there politically to keep it attached?" (Q 201).

157. A major shock of this kind cannot be ruled out. Despite the generally rosy forecasts, concerns have been expressed in some quarters that the recent rise in oil prices may present the ECB with more difficult decisions in future. The rise in oil prices in 1973 and 1979 was generally thought to have caused the rise in unemployment world-wide in the 1970s[149]. The recent rise in oil prices to roughly $30 a barrel in November 2000, from an average of $13 in 1998 (with a low of $10.41 in December 1998) may have substantial effects on employment and inflation—especially while the euro is low, since oil is priced in dollars. If this were to happen[150], it would leave the ECB facing the dilemma of raising interest rates to control inflation while under pressure to reduce them to moderate the rise in unemployment.

PUBLIC VIEWS

158. What the general public in participating Member States thinks now is arguably less important than what it will think after 1 January 2002 when euro notes and coins have become a reality, and goods are priced in euro. So this is really a question for the future. Nevertheless, we sought views from our witnesses, and consulted the results of opinion polls published in Eurobarometer.

159. The latest edition of Eurobarometer available to us gave information on the results of surveys carried out in April-May 2000. For the EU as a whole, the figures showed 58 per cent in favour, 33 per cent against, and the remaining 9 per cent undecided. The figures for individual EU Member States were:

Table 9: Percentage of people in favour of the euro (April-May 2000)

Italy	81%
Luxembourg	76%
Belgium	76%
Spain	75%
Greece	69%
Netherlands	67%
France	67%
Portugal	64%
Ireland	63%
Germany	50%
Finland	49%
Austria	48%
Denmark	40%
Sweden	38%
United Kingdom	22%

Source: Eurobarometer No 53, October 2000

160. Within participating Member States, there was on average 65 per cent support for the euro, down from a peak of 70 per cent in spring 1998. Men (63 per cent) were more in favour than women (53 per cent); the under 55s (61 per cent) more in favour that the over 55s (51 per cent); the more educated more in favour than the less; and managers, self-employed, and white collar workers more in favour than manual workers and those not in paid employment.

161. For Finland, the Ambassador said that "the Finnish people have … swallowed the whole hook of being in the European Union. They are seeing the euro as an integral part of being in the European Union"—even though he was not certain that a referendum would have gone in favour of joining the euro at the time (Q 129). He did foresee possible difficulties in the change-over, especially for elderly people who might have difficulty in using new notes and coin, but he thought "that we will have a new world in a way when the euro has been properly introduced, also in the minds of private citizens" (Q 127). Nevertheless, the spring 2000 Eurobarometer survey showed only 49 per cent of respondents in Finland as being in favour of the euro (up from 47 per cent in autumn 1999), with 48 per cent against.

162. The German Ambassador doubted whether people yet had the same confidence in the ECB as they did in the Bundesbank, but thought that it would come with time, particularly when notes and coins came into use (Q 313). Ms Schulz said that "for German people the most important thing is price stability and low inflation"; if they were convinced that the euro would deliver these, they would accept it (Q 75). She said that it was surprising how pragmatic people were about the introduction of the euro, regarding it now as a fait accompli (Q 80). Prices in shops were already being quoted in euro as well as marks, and bank statements were in both currencies, "so people are starting to live with the euro already" (Q 97). But once again, Eurobarometer gave a somewhat different picture, showing 50 per cent of respondents in Germany in favour of the euro (down from 55 per cent in autumn 1999) and 39 per cent against.

163. In Denmark, the result of the referendum in late September on joining the euro showed that public opinion there was deeply divided on the issue. On a turn-out of over 85 per cent of eligible voters, 53.1 per cent voted against joining and 46.9 per cent in favour[151].

164. The Dutch Ambassador claimed that a clear majority of the Dutch people supported the euro; even though support had decreased since last year, it was still at 67 per cent. However, he also referred to a poll published on 26 September 2000[152], in which 53 per cent of respondents had said that they would vote against the euro, with only 31 per cent supporting the new currency. In this poll, 36 per cent said that they had little or no faith in the new currency; 43 per cent expected the introduction of the euro to have a negative effect on the Dutch economy; and 63 per cent expected that life would be harder after the euro came in. Support was declining: a year earlier 22 per cent had held more positive views, and only 7 per cent had held more negative views.

