After more than six and a half years, the euro is now firmly established as the currency of over 300 million people. Its internal stability is evidenced by the fact that inflation has been steadily low from the very start, despite a sequence of negative price shocks (in particular a continuous surge in oil prices). As an international currency, the euro is second only to the US dollar.
At the same time, the euro represents a unique experience in history. On the one hand, it is based on a clear supranational monetary order, whereby the European Central Bank has full sovereignty in conducting a single monetary policy for the euro area. On the other hand, political union is still limited and sovereignty remains predominantly national in many policy areas. This asymmetry has raised questions about the sustainability of such an institutional arrangement since well before European Monetary Union started on January 1, 1999.
The recent "no" from the French and Dutch people on the treaty establishing a constitution for Europe triggered new interest in the prospects for Monetary Union and the future course of political union. This happened despite the fact that the text of the European Constitution does not imply any changes to the role of the ECB, nor does it significantly affect the allocation of responsibilities in most other policy areas.
The fundamental question has always been: can Monetary Union work and survive without a fully-fledged political union? The answer is clear: yes, it can. It is possible that, over the very long term, strong elements of a political union may (need to) emerge, but for the time being Economic and Monetary Union (EMU) can proceed perfectly well without a political union in the form that we understand today. Here are the main arguments:
First, Monetary Union in itself has a clear political dimension. It entails the transfer of national monetary policy decision-making powers to a supranational entity, the European Central Bank. Relinquishing national sovereignty in such an important field is a substantive contribution to political integration. A central bank is, after all, an element of statehood. The Maastricht Treaty has made the ECB independent of any political influence so that it is able to fulfil its clear mandate of preserving price stability. Monetary policy-making is hence not only centralized but also depoliticized. This step was only possible because euro area members had achieved a high degree of convergence in monetary policy attitudes and preferences in the run-up to Monetary Union.
Moreover, the way participating countries see themselves and their role as nation states has changed profoundly. In this respect, the launch of the euro marks the most recent and far-reaching step. National sovereignty has not only been transferred in the area of monetary and exchange-rate policies but also in other key policy areas, such as competition and trade. Finally, a single market has been established. As a result, the euro area countries already share important elements of state formation which are also key to the functioning of Monetary Union.
Flexibility
Second, from a purely economic perspective, what else is needed to make a single monetary policy work? First and foremost, flexible markets are needed to enhance the ability of individual countries to respond to specific circumstances and economic shocks. Wages and prices in particular may need to adapt more quickly and strongly. The mobility of capital will become an increasingly important adjustment mechanism. In order for markets to be flexible and send the proper signals, policy-makers must ensure an institutional framework that sets the right incentives.
Substantial progress has been made but a lot still needs to be done. In particular, labour market reforms are still lagging in many countries. As a result, the ability of economies to adapt quickly and generate employment is still limited. The Lisbon agenda, the "pro-employment and growth blueprint" for Europe, sets the right priorities. However, it needs to be implemented more forcefully. This would go a long way towards creating the dynamic and flexible environment that Europe needs, not only for the proper functioning of Monetary Union but also for the attainment of the growth and employment objectives of the Lisbon agenda.
Finally, sound fiscal policies are another prerequisite for Monetary Union to work. As sovereignty over fiscal policies remains at the national level, the EU member countries decided to introduce fiscal rules to help to prevent imprudent fiscal policies and their adverse effects on inflation and expectations. These rules are enshrined in the Maastricht Treaty and operationalized in the Growth and Stability Pact. In setting deficit and debt targets (most notably the 3% deficit limit) and establishing procedures for budgetary surveillance and control, they are not fundamentally different from rules at the national level. Compliance with the rules in member states will keep deficits low enough to ensure government solvency while providing governments with the necessary room to smoothen economic fluctuations through the operation of automatic fiscal stabilizers. This will also generate an appropriate fiscal environment for monetary policy-making at the euro area level.
Key element
The Growth and Stability Pact is a fundamental pillar of European Monetary Union. Past problems with its implementation cannot be denied, but the recent reform of the Pact aims to remedy this. In order to foster fiscal discipline, the governments of the member states, together with the Commission, now need to implement the revised rules in a rigorous and consistent manner. In this way, confidence in the credibility of the rules and in prudent fiscal policies can be reinforced. This will not be an easy task, admittedly, and serious concerns have been expressed. Sound fiscal policies will remain a priority for many years to come.
Optimistic frame
What does all this imply for the future of Europe? Given the achievements of economic and political integration in Europe over the past 50 years, we should remain confident that we will also find answers to our current problems. Many problems have emerged and been mastered, although solutions typically take time and rarely come overnight. Does that mean that we can trust only in our past record of achievement? Obviously not. Current and future challenges will need to be addressed by the actions of current and future political leaders. We will no doubt see new challenges and ongoing discussion and debate about the most appropriate policies and approaches to consolidate and extend the success of EMU. However, to expect that such challenges and debates will threaten EMU is to underestimate the strength of European institutions, our willingness to make this project work and our ability to knock heads together when tough solutions are required.
On the final stage of the integration process, the steady state of political union in Europe, one can only speculate. None of the examples of history, be they a federation of states or a union of nations, can serve as a blueprint for shaping political union. The EU has always been, and will remain, a unique undertaking for which there are no models that can easily be adopted. It is important to allow an evolutionary process which is open to further steps of integration, yet safeguards what is already in place and working well, and which assigns competencies to nation states or even regions as appropriate. In fact, we have been in the midst of such a process for quite some time, and Monetary Union is and will remain one of its major success stories.
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The author is chief economist and a member of the Executive Board of the European Central Bank