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EU Enlargement - a good idea?

Is it really a good idea? The general consensus is that it is, but has the case against been made? There seems a concerted effort not to make such a case. The CRCE itself has no point of view on the matter but its directors have been concerned at the lack of balance in the discussions.

When the esteemed Economics Editor of the Sunday Telegraph, Bill Jamieson, and historian and acknowledged EU expert, Helen Szamuely, approached the Centre with the idea of looking at the idea of Enlargement from another angle, we were delighted to publish their researches as an Occasional Paper.

A ‘Coming Home’ or Poisoned Chalice? - EU Enlargement with a Foreword by the Rt Hon Michael Portillo MP was launched at Politico’s Bookshop in London to great acclaim, and is a CRCE Bestseller.

In A ‘Coming Home’ or Poisoned Chalice? both the politics and economics of enlargement come under critical scrutiny. Clearly set out and packed with facts and figures, this is a must read for everyone who cares about Europe and her future.

See what the Reviewers said:

"An eloquent statement of the case that the countries of central and eastern Europe are wrong to give such high priority to joining the European Union!" - Samuel Brittan, Financial Times (London) 3 September 1998

"An EMU which imposes a ceiling on growth and employment will lead, probably to a breakout by at least one country, but only after longer and more bitter social tensions than exist at present. Only then will Europe awake to its lost place in the world. By then, the Eastern Bloc members, so Szamuely and Jamieson forecast, will be as far behind the present member states as they are now. Membership will eliminate the competitive advantage of their cheap skilled industrial labour. Far from winning a market for their agricultural products they will be eating subsidised German and French food exports. They are already having to give up new economic freedom in the quest for membership. The d envisaged in the EU budgets up to 206 will not be there, because it is predicted on GNP growth rates which the EU will not achieve." Alan S Milward, Times Literary Supplement, 25 September 1998

In the House of Lords, Lord Pearson of Rannoch spoke forcefully about the Enlargement issue: "I should have thought that all the CEECs really need is defence from NATO and access to the market, which, of course , is denied them, I am not alone in this view. I have here a serious study which I have recommended to your Lordships before. The study is called ‘A Coming Home or Poisoned Chalice? written by the distinguished economist, Mr Bill Jamieson, economics editor of The Sunday Telegraph and by Dr Helen Szamuely, a well known expert on Eastern Europe." - Hansard (Proceedings in the House of Lords), 7 December 1999.

European Union

Or Not?

 

Papers by

Vaclav Klaus and Pedro Schwartz

from the

Mont Pelerin Society Meeting

Bratislava

9th – 12th September 2001

 

Published by

The Centre for Post-Communist Economies

2001

 

The Constitution of the CRCE requires that its Trustees and Advisers dissociate themselves from the analysis contained in its publications, but it is hoped that readers will find this study of value and interest.

 

First published in November 2001

by

The Centre for Research

into Post-Communist Economies

57 Tufton Street

London  SW1P 3QL

 

© The Centre for Research into Post Communist Economies,

Vaclav Klaus and Pedro Schwartz

 

All rights reserved

 

Occasional Paper No. 11

ISBN: 0 948027 39 8

 

Printed in Great Britain by

Instant Press West One

ABOUT THE AUTHORS

 

Vaclav Klaus

Vaclav Klaus is an economist and politician and co-founder of the Civic Forum Movement (OF). He was the first non-communist Finance Minister in Czechoslovakia. In 1992 he became Prime Minister of the Czech Republic. Currently he is President of the Chamber of Deputies of the Czech Parliament.

Vaclav Klaus is also Professor of Finance at the Prague University of Economics. He has written extensively on economics and politics.

 

Pedro Schwartz

Pedro Schwartz is currently the Executive Chairman of IDELCO. He holds a chair at the Department of Economic Analysis at the Autonomous University of Madrid. He has been a Member of the Congress of Deputies in the Conservative Interest and an economist in the Bank of Spain’s Research Department. In 1990 the Queen appointed him OBE (Honorary Officer of the Order of the British Empire).

Acknowledgement

The CRCE is grateful to Vaclav Klaus and Pedro Schwartz for permission to publish these papers, given at the Mont Pelerin Society Meeting in Bratislava, September 2001.

 

BACK TO EUROPE

OR

AVANTI INTO THE EUROPEAN UNION

 

Vaclav Klaus

 

The formation as well as the development of the European Union in the second half of the 20th century is a special case of the contemporary globalisation and integration processes. It belongs to the prevailing trends and tendencies but it contains something specific – I see it in its dominant political aspect!

No one in this room is against opening up of societies, against elimination of all kinds of barriers and obstacles to the free, unconstrained exchange of ideas, of people, of goods and services, of money. Some of us, especially from Central and Eastern Europe, know from our personal experience what it means to live in closed, inward-looking, almost autarchic societies where any form of contact with the outside world was prohibited (or at least made very difficult). We know what it means to live in the world of barriers, obstacles, borders, prohibitions and – eventually – of permissions to be allowed to do something or to go somewhere.

Current European unification process is, however, not only or not predominantly about opening-up, but at the same time, about introducing massive regulation and protection, about imposing uniform rules, laws and policies, about weakening standard democratic processes which were evolutionary developed, about increasing bureaucratisation of life, etcetera.

I am afraid there are not many people in Europe these days who see this process with its two sides so clearly as we do. It is, therefore, our task to express our critical views openly and self-confidently, not to hide them, not to be afraid to be associated with them – even if it does not belong to the current political fashion and to the mainstream of political correctness. The title of my speech reflects both sides of this process. We want to go ‘back to Europe’, to the freedom which we did not enjoy in the communist era, but we hesitate to rush into the European Union which is the embodiment of ambitions to create something other than a free society.

In this short luncheon address I am not able to do more than to make a few comments to this topic.

For me (and for most of us in Central and Eastern Europe), the debate about Europe has two main dimensions – the reality of and the plans for the evolution of the European integration process on one hand, and the EU dealing with candidate countries, with its potential future members, on the other. Both topics are, of course, interconnected.

I will start with the second one, because – especially in the recent years – membership or non-membership in the EU has become a very simple differentiating factor suggesting who is and who is not a ‘normal, standard (or standardised), mature, decent, obedient European’ country. To put it this way means, however, a big problem for us. Such an approach is unfair (and for me difficult to swallow) but it has been more or less accepted. Due to it, the countries of Central and Eastern Europe have no other alternative than to make a maximum effort to become members of the EU as soon as possible – regardless of their views about the currently realised model of European unification and about ideology behind it.

This is – in a simplified way – our position and our motivation. We live, however, in the world of asymmetric motivations. As I said, non-members of EU are motivated to enter it. On the other hand, it is in the interest of member countries to prolong today’s status quo as long as possible. It is on their side an expression of rational behaviour. Member countries already have full access to the non-member countries. They are there and have a full possibility to realise their own comparative advantages in an easy, one-sided, and for them painless way. The benefits they get from relations with us exceed considerably the costs they have to bear.

This discrepancy is the main element of my description of the European reality at the beginning of the 21st century. There are several alternative scenarios as regards the future, because everyone will be searching for optimal trade-offs. But I predict that the EU member states will not be able to keep their club closed for a long time. The consequence will be the phenomenon of an incomplete membership.

Another ‘reality’ in contemporary Europe is the uncontested dominance of the ideology of unification, the ideology of Europeanism – which is, however, only a very superficial substitute ideology, an Ersatz-ideology. Its relative success is another modern fatal conceit. Its concentration on the form, not on the substance, is a successful way how to hide its real substance. It may be a rational strategy on the side of its exponents to conceal its etatist characteristics.

The most respectable ambition of Europeans, the ambition which most of us would whole-heartedly support, is to expand, enhance and guarantee freedom and democracy for all Europeans. In this respect, my question is: will the freedom and democracy in Europe be increased by Europeanism which means

•  minimising the role of one, indisputably genuine and evolutionary developed level of human organisation, called ‘nation-state’;

•  extending the distance between individual citizens and relevant decision-making bodies in remote Brussels or Strasbourg;

•  harmonising (or unifying) rules and policies instead of preserving competition between different rules and policies?

My answer to these questions is clear and straightforward:

•  I wish my country to remain a self-governing nation within the European Union;

•  I am convinced that it will be counterproductive to create an artificial European state;

•  I hope that the balance between intergovernmentalism and supranationalism will not be fundamentally shifted;

•  I believe that efficiency and strength will not come from uniformity but from experimentation, diversity and competition.

I am frustrated that these issues have not been sufficiently debated in Europe. The silent, uninvolved majority of Europeans does not care or does not see the importance of these issues. Pro-European activists – an apparent minority – claim to be the exclusive owners of truth. They dismiss all objections to their struggle for supranationalism and ever closer union as undemocratic, nationalistic and reactionary, and denounce all those who disagree with them as potential Lukasenkos or Milosevices. We have to admit that they succeeded in establishing a quasi-religious belief to see unification as a panacea.        

Looking at the recent changes of institutions in Europe, we see that the development goes in the direction where the pro-European activists want to have it. The intergovernmental co-operation of independent countries has been slowly but certainly converted into the system with many features of a supranational European state, and we see many attempts aiming at centralisation of power in Brussels and at elimination of European nation-states.

I see many dangers in this process of the accelerated unification of Europe which was made possible by the Maastricht, Amsterdam and Nice treaties. My approach is based on my over-sensitivity inherited from the communist era.

We used to live in a political and economic integration called COMECON, which was also characterised by the fact that decisions were made not at home, but abroad, by the belief that the whole is more than the sum of its parts and by the concept that some know better than the rest of us.

The currently victorious europeanism should not lead us to forgetting the EU economic and social practices (and the ideologies behind them). In my understanding the existing system is, in the long run, untenable because it is undermining European competitiveness in the globalised world.It needs marginal, incremental, evolutionary changes (and they will be – eventually – realised), but the system cannot be changed without more radical measures. Europe (or the Euroland) has been in the past decades a victim of creeping bureaucratisation, of increasing regulatory activism, of non-receding protectionism, of soft and all-embracing paternalism and of increasing ‘planetary’ ambition vis-à-vis ‘Le d’fi american’ or the Asian challenge. To discuss how to do it, however, would be a topic for another speech.

 

THE EURO, FOR AND AGAINST

Pedro Schwartz

The euro, a bold and stupendous experiment in social engineering, puzzles many of us libertarians. The avowed aims of European Monetary Union (EMU) and the new European currency appear blameless. The object is to create a solid currency that will free Europeans from the curse of inflation, do away with national monetary borders, ease travel in a large area, free industry from a great deal of exchange risk, bolster up budgetary and financial orthodoxy, permit the comparison of prices and foster competition and productivity in Euroland. Is this not the free market agenda?

Despite these golden prospects, however, we still look at the euro askance. Obviously we who believe in competition cannot like the way it is being put in place, by administrative fiat, with a new Central Bank politically imposed on Member States, the new currency invested with legal tender status, the democratically-elected governments being deprived of any say in the conduct of monetary policy, the people’s referenda passed over unceremoniously. But if the ends be acceptable and desirable, why quibble? John Stuart Mill, when asked by an investigating committee on French banking whether there should be one privileged national bank of issue or many competing private issuers of bank notes, replied that, if the monopolist is made to obey the right kind of rule, the final result will be the same as with competition. If the European Central Bank (ECB) abides by the rule enjoining it to keep the value of the euro steady, will not the final result be the same as that of a free competition among national currencies, only with a simpler and cheaper mechanism? Was Mill not right? Why do we repine?

