LET THE PUBLIC DECIDE WHICH ROAD TO EMU

by Dr Karl von Wogau *

The time has come to discuss how to approach the third stage of European Monetary Union and under what circumstances to put it into effect.

For too long the debate on the introduction of a single currency has been hijacked by the governing and technocratic elites, eager not to upset public opinion. And on 10 October the Council of Finance Ministers will, as usual, meet behind closed doors to map out in advance the technical details of stage three of EMU. However, a single currency needs the psychological backing of the public, and in order to reassure public opinion (not least in Germany) of the stability of such a single currency, run by the European Central Bank, it would be wise to call it either the European mark or the European franc.

This single currency is likely to be adopted by an initial core group of states willing to push European integration further, whereas others may prefer to wait and join in later or not at all.

The important thing to remember is that all member states should state clearly now which path they wish to pursue, because otherwise the European Union risks becoming paralysed by rifts which conceal a different philosophy of European integration.

After all, there have always been several speeds under the European Monetary System : some states had a narrow margin within the European exchange rate mechanism and some, such as Britain, did not participate at all for a short while.

Plans for a Europe of concentric circles, consisting of a hard core, then a group of states primarily participating in the internal market programme although integrated in the monetary sphere in different ways and a third group of countries closely linked to the core group of the EU, represent the only feasible approach, given the variation in national governments' policy choices and willingness to integrate.

Some countries however, may be prevented from participating in stage three of EMU because they do not meet the convergence criteria - economic targets designed to bring economies of different countries together. There are few signs that the Council of Ministers is willing to tolerate attempts to water down the criteria, even if the thought of it undoubtedly crosses the minds of politicians and officials in the European institutions.

However, the criteria have to be applied strictly, otherwise the credibility of the project will be badly damaged.

Above all national governments must be told that there is no way they can project deficiencies in their domestic economic policies to the European level.

It should also be remembered that the convergence criteria were by no means chosen arbitrarily : maximum outstanding public sector debt of no more than 60 per cent of gross domestic product was thought appropriate because it was the average of outstanding public sector liabilities in the EU during the negociations of the Maastricht treaty in 1991, the base year.

This meant that with an expected nominal trend growth of around five per cent, governments could allow for a budget deficit of no more than three per cent of GDP if the public sector debt ratio to GDP was to remain constant.

Furthermore, the criterion for inflation is based on average of the three bestperforming economies plus a margin of one, a compromise that resulted from the negociations.

Everything therefore depends on the economic discipline exhaled by the member state concerned.

However, two spmds ato pose problems for the initial launching of monetary union: for a two-speed approach, which is likely to occur, the treaty includes no more than rudimentary rides in some areas.

As far as the single European currency is concerned, it stipulates that such a currency will be linked to the present Ecu basket.

In other words, there will be a "hard Ecu", resulting from the fixing of parities between the member states fulfiling the Maastricht criteria, and a "soft Ecu" which continues to be a currency basket, including the member countries which do not wish or are not yet able to join the "hard core".

In order not to mix up the two Ecus, it would seem appropriate to call the single currency the European mark or the European franc, whereas the denomination of Ecu would continue to be used for the currency basket and for the European budget.

* Dr Karl von Wogau (MEP) is chairman of the Economic and Monetary Affairs Committee of the European Parliament.