Letter: Monetary union will allow fiscal foolishness
Tuesday 14 February 1995
Sir: What Kenneth Clarke, your newspaper ("The great EMU debate", 9 February) and other advocates of a single European currency without increased political integration have yet to explain is how, in practice, individual EU governments will be constrained to pursue responsible fiscal policies.
Why should any member government in a single currency environment court unpopularity by raising taxes, when funds can be raised with relative impunity on the capital markets? True, there will still be an upward effect on ecu interest rates, but the impact at home will be proportionately less because the increased borrowing is now drawn from a larger pool. In effect, the misery is being spread around and indeed exported to those member states following more prudent fiscal policies. These will be rewarded for their European solidarity by experiencing levels of unemployment together than would otherwise be the case. A more certain recipe for resentment arising between the member states can scarcely be imagined.
It is difficult to avoid the conclusion that international tension arising this way can be avoided only if the introduction of a single currency goes hand in hand with the transfer to a supranational body of control of fiscal policy throughout the EU. The advocates of a single currency should be honest enough to admit that this will be the necessary accompaniment of what they are proposing.
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