A further consideration should allay the fears of those of us who instinctively do not like the euro experiment: the increasing perfection of financial markets and indeed the growing ability of individuals to bypass officious government interference makes it less and less important which currency we use for our deals and contracts. The theory of rational expectations, whereby individuals one with another can be assumed to make full use of all the information existing in the market, makes it likely that people in general will discount the defects of the euro, with some deadweight loss but no fatal disturbance. In fact the theory of rational expectations indicates that if the euro is so good markets will adopt it spontaneously, including the British market, and if turns out to be a bad currency, markets will spontaneously dollarise. So again, why bother even to discuss the euro?

My worries persist in spite of all this. This essay will examine the pros and cons of the euro in some depth – and, if the cons are substantial, will debate whether it is a good thing that the British, and the Swedes and Danes, refrain from adopting the euro, now that undoing the whole scheme would be highly disruptive.

 

The euro seems to be working

The launch of the euro caused a mixed impression. It started with a value above that of the dollar and quickly lost more than 20 per cent on the exchanges. It is now recovering, apparently because the rate between the dollar and the euro seems to be governed by the relative productivity of their respective economies – an outcome which Ricardo predicted with his 1817 theorem on the real exchange rate, which he called ‘the law governing the relative distribution of the precious metals in the world’. But more of this when we come to discussing the performance of the Irish economy. When monetary policies are prudent, the movements in the relative exchange rates tend to reflect the perception of returns to investment in the different economies and should not be a ground for worry.

Though the euro has suffered no upsetting speculation of the kind that many of us predicted would plague the European Monetary System (EMS), this says nothing especially in favour of the euro. As Milton Friedman has noted, the weaker currencies in a system of pegged exchanges are liable to bouts of adverse speculation while full monetary unions only suffer from real, not monetary, tensions.

The transition to the euro was in fact smoother than I thought in my Wincott Lecture ‘Back from the Brink’. The American-led boom helped but the Maastricht conditions and the Stability Pact also contributed. Imposing a limit to the Member States’ budgetary deficits previous to entry was an apposite rule if one wanted to transmit the idea that EMU would not be a high inflation area. Prolonging the rule through the Stability Pact was again the right strategy for a fledgling currency that wanted to avoid the impression that the German conservative tradition could be watered down by Italian and Spanish bad habits. The Stability Pact recognises that a formal undertaking not to bail out insolvent Member States would not exorcise the fear that some Governments might follow a path of unsustainable debt creation (the interest rate of the debt being higher than the rate of growth of the economy). Be that as it may, most Member States have up to now shown themselves able to run substantial surpluses on their primary budgets, no doubt helped by the world boom. But now the German Economics minister is saying that the rule should be lifted when a recession looms, which Germany could have done (whether wisely or no) with the German mark (DM), but which Euroland cannot do with a dodgy euro.

An unforeseen development that helped make the euro popular in fringe countries was the broad interpretation of the Maastricht rule precluding devaluation prior to adopting the euro. It was lucky for Portugal, Ireland and Spain that the markets forced them to devalue heftily while their currencies were in the EMS. On the threshold  of the euro, these three countries found themselves in the enviable position of having a rate of exchange very favourable to export-led growth and seeing their money interest rates converge to those obtaining in Germany. These facts and the considerable funds coming from the EU explain much of the glorious prosperity these three countries have enjoyed since signifying that they would adopt the euro. The euro is now very popular there and will be so in all ailing newcomers if they receive a similar treatment.

The monetary policy of the European Central Bank (ECB) has also been perceived as quite ‘conservative’ for its refusal to disregard the danger of inflation for the sake of an anti-cyclical monetary policy. The spirit of the Bundesbank haunts the corridors of the new institution in Frankfurt. There is some worrying tension between France and Germany around the Presidency and some controversy about the instruments used by the ECB to carry out its strategy. However the ECB has had a better start than many expected.

So far, so good. But it is the future of the euro that we have to consider. The behaviour of the ECB, the course of the euro, the mettle of the politicians, the backing of public opinion in the Member States have not been tested in a slump, especially one delivering asymmetric shocks to the different countries and regions. The need to fund automatic transfers demanded by the smooth functioning of a currency area will need fiscal convergence on a higher level of taxation, which will be resisted by countries enjoying lighter taxes. Also, many experts, including Mundell, think that the ECB and the euro cannot succeed unless backed by a central political authority akin to that of a nation state, so there will be demands for a deeper union by some and protests about a hidden political agenda by some others.

But let me examine all these questions in a systematic manner.

 

Costs and benefits of EMU and the euro

Despite the favourable initial impression caused by the euro, it is still very early to try and evaluate the benefits and costs of this experiment. Some of the main economic benefits claimed by its backers are still to come, such as the boost a single currency will give the Single Market, important for consumers but perhaps less so for sophisticated producers and traders. In a slump the ECB may forsake its healthy scepticism about the ability of a Central Bank to counter economic cycles. Also, the ECB may be tempted to intervene in the exchange market if the rate of the euro with the dollar and the yen is thought not to be ‘right’. Nobody can tell whether there will be a ‘German re-unification effect’ for new entrants.

Even more difficult to foresee are the political consequences of the euro. What will happen if some Member States stay out; will the euro make for greater centralisation in Brussels making ‘subsidiarity’ even more unreal; is there likelihood that some member country will be forced to give up the euro, just as many gave up the gold standard in the 1930s; will a successful EMU harm Atlantic relations and world free trade? There are so many difficult questions whose answers we would prefer not to leave in the lap of the gods.

 

The case for the defence

I will try and make the strongest possible case both for and against the euro because the question is so weighty and so difficult to decide. I hope I do not end as when I was a student of law and used to attend to cases in Court: the arguments of both the prosecution and the defence convinced me completely and I was left thoroughly confused.

 

Economic arguments in favour of the euro

An independent ECB will make the euro a barrier against inflation; and also a guard against deflation. According to the Maastricht Treaty (Article 108 of consolidated Treaty of the European Union) the ECB cannot seek or take instructions from the Community or Member States Governments, and neither can national central banks nor any member of their several decision-making bodies. The independence of Central Banks has even benefited Britain, as this part of the Treaty is now applicable to the Bank of England. Independence is an important condition of currency stability, since it shuts the door to any temptation of monetising the public debt or financing budget deficits with money creation. As for maintaining the internal value of the euro, Article 105 of the Treaty establishes that the primary objective of the ECB is price stability. It is only ‘without prejudice to the objective of price stability [that] the ECB shall support the general economic policies in the Community’, such as ‘a high level of employment’. This shows that the ECB will consider growth and employment as aims subordinate to price stability. The Bank can treat the external value of the euro with ‘benign neglect’, since exchange rate policy is in the hands of the European Council.

The euro will reinforce the European Single Market and boost competitiveness, thus creating a prosperous Europe.

The introduction of the euro will reduce transaction costs and simplify price comparisons for consumers and other purchasers of goods and services. First, by dealing in a single currency Europeans will not have to pay exchange commissions; and though this will reduce the turnover of banks, commissions should be considered a deadweight cost so there will be a net welfare gain. Secondly, prices of tradable goods will be more easily comparable, and even differences in non-tradables if they are large will stick out. Comparisons in wages will also make for labour market convergence and reduce the amount of unfair trade within Euroland.

Firms will be rid of exchange risk for EU transactions. Random movements in exchange rates upset business calculations. Investment plans will be subject to one uncertainty less.

The euro demands a zero deficit fiscal policy. A common currency makes it imperative that no country free rides by being irresponsible financially, an especially hard temptation for new entrants (and some older ones). After entry, the Stability Pact will ensure general good conduct. If a country shows a higher inflation rate than the average, ECOFIN will watch over its fiscal policy to ensure that it is not expansionary.

The euro will force Member States in Euroland to re-balance their welfare systems, to privatise their national monopolies, to reform their labour markets. The Treaty of Rome purposely said nothing against nationalised industries or the Welfare State. However the logic of the euro, by demanding ever more efficiency, will force Member States to make their State monopolies face competition, balance Social Security accounts and follow the Dutch and British example on private pensions. The Danish ‘No’ in the euro referendum and the French refusal to open its energy market are doomed. As for the labour market, reaffirming German Mitbestimmung need not harm the Euroland economy and in fact is a plus for the kind of Europe that is being built.

EMU will be a good deal for new entrants. The expectation of their joining EMU will give new entrants the advantage of lower money interest rates, with minimal default insurance spreads, as they will profit from the macroeconomic reputation of Germany, while the Stability Pact will ensure that this reputation persists. This much reduces the pain of bringing money interest rates down on one’s own.

EMU will function as a currency board for new members, since their economies are small in relation to those of the existing Member States and their influence in the ECB Council will be negligible; this will bring their inflation rate to the level of the average of in Euroland, an important result for new entrants.

No inflation, the obligations of the Stability Pact, and generous Convergence Funds will set them on a steady growth path.

The monetary policy of the ECB, backed by the ECOFIN Council, will help untie the EU from the US cycle and relay the American economy in its role of world locomotive. When the euro runs fully, when the Single Market seriously functions, Euroland will be much more self-sufficient as far as trade and activity are concerned. The Community Authorities will have the opportunity of carrying out a macroeconomic policy that will stabilise Europe more efficiently than other areas and may even become the growth leader of the world.

Asymmetric shocks will be less likely in Euroland with a single currency and a single Central Bank, especially because EMU will increase internal trade. There are two views of the likely industrial and services distribution in a Currency Area. One is that of the European Commission holding that the more trade passes between two countries the less cyclical divergence there will be between them. The other is that of Krugman who predicts that in an integrated monetary and economic zone industrial activity will tend to form clusters and germane industries will tend to form nuclei. Empirical evidence shows that the cycles of Member States within unions such as the EU tend to converge, so that a monetary zone will not be torn apart by transversal shocks.

The euro will soon become a world currency and thus will be a source of seignorage for the EU. The remit of the ECB and the size of Euroland guarantee us that it will be able to look the dollar and the yen in the eye.

As for the UK joining, whether the pound is kept or not, the euro will be used in the UK especially for financial and export transactions, so why not go the whole hog?

The Chancellor Gordon Brown’s five criteria can be fulfilled in time for the referendum.

By giving up the pound sterling, British industry will be free of the exchange risk and will cease to be overvalued in relation to its main commercial partners, so no harm will come to British industry. The risk of a once-and-for-all price rise can be largely avoided by not going to far in giving in to exporter interest groups and setting a sensible initial rate of exchange; the risk of continued inflation will not materialise if the ECB functions properly.

British labour laws and the more flexible UK labour market will keep unemployment lower than that of other Euro-partners in the event of a deflationary ECB stance. Price competition propitiated by a common currency will increase consumer welfare and can be accommodated by the more efficient British labour market.

Entry can be delayed until the British economy has converged with the Continent. But adopting the euro will foster that convergence, as experience on the Continent has shown. Thus the importance of asymmetrical shocks can be discounted. The City will remain a European and world-class financial centre only if its main unit of account is the euro.

