Meeting in a small French town they decided to raise the stakes just days before the Inter-Governmental Conference begins in Turin. Their determination to stick to the Maastricht timetable for creating a single currency and their new proposals for stability pacts are as economically ill-conceived as they are politically misjudged.
This paper remains pro-European and strongly so. There are many sound economic arguments for a single currency, provided the conditions are right. Greater political co-operation and integration is a wise aspiration for a continent riven so many times in the recent past by nationalist tensions. The trouble is that the economic conditions are not yet right for monetary union. So for the French and German finance ministers to press ahead, in the face of a downturn in their economies and an increasingly sceptical public, risks derailing the political project they hope to build upon economic integration.
Monetary union under a strict interpretation of the Maastricht criteria and timetable is already almost impossible. There is little prospect of France meeting the economic criteria. Yet without France the single currency will be just a greater Deutschmark. The French government this week cut its expectations for growth this year from 2.8 per cent to 1.3 per cent. It will only be able to get its budget deficit down to the Maastricht requirement of 3 per cent of GDP through another round of severe spending cuts or tax increases. When the government tried the same thing last year, the public sector workers of Paris took to the streets in protest and support for the government collapsed. For France monetary union will only be possible with a politically risky and economically unwise fiscal squeeze when its economy is already weak.
The French know this of course and the real intention behind the finance ministers statements was to prepare the ground for relaxing the criteria for monetary union. The new proposals on budgets and exchange rates are a device to bolster the credibility of a hasty dash for a single currency. Countries whose budget deficits are too large would be fined. Those who remained outside the first phase of monetary union would be tied into a new, improved Exchange Rate Mechanism.
This strategy is misconceived. It will provoke the hostility of other European governments without creating the convergence between economies that monetary union requires. Take the new ERM as an example. Currencies which are not strong enough to join the Euro, but which are determined to prove themselves in a strict exchange rate mechanism will be targets for speculation in the financial markets. Another debacle like Black Wednesday would leave them further away than ever from genuine economic and monetary union.
But the strategy is no more advantageous for the French and Germans either. The Bundesbank among others is unhappy about linking its precious mark to weaker currencies, especially if looser criteria may allow other governments to go softer on inflation. Wide sections of the French electorate will object to a currency union which forces them to undergo further economic pain.
The French and German finance ministers seemed locked in a time warp. They continue to believe that the Franco-German axis and European integration rely on maintaining the momentum for currency union, when at the moment just the opposite may be the case.Reuse content