165. According to the Portuguese government, surveys there had shown that the level of awareness was lower than in the euro-zone as a whole in some respects, but nevertheless "69 per cent of people think the euro will be of real value for Portugal whilst in the euro-zone the average is 60 per cent" (p 118). This compares with the Eurobarometer figure of 64 per cent in favour.

166. Other witnesses were more inclined to consider the acceptability of the euro to financial institutions and businesses, rather than to the public at large. Mr Trichet said that businessmen in Europe

"consider that their position has dramatically changed for the better. I have no memory of a single French, German or Belgian entrepreneur that I know that would give evidence to your Committee and say: 'I think it is no good, we are going in the wrong direction'. They are all seeing the benefits of having that very, very large single market with a single currency" (Q 111).

And he particularly emphasised the importance of advance preparation by small and medium sized enterprises (Q 124).

167. Similarly, the Federation of German Industries (BDI) gave details of the extent of preparation by companies there, noting problems particularly for SMEs and in the new Länder. Not surprisingly, there was more awareness among export-oriented companies, and 60 per cent of all companies had already switched to dual pricing. Interestingly, the Federation commented that acceptance of the euro for accounting within companies was being slowed down because not all public authorities were ready to accept returns in euro. Nevertheless, according to the German Ambassador, BDI's latest opinion poll had shown that nine out of ten German companies were happy to be operating inside the euro area (Q 310).

168. The Italian government claimed the smooth acceptance by the public of an additional tax burden (to meet the convergence criteria) as evidence of public acceptability: "All political parties in Italy consider the successful achievement of this target a matter of pride" (p 116). However, the view is evidently not universally held in Italy. The Italian employers federation, Confindustria, is reported[153] to have fears that Italy's economic performance is declining because of the single currency. The sharp increases in taxation levels made in order to qualify represented a high economic price, and they could not be reversed without cutting public spending programmes, bringing conflict between government and unions. Entry had halted the devaluation which was helping to boost Italy's exports to other parts of Europe, and companies had not responded by increasing their productivity. Confindustria now doubted whether collective negotiations over economic policy would be the best way forward.

AND FINALLY …

169. The will to create the euro was political. Its future must equally depend on the continuing political will to create success. The problems that will arise on enlargement and future changes in the Common Agricultural Policy are obvious difficulties which will test that will.

170. The views of the public will also develop, affecting the position of their governments. Public perceptions will depend partly on whether there is a smooth change-over in 2002 to the use of euro notes and coins, as well as on whether consumers think that the change has been used as an excuse to increase prices, or on the contrary see prices falling as a result of easier comparability across national borders. They will also depend on the extent to which the public is provided with accurate information.

171. The points which we have made in this Part serve to emphasise that this is indeed an interim Report: there are many issues which cannot be determined today and will therefore need to be re-visited.

RECOMMENDATION

172. The Committee considers that the issue of how the euro is working raises important questions to which the attention of the House should be drawn, and makes this Report to the House for debate.

145 Lecture at European Business School, op cit. Back

146 Revised version of lecture given on 20 September 1999, published in Institute of Economic Affairs Journal, March 2000. Back

147 Lecture at European Business School, op cit. Back

148 Chancellor of the Exchequer, Hansard, 27 November 1997, col 583. Back

149 The arguments were set out in Michael Bruno and Geoffrey D. Sachs, The Economics of World-wide Stagflation, Harvard University Press, Cambridge MA, 1985. Back

150 As is forcefully predicted in Alan A Carruth, Mark A Hooker, and Andrew J Oswald, "Input Prices and Unemployment Equilibria: Theory and Evidence for the United States", Review of Economics and Statistics, 1998, 80, pp 621-628. Oswald expected a marked slowdown in growth starting 18 months or so after the oil price rise (interview, 17 March 2000), and claims that it is now happening (private communication, 13 November 2000).; he points to a clear association between the real oil price and the rate of unemployment. Back