 

Political arguments in favour of the euro

The euro will be a powerful symbol of European unity and will make Europeans proud to belong together. In fact the creation of the euro is well within the spirit of Jean Monnet, to use convergence brought about by economic institutions slowly and carefully to promote European political unity. Since the strength of national feelings makes it very difficult to move directly to a European federation it has been best since the days of the European Coal and Steel Community and the Treaty of Rome to use the indirect and modest way of deeper and deeper economic collaboration to pave the way for an ever closer political union.

Everyday use of the euro will allay the fears of individual citizens before EMU, expressed in a number of negative referenda.

The use of the physical euro will make new entrants feel real Europeans at last and help them over the sacrifices that entering the EU will demand.

The use of the euro, together with the Schengen Accord doing away with borders, added to the strengthening of the ‘second pillar’ on a common space for justice and the ‘third pillar’ on a common foreign and defence policy, will act as an antidote against narrow nationalism, the putrid ground for the rank growth of European civil wars.

A single currency demands a single political authority with centralised fiscal powers to underpin it, as the history of previous monetary unions shows: the euro will make it imperative to set up a European Federal Union with a democratic Constitution. The theory of optimal currency areas shows that they cannot function unless there is an automatic system of fiscal transfers. The ridiculously small tax income of the EU, capped at 1.75 per cent of Union’s GDP, is a brake on the movement towards a united Europe. The inevitable need for fiscal transfers if the area is to function smoothly will push Europeans towards moving some taxing powers from Member States to the Community.

The convergence of the fiscal and monetary policies of the Member States necessitated by the euro will slowly make for a common economic policy and thus reinforce the cohesion of the EU. The euro will make the citizens of the different Member States accept measures that would be ‘politically impossible’ without the authority of the Union.

Europe is trying to define a distinctive Third Way in social and economic matters, neither old style socialist nor neo-liberal. Europeans must accept globalisation but they must tame it and control it, so as to put economic forces and transnational companies at the service of man and community. Having a common currency will help create a space where this more humane society can flourish with the help of the more positive forces of capitalism.

Reining in excessive German power and making for a more balanced Community is one of the effects of merging the DM with other currencies to form the euro. The ECB is not the Bundesbank: all European nationalities and the Governors of all the participating Central Banks are represented on its Governing Council. Thus joining EMU and adopting the euro is better than setting up a currency board, since all participating nations will have a say in the policy of the ECB, within the framework of its constitution.

Having a single currency and a common Central Bank will reduce friction among Member States. Not only has the Commission shown that more trade means more convergence (and the use of the euro will mean more intra-European trade) but also the euro rules out beggar-your-neighbour devaluations and forces agreement on a common macroeconomic policy. Episodes of friction there may be but they will take place in the open and dressed in a technical monetary garb.

The euro will reinforce the perception that Europe is becoming one of the world’s major power blocs, able to hold its own with the US and emerging Asian economic powers. The end of the Cold War propelled the US to the role of the only Great Power. Other centres of power may be forming in the Far East. It is only prudent that there should be a Europe aiming to take on the role that Britain played in the 19th century, holding the balance of power vis-à-vis the Continental nations.

Britain will at last pull its due weight in the Community by adopting the euro. It may seem incredible, but Britain lost an Empire half a century ago and has still not found a role. Throwing its lot with Europe is the most sensible and realistic line of policy. By rejecting the euro the UK reinforces the prejudices of Continental nations that the perfidious Albion is bent as ever on wrecking the European experiment.

The free market and free world trade will have a greater chance of being fully adopted by the EU with the UK fully in EMU and using the euro. Many ideological forces are at work in Europe and old style socialism might still raise its ugly head, with the help of the French bureaucrats and barely converted ex-Communists from the old Soviet Empire. Tony Blair’s Third Way does not stand a chance of being accepted unless Britain is seen as a full member of the Club. And the efforts to launch a new trade round within the WTO could be jeopardised.

 

Confusion worse confounded

Before starting with the case against the euro, I must underline that two developments have moved the goal-posts for both teams, for the friends and the foes of the euro: the revolution in macroeconomic theory and the crisis of the nation state.

Firstly, the economic arguments for and against the euro have been traditionally based on a model of the economy originating with Keynes and his disciples that has not worked in practice and is unacceptable in theory. Secondly, the political arguments for and against the euro have been based on assumptions about the functioning of democracy and the viability of the State, which are turning out to be superficial or outdated.

 

Old hat economics

Take any textbook on EMU – for example, the most pedagogical of them all, Paul de Grauwe’s Economics of Monetary Union, now in its fourth edition.1 The basic concepts generally used are aggregate supply and demand curves, the Phillips curve, static demand for money, and even the IS/LM model – all of them rejected by the literature as giving badly distorted pictures of reality.

Thus, de Grauwe starts with diagrams showing: differently positioned aggregate S and D for Germany and France; the depressing effect an asymmetrical shock on French aggregate supply (and employment); and how a devaluation of the franc or a revaluation of the DM corrects the imbalance by increasing French exports. Then de Grauwe introduces fundamental qualifications, to the effect that a nominal devaluation will end by pushing French prices up; that this will turn the real exchange rate against France; and that the only way to even out the imbalance between the two countries is structural reform in France, which could and then could not be helped by the devaluation; and only puts back the need for structural reforms. De Grauwe knows that what matters are real exchange rates, which devaluations affect randomly. He ought not to start with bad macroeconomics just because they are ingrained in today’s political discourse. By doing this he panders to the belief that devaluations effected by Governments are a powerful weapon to right the balance of payments while the qualifications indicate that perhaps devaluations are not useful after all.

Again, he uses our old and treacherous acquaintance the Phillips curve to examine the possibility of a trade-off between inflation and unemployment. On this basis he typifies two kinds of government policy towards monetary policy, hard-nosed and wet, as if governments could after all choose lower inflation and higher unemployment, or vice versa, at will. Then, as an up to date economist that he really is, he introduces the natural rate of unemployment as an afterthought and suggests that expansionary monetary policies can have no effect on employment and that wielding sovereign power over monetary policy may be irrelevant for the labour market (unless it be as sand in a delicate mechanism). He uses Phillips curves all through the book as an expository device to analyse the costs and benefits of monetary unions, when it is well known that such curves are unstable. This precludes him from pointing out that introducing the euro, as also as keeping the national currency, is irrelevant for long-term employment.

Even the IS/LM curves are used to explain the possibility that fixing the exchange rate does not necessarily reduce the volatility of output compared to fixing the money stock. Again, these curves are well known to be mis-specified and are too unstable for predictive purposes.

A defective model, however much qualified, is an unstable base for explanation and a defective guide for policy. Thus de Grauwe says at one point, ‘in a monetarist world the cost of a monetary union is really zero’, a misleading and unbalanced statement. What he means is that monetary instruments, such as the nominal exchange rate, are very ineffective instruments for correcting real imbalances, and that therefore the costs for countries joining a monetary union and giving up their currencies are very low. What he would have said if he had started with the appropriate theory is that, since money is a (fluttering) veil, then keeping or giving up your currency is (almost) indifferent. He concludes that adopting the euro changes nothing fundamental in the real growth path. He fails to add that neither would refuse to adopt the euro.

If, on the other hand, one uses rational expectations theory to evaluate EMU and the euro, rather than mongrel Keynesian models, the picture is much more exact. It is then possible to present a truer qualitative analysis of the economic costs and benefits of adopting the euro.

As is by now well known, the rational expectations theory does not assume that individuals have perfect information; rather, that they can and do learn to make efficient use of all the information existing in the market about the future. Individuals guide their actions by real prices and calculate Bayesian probabilities of future outcomes: they are not content with nominal values and mere adaptive expectations. They are not inert pawns in the hands of the Authorities, but continuously discount economic policy decisions. Hence discretionary monetary and exchange policies become impossible or self-defeating, because they are necessarily time inconsistent. The only possible economic policy is one based on simple and stable rules and a reputation for abiding by them. An optimal growth path is attained by direct institutional reforms to increase the efficiency of markets.2

This removes much of the ground from under the feet of the defenders of constructivist impositions, such as the euro. But it also emasculates many of the arguments of the critics of EMU.

Critics of the euro must be careful not to rely overly on arguments based on a Keynesian view of the world, such as the need to keep sovereign control over money, interest rates, and foreign exchange. What if a successful anti-cyclical policy is not within the reach of a Central Bank? What if Central Banks cannot directly and permanently contribute to full employment by expanding money supply or reducing interest rates in the money market? What if Central Banks prove unable to change the real interest rate on long-term credit? What if the real rate of exchange cannot be managed discretionally? And even more centrally, what if today’s free capital movements, by allowing investors to choose what currency they will use in their contracts, make legal tender laws an ass? What if individuals turned out to be indifferent to the currency they use?

All this indicates that a whole family of economic arguments for and against the euro loses relevance as national economies become more flexible and open. To those in favour one may ask why they want to impose a new more centralised currency if people will increasingly be able to choose whatever money suits them best. To those wishing to retain monetary sovereignty one may say that there is little point in wanting to control monetary policy, or wield the instrument of Bank interest rate, or intervene in foreign exchange markets, as economies become increasingly globalised.

When criticising the economics of EMU and the euro we must now distinguish between two kinds of objections: some have a transient character, for they emphasise that money matters in the short run, especially when a country is rigid and inefficient; others have a more permanent character, as contrasting the institutions of flexible and competitive economies within the EU setup and monopolistic arrangements symbolised by the euro.

 

Democracy and the State

A parallel deficiency ails the political arguments around EMU and the euro. Many of the political points levelled for and against are also based on a badly-focused view of the world. The defenders of the euro base their demands for a pan-European organisation on what they see as the terminal crisis of the nation-state. The critics of the euro argue that the traditional nation-states are indispensable for democracy to work. If both are right, what is the way forward?

In a world where capital moves quickly, where trade takes goods and services over tariff and non-tariff barriers, information is dispersed and available; people can travel more widely and cheaply than ever,  migrants move across seeping borders in irresistible waves, and crime is becoming international: it is more and more evident that the levers of national power have less and less effect on social reality.

Though this seems to me quite true, the reaction of the europhiles is a peculiar one. In the realm of money, they saw that the national Central Banks of the European nations, except perhaps the Bundesbank, had lost most of their power; curiously, they decided to move one step up and create a larger old style Central Bank, a European cartel of failed national monopolists. In the realm of politics, the people who want to use EMU to bring about ‘an ever closer Union’ and so ease the way for a European State, with all the trappings of a Federal Constitution to define subsidiarity, a European Parliament, a senatorial Council, an elected President, a governing Commission, a single electorate, again seem to have no quarrel with today’s nation-state but its small size. The very people who descry old style nationalism for its belligerence want to nurture a new European nationalism to give a soul to a Continental super-state, a new world power able to look America and China and Japan in the eye.

To the defenders of the euro for political reasons, one could ask the question, is the answer to the slow decay of the nation-state to try and create another organisation of the same ilk, the enlarged copy of an old sepia photograph of Leviathan? Is not the EU a cartel of impotent States aspiring to world leadership?

On the other hand, true as it is that nation-states are in crisis and that sovereignty is a 19th century notion with diminishing content in this global world, the critics of the euro are right to fear that their democratic traditions are in danger in the hands of the constructivists in Brussels. It is understandable that countries like Italy, which has had no State to speak of, or Spain, with a chequered history of liberties, or Portugal, always worried by a large neighbour, or the ex-Soviet nations, should want to merge and forget their shortcomings. But Britain, Denmark, Sweden, Norway and Switzerland understandably want to preserve their hallowed democratic traditions.

Some critics of EMU and the euro, however, adopt a jingoistic tone when defending the individuality of their country against back door unification and in that way weaken their own case. The nation state is certainly not dead, especially as the only constituency for the exercise of democratic liberties. But with their insistence on national sovereignty, whatever its content, the eurosceptics fail to spell out and address three problems of democratic politics in an open world. The first is the ‘Tocqueville problem’ or how to govern a wide territory with a large and diverse population liberally and democratically. The second is the ‘underground economy growth’ problem, or how to conjoin governance and globalisation. The third is the ‘Tammany Hall’ or ‘Mayor Daley’ syndrome, or how to avoid the takeover of a small state by a corrupt band in the name of nationalist sentiment.

The Tocqueville problem was a traditional one in political philosophy and Tocqueville offered a solution to it after his journey to the US. It was assumed since Classical Greek political thought that the polis was the ideal size of a democratic state and that large states, especially if composed of many nationalities and religions, had to be ruled by a central authority not answerable to the large and dispersed population. Tocqueville discovered a solution in the federal organisation of the US, allowing for the answerability of the central government to its citizenry. For such a devolved system to work he listed four conditions: a habit of local self-government (which exists in many parts of Europe); a common language (conspicuously lacking in the EU); a political elite that is felt to be part of the people (rather than a remote bureaucracy); and some shared moral beliefs (certainly not there in Euroland).3 When these conditions obtain, the feeling of the people for their country is one of ‘relaxed patriotism’, as Siedentop calls it. This feeling is the same that Jurgen Habermas has called ‘Constitutional patriotism’. But Siedentop, who would like to see a Federal Constitution of Europe on the lines of the American Constitution, nurtures the fond illusion that such a moderate love of Europe can be kindled in the breasts of the several citizens of twenty or thirty-odd historic states with wildly differing histories, cultures, habits and polities. The easiest part to transform into a commonality is the economy, and that will prove difficult enough.

The usual answer of ambitious state builders is to have recourse to that most dangerous of social metaphysics, nationalism, in this case European nationalism. Instead of Tocqueville, the patron saint of nationalists is Ernest Renan, who defined the nation as ‘a permanent plebiscite’. Now we know what sort of beast a plebiscite is. Instead of an affectionate pride for a common political democratic procedure, the nationalist wants to excite in the populace a unanimous passion for a common project, for a communal goal.

The Tocqueville problem cannot be solved on the European plane – not for the foreseeable future. If we want to live in liberal democratic societies, the present nation states will have to stay. Further, the experience in the Basque country, in Ireland, in Corsica and in Yugoslavia indicates that changing borders is a dangerous exercise and that peaceful divorces such as that of Czechoslovakia are very much the exception. The use of devolution as in Spain under the 1978 Constitution could help solve the tension between traditionally centralised governments and disparate nationalities.

The growing impotence of the nation state to make its rule felt in important fields cannot be ignored by the eurosceptics. The traditional nation states must enter into arrangements with their neighbours to come to agreed common action on the environment, justice, health, crime, international transport, telecommunications, free movement of people and whatnot. International treaties can deal with all these.

A large part of these problems, however, will have to be solved by a retreat of state power – the state must try to interfere less with the contracts among individuals. The evasion of state fiat through the underground economy will have to be minimised by giving citizens much more latitude in their affairs.

The trouble with international treaties in the EU is that they have been misused in the same way that the single market is being misused to bring about an ever closer union without the people noticing much. Through the various European Community treaties and taking advantage of the rule that ‘international law is a part of the law of the land’, increasing powers have been granted to supranational bodies to legislate on domestic matters.

‘Small is beautiful’ has a limit in political matters. With state expenditure running at 40 to 50 per cent of GDP, secession and local autonomy can turn out to be a recipe for a small clique putting their hands in the till. If those small new governments can wrap themselves in a nationalist flag and whip up local sentiment by appeals to a defence of the local language, customs, culture, guilds and corporations, the ethnic bosses will soon see the possibilities of universal adult franchise, as V.S. Naipaul put it in The Suffrage of Elvira.4

My suggestion to both the europhiles and the eurosceptics is that they should not lightly turn the fight over the euro into a political battle around the rival attractions of a European Federation or the sanctity of national sovereignty.

The way forwards for the europhiles is less evident: the chances of a continental union ‘from the Atlantic to the Urals’ look pretty slim to me. But europhobes should not be led to defend even a bloated welfare state just because the people have chosen it democratically. True, the democratic nation state is the only credible repository and guarantor of individual freedoms. But if it tries to do too much it will be circumvented and undermined by its disgruntled citizens who can use the instruments of globalisation to hide, evade and disobey. The only sustainable role for the nation state is to concentrate on what it can do on its own. A project for the nation state that deserves to be at least examined and discussed is: rule-governed economic policy, sound money, democratic government, minimal state powers, good neighbour policy, international free trade and competition, open doors to genuine economic migration – all within the framework of a military alliance of free nations.

 

Economic arguments against the euro

I shall now review alleged benefits of the euro. I shall distinguish long-term effects from the mid-term repercussions that mainly affect new entrants and present members with rigid economies. Given the rational expectations model used here, the mantra is:

•  attention must centre on real reforms to make countries more free-market ready;

•  the long-term benefits of economic union will not be changed either way by the euro;

•  the political consequences of the euro are much more worrying than europhiles allow.

The independence of the ECB seems to be sufficiently assured. With some amendments the scheme is working very well with the Bank of England, which was given its independence thanks to the Maastricht Treaty provisions. One big snag is that big decisions on the exchange rate are not in the hands of the ECB but of the European Council: if a political agreement intervened to fix or set bands to the exchange rate of the euro, the dollar and the yen, as has been attempted more than once by officious politicians, the autonomy of monetary policy would go out of the window. This is because, as Robert Mundell pointed out in 19605, monetary policy is penned within an iron triangle: only two of the following three conditions can be attained, free capital movements, an autonomous monetary policy, a stable exchange rate.

The remit of the ECB to maintain price stability suffers however from a number of defects. First it is the Council of the ECB who have defined what is meant by price stability, i.e., a long-term increase of the harmonised consumer price index of not more than 2 per cent and no less than 0 per cent. These are self-imposed limits and there is no other security in them than the confidence we may feel that the Bank will not play games with its remit. There are no sanctions on the Council or the Bank officials for failing to deliver, of the kind the Bank of England Act or New Zealand have to work under. Also there is much argument as to whether some prices or the index itself should not fall if there are great productivity gains in the country.

Experience shows, it is true, that sudden and very large falls in money supply can put an economy in a tail-spin. This, in my opinion, is not so much due to nominal money being an important argument in the reaction function of consumers and investors, as due to sudden changes in discretionary monetary policies.

All this holds, in so far as individuals are supposed mainly to money or nominal prices. If, on the contrary, they try to base their actions on information about what is happening in the real economy, then falling prices may be a better indication to laggards that they have to pull their act together.

The Maastricht Treaty seems to have de-emphasised the possible effect of monetary policy on employment and activity in general, by saying that such economic policy aims may be pursued by the Bank ‘without prejudice to the objective of price stability’. However, during the present slump we shall witness a great deal of pressure being put on the ECB to lower interest rates for the purpose of reviving growth and in imitation of the Federal Reserve. The uselessness of Keynesian public works and expansive monetary policies in the case of Japan does not deter the believers in discretionary macro measures.

Setting a rule for the Central Bank, especially if accompanied by an incentive scheme, may be a workable system to avoid inflation. The most effective sanction however, in monetary matters as in the production of all kinds of services, is competition. Individuals should be able to choose the monetary standard for their contracts and to have a market at hand where the different currencies are quoted by the minute. In fact there is no reason for precluding that a composite currency might appear, or a private moneys exchangeable at par for options on a defined basket of goods. Each issuer of a currency would advertise and abide by the rules it thought most convenient for obtaining the maximum seignorage. There would be no ban on fractional banking, which is a way of redistributing the seignorage among the banks of a club headed by an issuer.

Reducing the number of foreign exchange deals is a net gain, especially for tourists (who wield a great number of votes). For other transactors the net gain is not so clear, since the absence of the foreign exchange automatic shock absorber may mean an increase in output volatility, which will be a greater cost in as far as the economy is less flexible. It is of the essence of prices that they should change and getting rid of one price (the foreign exchange) does not reduce the overall price volatility.

The importance of Europeans being able to get better terms after they can compare prices more easily because they are quoted in the same currency has been somewhat exaggerated. The gain depends on the assumption that people suffer from a large degree of money illusion, which may true for consumers but not so much for others. In the production markets there will appear arbitrators and speculators whose deals will reduce margins. In a labour market made imperfect by unionisation, comparing wages easily with more productive economies may be counterproductive.

The creaking economic institutions of Euroland are not very promising for a happy life under monetary union. The forces of finance will push towards more efficient markets in a larger area with keener competition. But the bad habits of social democracy will endure and make recessions much more painful than is necessary.

The labour market will be a good indicator of how far Euroland will be approaching the status of optimal currency area. As long as average unemployment stays higher in Euroland than in the US, European labour market law and institutions will be judged inefficient. Whenever unemployment rates and proportion of people at work will differ greatly among the several regions and other factors of production tend to stay put then Euroland will be seen as a non-optimal currency zone.

The idea is again that reforms of the real economy are indispensable whatever the monetary arrangements. If the single currency be the spoon to ram the bitter medicine down the throat of unwilling patients, so be it, but be ready for the retching.

There is no set recipe for modernising backward economies, but experience shows that the process will be long and hard. Certainly EMU will prove no magic wand.

For the new entrants, fulfilling the Maastricht conditions is indispensable, especially the ratio of debt to GDP, if they wish to enter the EMU without too much mishap. Servicing too high a foreign debt is very tricky, both under floating and fixed exchange rates, since the country has to run a large surplus on the balance of payments anyway. However doing it with floating exchanges is easier in a populist country not accustomed to controlling costs overtly. With a single currency, for example, the demonstration effect tends to push wages up. The example of Argentina is very telling on this point. For these countries money matters a lot during a prolonged period, because they are inefficient and very difficult to reform.

If candidate countries will insist on joining EMS, they must do it at the ‘right’ exchange rate. That means they should try and imitate the path taken by Spain, Portugal, and Ireland and have as large pre-entry devaluation as possible. Trying for a devalued rate will make it difficult to fulfil the inflation condition. Entering with an overvalued exchange will plunge them into East German despair, another case where money mattered a lot in view of the dreadful political traditions, bad working habits, nil entrepreneurial spirit and outdated equipment of the DDR. It would have been better if the two marks had run in parallel. Convergence and structural funds are not much help in cases such as these.

Still, as we said, joining EMU will give new entrants the advantage of lower money interest rates based on the macroeconomic reputation of Germany, while the Stability Pact will ensure that this nectar will not be watered down. This is a shortcut on the painful road to bringing money interest rates down by one’s own effort, as Canada did over ten years, but it simply means taking the pain after joining rather than before. The economic cycle will become a world cycle whenever America stalls. The European locomotive is still in the Coal and Steel Community age!

One cannot tell whether industry and services will, in the end, be evenly spread over the whole of the Community, or whether the pattern will be more like that of the US, with geographic specialisation and liability to transversal asymmetric shocks. One prediction can be made drawn from the Italian experience: too much aid will create Mezzogiorno problems. Also, the slow attrition of the Common Agricultural Policy will force more people off the land and into the great cities, a force making for unevenness. I think Krugman will be proved right and that as in any united market, industries and regions will boom and bust at different moments.

Transversal shocks will not be lightened by the size of the market but by the flexibility of factors of production. The more goods and services become ‘tradeables’, the less will the capital value of non-tradeables be affected by uneven fluctuation: internal migration, free movement of investible capital, re-engineering of factories and companies are all forces making for balanced growth.

There is little doubt in my mind that the euro will become a currency used not only within Euroland but also around the world by money managers and traders of goods and services. The doubt is how much larger this role will be than that of the DM, the answer will depend on the behaviour of the ECB. A new world currency is to be welcomed if it increases currency competition. For this reason, it would be a loss if the pound sterling disappeared, except for power-hungry European politicians and public relations officers.

If giving up the pound for the euro is profitable for the several individuals and firms that use the British currency then the euro will be used increasingly in contracts, securities, deposits. Whether legal tender laws are in operation or not, the switch will occur, despite ‘network effects’ in some uses of currencies. This is what is happening, it appears with the Swedish krona, because companies keep more and more of their balance sheet in foreign currencies, hold a larger proportion of their deposits in foreign moneys, and demand for the krona is driven only by demand for Swedish equities on the Stockholm Stock Exchange. I have no quarrel with that sort of competition, which indeed should have been the method used to introduce the euro, – as a parallel currency.

Whether the use of the pound will be reduced to paying for bus fares will depend on the size and profitability of the British economy. It will in fact be a good indicator of the progress of British society towards becoming a venue for all sorts of activities.

When a currency spontaneously revalues, as the DM used to do in the 1960s, it reflects the increase in productivity of a large part of its economy and becomes an instrument in pushing the whole country towards those especially profitable activities.

The exchange risk inherent in changes of the real rate cannot be done away by entering a monetary union. Eire has been a case in point. The Irish economy has been very productive, due to English being the national language, to a young and educated population, and to a well-designed policy of attracting foreign investment. The nominal exchange rate of the punt cannot move, since Ireland has adopted the euro. Tradeable goods and services are priced at world prices. Non-tradeables must rise in price to effect the inevitable real appreciation of the punt.

The flexibility and adaptability of the British economy will be reduced by its adopting Euroland legislation. Being a Hong Kong to the Republic of China is profitable in itself, with no need to give up the dollar for the renmimbi with the object of contributing to the increase of productivity of the mainland.

I have never understood why it would be a good thing to have the British cycle converge with that of Euroland. A cycle is a troublesome phenomenon because variables that should move so as to compensate, move in sinister harmony instead: in a slump, prices, wages and interest rates fall; but so do consumption, output, employment and investment instead of going the other way. It would be good for the world economy if not everybody caught the flu at the same time.

The City seems to be doing all right as a financial centre by quoting prices in all sorts of currencies, even in euros.

 

Political arguments against the euro

With a double entendre typical of the Jean Monnet method, the euro is presented as a currency issued by a Central Bank that is independent of all political pressures, and also put to work to cement European political unity. If at some point painful frictions appear in the Council of the ECB, there will be calls to modify the proper monetary policy to soothe the feelings of those nations that cannot cope.

In any case, imposing a currency willy-nilly is a curious way of heightening pro-European feelings. I have heard menaces to the Swiss that they will rue the day when they did not join the EU. But if capital moves freely from one country to another, if trade is free, if money is a matter of choice, if work permits are freely given to nationals of both sides, why should Switzerland (or Norway, or Britain) be punished for not wanting to play the Brussels game, unless it be war by other means?

A multilateral disposition in all the nations of the Atlantic world would be more constructive. The legend has been fostered that ‘European civil wars’ have not happened in the second half of the 20th century because the Common Market has brought France and Germany together. In my view, peace in Europe is due to American intervention and generosity.

Politicians love to spend and if need be, they will tax for it. If the point of the euro is to open the door to more taxation, I would rather stick to currency competition and flexible exchange rates.

It surprises me to see that so many European democrats accept the ‘chastity belt’ theory of politics. It is one thing that the citizens of a country should come to a Constitutional agreement on a ‘self-denying rule’, such that no group should be granted privileges denied to other groups, and quite another that hard decisions should be conjured away from public discussion and the responsibility shifted to the bureaucrats of Brussels. National politicians, instead of convincing their electorates that they should refrain from their populist habits, clamp on them some directive and blame the EU for the pain that hard but necessary measures cause to the man in the street. It is the same dangerous trick that Governments from underdeveloped countries play on their citizens by blaming on the IMF the measures that they should have taken long ago. I fear many ordinary European citizens are turning against the EU and the free economy, just as so many anti-globalisers are turning against the international organisations and capitalism.

The ‘Third Way’ is their fig leaf. They cover the sleight of hand by which they say they are forced to take the policy measures that it is their duty to take and explain. They cover our inhumanity to the peasants of the developing world with our agricultural protection. They cover the barriers erected against immigrants who are ready to do the work Europeans refuse, and even to compete with overpaid European specialists.

A common mistake that politicians make when they discuss economics is to think that it is a power game. If the market is wide and competition keen, the heavy-weight corporations of today are the dinosaurs of tomorrow. It is a different story when governments favour their companies, but I thought that the point of the single market was to open the Continent to competition and foreign investment.

There has been surprisingly little friction among the founder members of the euro. I sincerely hope a recession does not sour tempers. I may be a critic of the euro but the last thing I would want as a European is a falling apart of sister nations.

There are two dangerous elements in the hope that Europe will become a world power, politically and economically: one is the fissure it opens in the Atlantic community; the other the boost it will give to a world divided in economic blocs. The US as the hegemon is presented with many temptations, including isolation and concentrating on the Pacific. The political and military alliance with America should be the guiding principle of European foreign policy.

One of the fondest ideas of ‘sensible’ economists is that the best way, if not the straightest, to world free trade is the creation of customs unions and economic communities. Professor Bhagwati is right in asking the question ‘building blocks or stumbling blocks?’ The EU, NAFTA, the Group of Rio, and ASEAN are at various stages of consolidation and enlargement. The effort of the Atlantic nations should concentrate on helping the WTO, so that the countries that are kept out of the block game can profit from freer trade. Why should India (an old and miraculous democracy), Russia, the African countries outside the Lomé Pact, Australia and New Zealand, and many others, be thrust out where there shall be weeping and gnashing of teeth?

There is nothing a successful Prime Minister like Tony Blair enjoys more than a touchy-feely photograph with important world leaders. Politicians think that the economy has to be governed if it is to function properly. They do not want to understand that the essence of a free economy is that it functions on its own within the framework of abstract laws. To be able to throw his weight about and ‘do something’ Tony Blair is ready to accept what Britain does not need: to send the Old Lady of Throgmorton Street to an old peoples’ home and be ruled by Die alte Fraulein von Frankfurt. Britain is no Struwelpeter, who refused to brush his teeth, cut his hair, and trim his nails.

Alfred Hirschman thought there were two ways to influence a club or a corporation: ‘Voice or Exit’. There may be a third way, if you will pardon the expression: playing games of disloyalty to force the group to move in the direction. By keeping the pound and staying in the EU, by rejecting the euro and pushing in the free market direction, by engaging the US and betting its all on the next round of the WTO, Britain may be of more service to itself, Europe, and humanity than by submitting meekly to Jacques Delors’ gospel.

Britain abstain!

We start from here, as Buchanan says: Britain is in the European Community, so how can it make the EU change direction? By showing that one can prosper under free competition, including currency competition.

Endnotes

1   Paul de Grauwe, Economics of Monetary Union, Oxford University Press, 4th edition, 2000.

2   See: R. Febrero, “La moderna macroeconomía neoclásica y sus consecuencias para la formulación de la políticia económica, MS prepared for publication in Economía y economistas españoles, E. Funetres Quintana, ed.

3   Cf. Larry Siedentop, Democracy in Europe, Penguin Books, 2001, chapter 1 “Democratic Liberty on a Continental Scale”.

4   V. S. Naipaul, The Suffrage of Elvira, André Deutsch, 1958, chapter 1.

5   R. Mundell, ‘The Monetary Dynamics of International Adjustments under Fixed and Flexible Exchange Rates’, Quarterly Journal of Economics (1960).

 

A Delayed Homecoming:

An Update on European Union Enlargement

 

Dr Helen Szamuely

Based on a talk given to the CRCE

on 1st December 1999

 

Published by

The Centre for Research into

Post-Communist Economies

2000

The Constitution of the CRCE requires that its Trustees and Advisers dissociate themselves from the analysis contained in its publications but it is hoped that readers will find this study of value and interest.

First published in January 2000

by

The Centre for Research into

Post-Communist Economies

2 Lord North Street

London SW1P 3LB

© The Centre for Research into Post-Communist Economies

and Helen Szamuely

All rights reserved

Occasional Paper 8

ISBN 0 948027 33 9

Printed in Great Britain

Notes

 

The talk was given just before the Helsinki Summit where the predicted widening of the enlargement process was decided on. Bilateral intergovernmental conferences will be called in February 2000 and negotiations will begin with Romania, Slovakia, Latvia, Lithuania, Bulgaria and Malta. There will be interim reports on the progress each country makes towards incorporating the full acquis communautaire. Turkey, too, has been accepted as a candidate state, subject to various conditions relating to its human rights and economic records. Solution of the Cyprus problem has been postponed until negotiations with that country are completed. Similarly, the European Council has suggested that the dispute over the Aegean Islands be submitted to the International Court of Justice in 2003.

 

Even in Turkey it was recognized that the country’s status as a candidate member was little more than symbolic, since the possibility of actual membership is far in the future. The offer has been greeted with great joy, however, as it confirmed Turkey’s status as a European state, just as the status of the former Communist countries as full members of the Western community had been confirmed by negotiations being opened with them.

 

Whether, having achieved this coveted status, the candidate countries will continue to strive will be interesting to watch. In particular, it is worth noting that the first development in Romania was a full-scale political crisis that had clearly been suppressed prior to that point in order to allow the European Council to make a decision in that country’s favour.

 

To turn to the vexed question of the Common Agricultural Policy, two things need to be added. The first is that the hopes centred on the WTO were disappointed even more spectacularly at Seattle than anyone had expected. The second is the confirmation in an article written for the Sunday Telegraph by a newly elected MEP who sits on the Estonian Joint Parliamentary Committee in the European Parliament that much of the negotiation with that country consists of pressure being put on it by the European Union to reverse many of its free-market reforms in agriculture. (Sunday Telegraph, December 12, 1999)

 

Helen Szamuely

January 4, 2000

About the Author

 

Dr Helen Szamuely is on the Advisory Council of the CRCE. She has written extensively on Russia, Eastern Europe and the European Union and is the co-author, with Bill Jamieson, of A “Coming Home” or Poisoned Chalice?.

 

A Delayed Homecoming:

An Update on European Union Enlargement

 

Based on a talk given to the CRCE

on 1st December 1999

 

The obvious question to start with is why does one need an update on European Union enlargement at this point? There are two reasons: the process of negotiating with the East European countries has now gone on for about eighteen months or just over, so it is probably quite a good point to have a look at what has been achieved and what, more to the point, has not been achieved. Also, a number of things are happening at the end of this year which indicate that perhaps these negotiations will take a slightly different turn. One does not, however, necessarily expect anything to move any faster, or in what one might call a sensible direction. It looks fairly likely that at the Helsinki Summit in mid-December, the participants will accept the idea that the other five countries – Slovakia, Latvia, Romania, Bulgaria and Lithuania – should also start accession negotiations, on the grounds that most of them have now reached what they call the Copenhagen standards in their political development: they have established democratic systems and have made serious progress towards opening up their economies. There are certain conditions laid down for Romania and Bulgaria. In fact everyone is feeling extremely worried at the thought of Romania coming anywhere near the European Union. But, nevertheless, they cannot just leave Romania out.

The one country which is still going to be left out is Turkey. Just as Slovakia, Latvia, Romania, Bulgaria and Lithuania have moved up one notch, in the sense that they are going to start accession negotiations, Turkey has moved up one notch as well in the sense that it is now accepted that Turkey is a candidate . We are not yet negotiating with the Turks, however, because their human rights record is terrible and their economy is up the spout, particularly after the earthquake. So to deal quickly with Turkey for a moment, because it is not really part of the talk – the idea is that we go on having various agreements with Turkey, helping them and having a customs union with them. As a matter of fact every agreement with Turkey gets spoiled by Greece, who refuse to hand out money. A great deal of the money that should have gone to Turkey to help them develop their economy has actually been held back, because the Greeks have said no, until we have sorted out the Cyprus question and various other problems like those islands that nobody actually wants to live on. The Cyprus question does not look like being sorted out for some time, although Cyprus is one of the countries that is high up on the negotiation scale.

So after Helsinki we are going to have a situation where we have up there somewhere the five countries to start with, with Hungary quite high up, Poland and Slovenia next, the Czech Republic has slipped down – you get these little races, where one country has gone on a bit and another has slipped back, and so on and so forth. Then you get Latvia and Lithuania, which are coming fairly close to reaching the stage where we might just start accession negotiations, and then Bulgaria and Romania which are nowhere near in sight but we cannot just leave them out. Somewhere between those two groups is Slovakia, which has, since Meciar’s defeat, according to the EU, made tremendous progress towards setting up a democratic system and slightly less tremendous progress about opening up its economy, in that privatisation has not really taken off.

So that’s one thing: the decisions that will be taken in Helsinki. Then, in order to achieve the right decisions, Romano Prodi has commissioned only three “wise men” this time – as opposed to last time when there were about five or six of them – to produce a paper as to the sort of institutional reforms the EU needs in order to enlarge. Not surprisingly, they came up with the idea that what we need is more qualified majority voting, more centralisation, more powers to the Commission, only one Commissioner per country, re-rating the votes in the Council of Ministers – and all this because once we have twenty countries, and maybe more, we obviously cannot cope with the system we have now. In parenthesis, they also mention that we are finding it hard to cope with it even as things are.

That paper is quite interesting, because it is the only one that is very gung-ho about enlargement: enlargement is an absolutely wonderful thing, it is going ahead, and it is going to transform Europe into something totally marvellous. When you look at the Commission paper which has just come out [Composite Paper – Reports on progress towards accession by each of the candidate countries (12053/99)] as a sort of an update on what is really going on, it says quite frankly that the reason there was felt to be a need for a paper which was a bit more than the usual monthly update, was because negotiations had clearly stalled and needed another kick-start.

When you look at the recent House of Lords report Enlargement of the EU: Progress and Problems you find that it says the same thing: there are clearly serious problems in the enlargement negotiations. For example, there are tremendously upbeat reports from the countries: they have installed this and they have privatised that; then all the way down at the bottom of the report it states that they are not putting the acquis communautaire into practice – for which one does not blame them, exactly – but unfortunately they cannot come into the EU until they have actually installed the acquis communautaire and integrated it into their legal and economic system. They have not kept up with their environmental standards; even the privatisation programmes have been “iffy” in some of the cases; there are problems with human rights including with Roma, whom everyone else calls Gypsies. So there is a feeling that after eighteen months the whole thing has slightly ground to a halt. The idea is that by bringing the other five countries into the negotiations the process will be given a kick-start and take off again.

At the same time there have clearly been reactions against enlargement in some of the member states and applicant countries. Opinion has changed quite considerably. I think everyone has followed the success of Jörg Haider’s party in Austria. It is quite hard to work out what Haider’s policies are, but the one discernible part of them is that his party and the people who voted for him – which is actually a sizeable proportion – do not want immigrants, and they do not want enlargement to happen in a hurry because the East Europeans are going to flood into Austria and Germany. Actually there are quite a lot of East Europeans in Austria and Germany already, but there are going to be some more.

The Wall Street Journal has a monthly Central European supplement, and they recently published some opinion polls in it. The Western attitudes are quite interesting. The polls show that in Austria, the support for enlargement is down to 38.7 per cent. In Germany it is higher, at 60 per cent. In France, not surprisingly, it is about half and half – about 45 per cent support enlargement while 44 percent oppose it. In the United Kingdom, which is supposed to be so gung-ho for enlargement, only about 41 per cent support it. Italy, for some reason that no one can quite understand, is very much for it – 67 per cent support it, which is plain against what everyone says, that the southern states are against enlargement. I notice that they did not ask Spain, which is the crucial one, because the Spaniards have already said that they are not giving up one peseta of the money they receive from the structural fund and the cohesion funds in order to help Eastern Europe.

In Eastern Europe, opinions have changed as well. Hungary is the only country in which support for enlargement has gone up since 1995, from 73 to 83 per cent. In Poland, Slovakia and the Czech Republic it has gone down. For some reason Slovenia and Estonia were not listed. But I think what has happened in these countries is that as negotiations have carried on, and as they have realised that the European Union is not being terribly helpful to them, and as the trade between the EU and Eastern Europe has not opened up much more, they have become a little less interested in joining the EU. The other point, of course, is that most of these countries wanted primarily to join NATO. Once that has been accomplished for some and became a possibility for others, the EU has started to matter less, although with the building up of the European Union’s security and defence identity, the question of defence of Eastern Europe may well come up again.

The last reason why it is an interesting time to have a look at this is that it has become absolutely obvious that all attempts to reform the Common Agricultural Policy have failed, yet again. There is now talk of yet more reforms in about two or three years’ time. What makes this all so interesting is that the Commission paper, which talks at great length about trade and about institutional reform and about what is required from the East European countries and so on, hardly ever mentions the Common Agricultural Policy, whereas of course it is perfectly obvious that you cannot bring in countries that are both largely agricultural and poorer than the European Union average while the CAP is in place as it is. The rather weak attempts to reform the EU agricultural policy, which were proposed in Agenda 2000 – they were not huge attempts, just a certain cutting-back of support here and there – were watered down by the discussions of the Finance Ministers, and again at the Berlin Summit. The reforms are all falling apart. So now the great hope is that the WTO negotiations will actually force the European Union to reform the CAP. On past record, I would say that was very unlikely, but other people may have different ideas and may think the WTO will actually be able to do something about it.

So the Commission is saying that we really must inject a new momentum into the negotiations. The Commission is also saying that the reason we want successful enlargement negotiations is because “we want to reunify Europe”. I looked in vain to see when they thought Europe was last unified. One gets this all the time – people saying they want to reunify Europe – but when was it unified before? The Roman Empire, Charlemagne, Napoleon? Not one of them unified Europe for very long – the Roman Empire lasted a long time, but it was hardly a European empire. If the idea is to create a Europe of democratic nations then that is contrary to the clearly professed aim of political, economic and monetary union. This has never existed before, and it is very questionable whether if it does come into existence, it will produce the desired result of a stable, democratic society.

When we have ten countries negotiating, as the Commission and the House of Lords Committee have acknowledged – I am leaving Cyprus out because the problems with Cyprus are so completely separate, sui-generis – there is going to be a problem in that these countries have reached very different stages in their political and economic development. Since accession negotiations are contingent on these developments, clearly these cannot happen in the same way as with, say, Hungary and Romania, taking the two that are at the furthest ends of the spectrum. A highly complicated system has been proposed. The acquis communautaire is broken down into several chapters, and the chapters are negotiated in batches of seven or eight at a time. So the idea is that the Commission will decide with each country what chapters to start negotiating first. There will be a core set of chapters, which are going to be negotiated with all the countries. Therefore, some of them will start with only three, and some will start with five, and some will start with ten or seven or eight, or whatever, which is a bit like a game of Grandmother’s Footsteps. It is difficult to imagine how any of them are going to reach this wonderful finishing line: all of them joining the European Union.  

The other problem with negotiating the acquis communautaire chapter by chapter is that, not surprisingly, all the really difficult chapters have been left to the last batch, even with the first five countries. We have not even started negotiating on agriculture, which is, predictably, where sparks will fly. Yet another problem is that as the chapters are negotiated and are closed, it is only a temporary closing. They may well be reopened next year for two reasons. First, in the meantime the Commission wants to know whether these countries are continuing to implement all that they are supposed to implement. There is evidence that some of the countries have simply implemented a lot of the rules leading up to the negotiation – this is particularly true in the Czech Republic – and then once negotiations began they decided they did not have to implement anything further. It is a kind of psychological barrier. They want to be among the countries which are negotiating, but they do not actually want to implement all of these rules. And again, one cannot actually blame them, because there are already far too many rules and most of these countries cannot afford to implement them all. An earlier House of Lords report on enlargement calculated that for Poland to implement all the environmental rules would bankrupt the economy. This is not a cheerful prospect either for Poland or anyone around Poland.

The other reason why a chapter is only temporarily closed is, of course, because the European Union keeps changing the rules. Because each country has to come in on the whole of the acquis communautaire, every time it changes and new legislation, new regulations new institutional set-ups are put in, negotiations have to be reopened. One can see this carrying on for a long time, especially as there is a new inter-governmental conference coming up next year, which will change all the institutions – that is its purpose. So all the institutional negotiations with Eastern Europe that have happened up to now will have to be restarted. In case any of the negotiators think they are out of the woods, they will have to think again.

One of the suggestions made by the House of Lords Committee is that, this being so, representatives from the East European countries should take part in these negotiations or, at the very least, have observer status at the IGC. It is not entirely fair, the Committee suggests, for these countries not to know what is going to be thrown at them in six months or a year’s time. Either way, at the end of the year there will be a new institutional set-up, and all the applicant countries will have to start negotiating again, and they will have no idea until the Treaty comes out at the end of the IGC what these new institutions will be. At present, it is just a suggestion, and no one has agreed to it. In fact the British government is on record several times in the shape of Robin Cook saying that the only way the East European countries can come in is on the whole of the acquis communautaire: there can be no derogations, no transitional arrangements. They will just have to sit back, wait, and then lump it.

The requirements from the East European countries – the list of what they must do in order to become worthy members of the European Union – fall into what I would designate as two parts – there is the sensible part, and the somewhat less sensible part. The two are often contradictory. The sensible part includes the strengthening of the democratic political system, the strengthening of the judiciary, the freeing up of the economy, opening up trade with other countries, removing tariff barriers – something the European Union could start thinking about a bit more seriously itself - then the Commission goes on to the next stage and says that they must implement the whole of the acquis communautaire, and integrate their economy with the European Union (which, apart from anything else, means the erection of tariff barriers against other countries that may be the neighbours and trading partners of the applicants). So you have this extraordinary set-up whereby certain basic political and economic ideas are mixed in with something which is actually rather debatable.

Is it the best thing for East European countries to integrate their economies with the much more advanced, much stronger economies of Western Europe? It certainly has not proved to be the case in East Germany. It integrated its economy with West Germany, and currently unemployment is running at about 25 per cent. Most of the East German factories have had to be dismantled because they cannot produce anything. It is not a particularly happy situation, especially with the Communists making electoral comebacks in those countries. I find it very interesting that in the midst of all these official discussions about how wonderful it will be when Eastern Europe integrates its economies with the European Union, nobody has actually suggested looking at the German case – looking at what happened with East and West Germany – and questioning whether this is actually the best way of helping Eastern Europe. In fact, the integration of the economy and trade with the European Union have grown recently as a result of the Russian economic collapse. Many of the countries that were trading with Russia a great deal can no longer do so and are now turning to the West. While on one level that shows that they have very flexible economies – at least the ones that have managed to turn to the West – the other part of that is that these countries have become very dependent on the fluctuations within the European Union, and especially on German economic development, which is not terrific at the moment.

In response to the East Europeans putting all these rules and regulations into place the European Union must reform its institutions, which will probably happen; it must do something about the cohesion funds because more of the money will have to be directed towards Eastern Europe, while at the same time it is agreed that no more money will be extracted from the member states because no government is going to agree to raising the European Union contribution above 1.27 per cent of the GDP. The amount will, therefore, depend on what the GDP is like, and while there are predictions of higher growth in the European Union, there has not been a great deal of it recently. Finally, there is the need to reform the Common Agricultural Policy, which, as I said before, has not yet happened.

One of the thorniest questions is that of the transitional period. Because it has been acknowledged that unlike the last lot of countries which came in, which were mostly the fairly well-off Scandinavian ones, the East European countries actually do have quite serious economic, political and social problems. Their environmental standards are very different, some of them are economically backward and so on, and so there is this question of a transitional period. Such transitional periods have existed before – for instance, on the fisheries and on labour mobility when Spain and Portugal came in – so there is not really anything very new about the concept. The problem is that because there are so many of these countries, and the transitional periods might well be very long, there is a great deal of opposition within the European Union, although it looks as if there will be a transitional period on installing all the environmental rules. Some of the environmental rules may well be installed, but one must remember that most of the West European countries are already groaning under the weight of all these rules.

It is a firm ruling within the European Union that anything to do with the single market will stay as is. There are no transitional periods on the single market, although the House of Lords Committee has suggested that perhaps it might be worth looking at this issue more closely. One cannot see that happening, because all discussions of flexibility always fall down, and indeed any kind of repatriation of rules always falls down over this idea that nothing to do with the single market can be left to the discretion of the countries. If the new countries are allowed to stay out of that and to take certain rules of the single market and say that they do not actually want them, this would have enormous implications for the existing members. If Hungary and Poland, for instance, are allowed not to obey the rules of the single market, well why not Britain? And indeed, this may become Conservative policy. William Hague has certainly mentioned the possibility that once one has introduced flexibility for Eastern Europe, one might well have flexibility for other countries as well, although it looks as if the Conservative Party has not quite made up its mind as to what ‘flexibility’ means. Nevertheless, the European Union and its fervent advocates have scented problems there.

There could also be a transitional period for mobility of labour. That actually comes from the European Union, because they are rather worried about East Europeans coming into the West European countries, accepting work – mostly highly-qualified people who are willing to accept work at a lower wage, and certainly lower social security, or perhaps no social security, than most people in Western Europe. Germany and Austria are especially worried about that.

Finally, there is the question of agriculture. As things stand, the offer to Eastern Europe is that Eastern Europe will have half a CAP. They will be governed by all the rules and various quotas, but they will not have any of the money that goes with it, which cheers everyone up no end. So clearly there will have to be some sort of negotiations. Personally I am rather looking forward to the negotiations over agriculture. The Hungarian and Polish agriculture ministers have already been making rude noises about “oh no, you don’t cut us out of all this money that you are dishing out to other farmers!” and so it will be quite interesting to see what happens about that.

I shall quickly sum up the main difficulty, as I perceive it. We come back to the problem we covered in our book A ‘Coming Home’ or Poisoned Chalice? – the question as to whether this is really the best way forward for the two parts of Europe.

The assumption behind all of this – integrating with the European Union economy, accepting the acquis communautaire, and so on – is that it is treated as the best possible arrangement in this best of all possible worlds. At no time is there a suggestion that there is quite a lot wrong with the European Union’s structure. It is all very well for us to preach democracy to East European countries and to tell them they must have an independent judiciary and a strongly democratic system, but the European Union does not have an independent judiciary. It has a European Court of Justice which is not an independent court: its aim is to promulgate the integration of the European Union, not to interpret the law. By no stretch of the imagination can that be called an independent judiciary. We have a Commission that is of questionable democratic value. We have a European Parliament, which seems progressively to lose support the more powers it acquires, and a great deal of the European Union legislation goes by regulation, not directives but regulations which are promulgated by the Council and the Commission, and simply become law. They are never discussed and never debated. There is nothing anyone can do about it. Clearly this is a very questionable sort of model to put in front of people who have just spent fifty years under Communism.

Another great thing that we preach to East Europeans is the idea that they must free up their economy. They must not have tariffs, and they must open up their economy to foreign investment. Fine – these are wonderful ideas, and indeed foreign investment is pouring into some countries in Eastern Europe faster than it is pouring into Western Europe. Clearly they are doing something right. But then look at the negotiations that the European Union itself has conducted with Eastern Europe: it has removed all tariffs from industrial goods, but the tariff on agricultural goods has remained. Indeed I hate to say it, but it is the Commission that has been pushing for the speedier removal of tariffs from agricultural goods. All the same, it has just not happened.

The reason is obvious. We can sell industrial goods at great advantage; with agricultural goods we are not going to do so well, as more agricultural goods are produced in Eastern Europe and they are often of higher quality. Not only are East European countries prevented from exporting their produce to us, at the same time agricultural goods from the European Union are subsidised and they are dumped upon East European countries. This has caused a great deal of trouble in Poland. In fact a Polish activist was recently arrested because he protested about this in various violent ways, and there have been demonstrations in Poland throughout the year about the dumping of subsidised agricultural goods on the country. While Polish agriculture could probably do with some reforming, this is not the way to go about it. So there is a problem about how can you exhort people to free up their own economy if we have not freed up ours? The CAP is not an example of a free economy, quite the opposite.

There is also a problem with saying that Eastern Europeans must develop their small and medium sized enterprises. Again, it is a very good idea, but certainly what you get in Britain is the small and medium sized enterprises complaining vociferously about the amount of regulation which is imposed on them from the European Union. So we go to Eastern Europe and tell them they must develop their small and medium sized enterprises, while at the same time saying that they have to accept all the regulations which are killing our own small and medium sized enterprises. If they don’t like it, we might give them some money to support them. This is clearly not the ideal situation.

Therefore, one really has to abandon the idea that people have advanced, particularly here in Britain, that enlargement will somehow be a catalyst for reforming the European Union. The only reforming that will happen will be greater centralisation as advocated by the Commission. There will be no reform of the regulatory structure or the agricultural policy or anything else that would turn the European Union into a vibrant forward looking economy. So the question remains: is this the best way forward for a relationship between Eastern and Western Europe, and for development in Eastern Europe?

In our book A ‘Coming Home’ or Poisoned Chalice? which was published last year we put forward the theory that this is not the best way for Eastern Europe. Instead, what we ought to be doing is negotiating free trade agreements with East European countries, making it easier to invest there, and in the process it might become easier to invest in some of the Western European countries. I have to say, eighteen months on, I still stand by that.

Questions & Answers

 

Dr Eamon Butler, Adam Smith Institute:

The Adam Smith Institute once calculated that there were 42 countries in the European region which could credibly become members of the European Union, just on geographical terms. I would like to see every one of them in the European Union – let the French try to run that lot!

They can come in under one set of rules, but it will not be too long before people start re-negotiating, and thank goodness for Spain and Portugal, because once these countries like France start becoming net payers rather than net receivers, it does actually put the system under some strain. At least we are now talking about the Common Agricultural Policy – these are arguments which never previously existed. It is not the best way, and certainly not the best for Eastern Europe, but I think it would actually reform the institutions of the European Union inexorably.

HS:

Well, I am delighted to say that Hungary is leading the field because, knowing a little something about Hungarians, I would love to see them in the European Union. They are a nation of natural anarchists, so they will come into the European Union, probably take over a number of the institutions, and then wreck them just for the hell of it. So the sooner Hungary becomes a member, the better!

But the truth is that the European Union cannot actually be run. The whole thing is grinding to a halt even with fifteen members. Spain and Portugal are a great help there, of course, particularly Spain. Whenever anything is to be reformed or not reformed, the Spanish Prime Minister comes along and bangs on the table and – for reasons I fail to see, since Spain lives off the European Union – everyone says “all right, all right”.

However, the general trend is the opposite of that, whatever will happen in the long run. The only way to run even twenty members is to centralise much more. In fact it is happening already with the institutional proposals. The French are actually net contributors, although not that high, and I cannot say I have noticed that much change in their attitude. They are still absolutely determined to keep the Common Agricultural Policy as it is, and to keep everyone else out.

Robbie Millen, The Spectator:

Is there any significant body of free market opinion in Eastern Europe which says ‘let’s not bother with the European Union, it’s going to retard what economic progress we have made’, or do people generally hold as an article of faith that European Union membership is a good thing, full stop?

HS:

It is not very significant, although CRCE is doing its bit – sending out publications such as A ‘Coming Home’ or Poisoned Chalice? and so on. I think the main problem is that the advantage of joining the EU has been an article of faith for some time. I remember attending a round-table discussion in the Hungarian Embassy. There was someone there from the Foreign Ministry, and I was saying “Is this actually the best thing for you?” and he said “Look, we just want to belong.” 

Some of the shine is now going off that. “Belonging”, after all, does not necessarily mean belonging to the European Union. But there are problems. One is that the people in all these countries who vociferously oppose membership of the European Union tend to be the extreme nationalists and the unreconstructed communists. So those who have, say, free market doubts about membership do not want to be seen to be part of a group containing such extremely unpleasant people. Extreme nationalists in Eastern Europe do tend to be extremely unpleasant. It is not like nationalism in many other countries.

I am sure doubts will grow once they are inside the European Union, but they are probably not there now. It is still true that most people in Eastern Europe do not know what being part of the European Union will involve. How can they? Most of the British do not know what part of our legislation comes from the European Union, and we have been members of that wretched organisation for more than twenty-five years now. So I am afraid we cannot rely on that.

Merrie Cave, Salisbury Review:

Is it really true that no one has pointed to the experience of joining East and West Germany? You would have thought the Germans themselves would have pointed to it. As you say, all the factories with the old names have been closed down.

HS:

What has actually happened is that Eastern Europe has benefited by that, in that the West Germans have leap-frogged over East Germany and invested in factories in Eastern Europe. It is actually quite logical, because they are much cheaper. East Germany has all the problems of a former communist state, plus all the problems of the West, because everything has been integrated. So all these factories which perhaps ought to have been in use in East Germany are not there now. They are now in Poland, Hungary, and the Czech Republic.

I think what will happen is that when these countries have to obey all our rules, investment will move even further east. Investment will go to Ukraine – possibly not Russia, Belarus maybe. In the Soviet days, Belarus was actually quite an industrialised, developed place, although at present it is going through a very bad phase. But if the Germans do decide to invest there, assuming that Lukashenko does step down at some point and there is some kind of relatively sensible government there, they could easily bring some of the old industrial factories back into play. In the end, people vote with their wallets. This was actually mentioned in one of these absolutely priceless House of Lords reports – although no one ever pays any attention to them, they do actually come up with some interesting ideas.

The other thing that ought to be mentioned when considering how these places ought to be developed economically is what happened when some of the southern states came in. Spain is one example, but Greece is perhaps even more interesting. Greece has now been a member for twenty years or something like that – perhaps going on for twenty-five years – and lives totally off European Union handouts. There is not the slightest sign that it is developing anywhere. Indeed, this comes up year after year over the tobacco subsidy. The European Union spends vast sums of money banning tobacco and tobacco advertising, but spends even more money subsidising tobacco grown in Spain and Greece, and a little bit grown in Italy. Since it is apparently unsmokable, I think it is dumped on the Third World, and once the subsidy is collected a great deal is burned.

But whenever that subject comes up and someone says that this must be stopped – saying that this is not logical and is a waste of money – the answer is always the same: that the people who grow the tobacco are totally reliant on this subsidy. There is not the slightest sign that there is any kind of development that would mean those particular areas might become less reliant on this ridiculous subsidy, which produces nothing. And this is twenty-five years after Greece joined the European Union.

So there are all these arguments about how the East European countries might be backward now, but give them a chance and they will come into the European Union and will develop very quickly. Well, it has not happened with the Mediterranean countries – I don’t mean Italy, but the later entrants. There is no real guarantee that it will happen in Eastern Europe. Possibly there is a reasonable chance as things are developing now that if there were free trade agreements, they would develop in a way that would stop Eastern Europe being reliant on Western handouts. There is not a chance of that happening if they come into the European Union. It is like East Germany, which relies on West German handouts.

Wiktor Sobkow, 1st Minister, Polish Embassy:

I have various short remarks. Regarding the Gypsies, the reason we call them Roma is that they call themselves Roma. We used to call them Gypsies, but they insist on being called Roma, and so we respect that.

As far as the environment is concerned, you were saying that imposing the European Union regulations 100 percent was not possible because it would ruin the Polish economy. But could you name one country in the European Union which has adopted 100 percent of the rules? The European Union cannot force newcomers to adopt 100 percent of the rules when they have not adopted the rules themselves.

As for opinion polls, this is a very tricky question. It depends if you look at elites or the average people in the street. The average people in the street have no idea about Central Europe, and they have no idea of the European Union. They have never been to Central Europe. Maybe they have seen some people begging in the streets or washing the windscreens, and they say they do not want that. But the elites take a different view. They see enlargement as beneficial to Europe as a whole, to the European Union and to Eastern Europe.

You talked about the competition between the various applicant countries as part of the negotiations, of some being “better” and others “worse”. There is no competition. It depends which chapters you open. If you open the chapter on audio-visual, for example, Estonia could not close it because the rules are that 51 percent of the production has to be European, and they have US television almost exclusively. So you cannot say that Estonia is worse at the moment in this respect. Hungary will be negotiating agriculture, and for example the question of wine will turn up. Italy, France, and perhaps Spain will try to block Hungarian wine. And then there will be a kind of impasse. We have potatoes; maybe other countries will have something different. I do not think it is possible to say who is the best. This is not a competition, it is just that some chapters are more difficult for some countries than others.

Regarding East and West Germany, I do not think there is any comparison. It is no wonder there has never been any comparison, because there cannot be. That was an annexation, a liquidation of a country, and everything was imposed automatically from the western part. I think if Eastern Germany had followed the course of other Central European countries, they would not have high unemployment and other things, because they would work it out themselves, they would create the economy themselves. They did not have any choice. Everything was imposed on them. They did not have to think about it, they did not have to strive for solutions and find out some good rules which were suitable for them. They had to be passive. They were fired from work and everything was imposed on them. So you cannot compare Poland, Hungary, Latvia, Estonia, Slovakia to East Germany. The situation is completely different.

You ask if integration is the best way forward for two separate parts of Europe. But tell me if there is any other alternative. Norway is a rich country, Iceland is a rich country – they have oil and gas, for instance – and Switzerland is another good example. What is the alternative for Poland, or for Hungary? Can we form another economic alliance? And with whom – with Ukraine, or Russia? There is no alternative.

Then you spoke about democracy and the economy, and whether the European Court of Justice is fully independent, whether the European Commission is democratically elected. Yes, but I do not think anyone in our countries really thinks about democracy in the European Union. The economic aspect is the most important. It is not so important for people in our countries that the Commissioners are not democratically elected, or the balance of power in the European Parliament. Maybe in ten or twenty years we will engage in this discussion. At the moment, the economic aspect is the most important. No one will think we have had the domination of the Soviet Union and now we have the domination of the European Union. You have some groups of people they say that they are anti-European anyway, so it is not anything specific.

You also said that we will not get any money from the CAP. This is not true. We will get money, but not direct payments, not direct subsidies. Nevertheless we will receive help from the European Union. The question is about direct payments. Of course farmers protest in the streets of Poland. They say why, if we are to be a full member of the European Union, are we second class members? There is no second-class membership – either you are a member or you are not. Our former Foreign Minister said that there is no partial membership, like there is no partial pregnancy. So they protest in the streets to say that when we become a member of the European Union, we should have equal rights with the present members.

The last point relates to transitional periods. Again, you should divide them very clearly into two groups – transitional periods that are demanded by the European Union, and other transitional periods. I have the impression that you might think that we wanted a lot of transitional periods and long transitional periods, which is not the case, at least in Poland. We want short transitional periods, and as few as possible. The problem is that if you have a lot of transitional periods which last a very long time, you have second-class membership, which we do not want. If you have one hundred transitional periods for twenty years, you have second class membership. But we have also asked for some long transitional periods, like the purchase of land. Some people say this is because we fear Germany, but that is not the case. The price of land is one tenth of the price of land in the European Union. If we opened the market to the European Union, we would have thousands of farmers – we have requests from Holland, from Denmark, from Ireland, and also from Britain – a lot of farmers ask at our embassy about when we will open this market. They want to come and buy the land because it is cheap. We will sell it, but later. So if our land is one tenth the price of that in the European Union, we cannot just open the market. It is not fear of Germany or any other country, it is an economic and political point.

HS:

I did not mention the particular problem about land ownership. Poland is not the only one; I think that is a problem in Hungary and the Czech Republic as well. Inevitably, as you say, in economic terms it would make enormous good sense for people here to buy the land, and it would force people there off the land. There is the other part of it, which is that it would possibly be quite good to have some foreign input – some of the land bought by farmers from Western Europe who have more advanced methods of farming – but probably not all, and it is unlikely that East European farmers or governments who depend on their votes should see it that way.

A lot of what you were saying sounded as if you disagreed with what I said, but you were actually agreeing. I did not say “better or worse”, because that would actually suggest that I thought the standards that the European Union was putting in front of the East Europeans were some sort of absolute standards. It is just a question of the EU negotiators occasionally saying that a country has come up to scratch and closed this chapter or that chapter. The problem there is that closing a chapter is only temporary, but even on that level it means that these countries have somehow integrated into the European Union rules and somehow accepted the European Union rules. The aim is to ensure that there is very little difference between what is happening in the East European countries and the European Union, which is insisting that its rules should be accepted totally. I agree that of course no one implements 100 percent of the rules. This is why there are all sorts of tables showing how much of a certain legislation has come in and how much has not, and how much of it is properly implemented and so on, even within the EU.

Nevertheless, that is what is happening – EU rules are being imposed on Eastern Europe. It may not happen from one day to the next as it did in East Germany, but this is not a negotiation between equal partners, so the East German example is not that far off mark. The European Union is definitely insisting on the acquis communautaire, that all these things should be included. And they can definitely whip up support for that by saying that they do not want all this food which is being produced under worse environmental rules, or that the East Europeans do not look after their animals properly, or whatever. It does not matter whether this is true or not, or whether the environmental rules are entirely necessary. In fact a great many of the environmental rules that we have in the European Union are not necessary. But they can always whip up support for them. They do that now in order to prevent proper implementation of free trade in agricultural goods.

 

I agree with you that most people in the West do not know about Central Europe. Sorting out all these different people is difficult – it is bad enough with the Balkans – and most people here in Britain just do not know. And what people do not know they are afraid of. This is not a fear I have much sympathy with, because I think if people come and work here, that is fine. But there is a fear that people are coming here, they will get our jobs, they will not pay the social security that we have to pay, they will just earn the money and go away, and so on.

 

As for the agricultural negotiations, yes – that is more or less the point I made. When we come to agriculture, there is going to be a great deal of trouble. May I just quote what the State Secretary of the Foreign Office of the Federal Republic of Germany in 1987, whose name was Dr Hans-Friedrich von Ploetz, said:

I can sketch out what will happen when we come to that junction [enlargement on agriculture]. We will have the German representative at the Council table who will make a very, very strong pitch saying “Yes, we are for enlargement, but no Polish potatoes. Not one.”

That is, as they say, from the horse’s mouth, and that will be repeated with other products by various countries. Those negotiations are going to be very, very difficult. All the really difficult issues have been left to the end, and so that will take a very long time.

As for the institutional changes, it is not entirely clear how long that will take, as one never knows how long these IGCs will take. The time-table at the moment is that at the Helsinki Summit they will call the IGC; everyone is making noises that we must make this one shorter than the last one; and also the idea is that the treaties must be separated, with only the core part of the treaty having to be voted through by every single member state, and so on. But I can foresee endless negotiations there. They will not involve the East Europeans, although there has been a suggestion in the House of Lords report that the applicant countries should have observer status, so they will at least know what is going to hit them at the end of it all, rather than just passively accepting what is happening.

Miss Lubica Vasekova, 1st Secretary, Slovak Embassy:

As I understand it the IGC will have a limited agenda precisely because its aim is to prepare for enlargement and, therefore, nobody wants to drag it out too much. Therefore, flexibility will not be discussed only the particular institutional changes that are needed to make it possible for the EU to enlarge in 2002, which is the date given at the moment.

HS:

There are problems with IGCs anyway. All these things were supposed to be solved at Amsterdam, but they were not. If you limited it this time, what will happen will be the same thing – they will say that they need to have another IGC. Indeed I can see them saying the same thing in 2003 – that they cannot actually enlarge because they have not solved this problem or that problem. If you have a time limit, then you clearly have to limit the agenda.

I am afraid that I come back to my original point, which is that institutional reform is only one part of this. The European Union, in order to prepare to enlarge to the east, will have to reform the Common Agricultural Policy, which is nowhere in sight at the moment, and will have to reform the whole structure of the cohesion funds, which again is nowhere in sight – partly thanks to our friends in Spain, who are absolutely determined that they are not going to lose anything. They can and have in the past vetoed any kind of a treaty. We saw this before in the case of the previous enlargement, where they threatened to veto the treaty unless they got their agreement over the fish. They are quite happy to use the veto, whereas the British always agonise over anything like that. So those two outstanding problems still remain. They are in some ways more serious than the institutional issues, which can be adjusted.