NCPA - National Center for Policy Analysis

Euro Money?

January 2, 1996

Political unification of Europe is unlikely in the near future; but that hasn't stopped plans by the 15 countries in the European Union to establish a single economy -- an Economic and Monetary Union (EMU) -- by January 1, 1999.

When European governments negotiated the agreement to create a single monetary system, the Maastricht Treaty, Germany was the most insistent that the central bank be independent from national politics; that it be forbidden to buy government securities directly (instead of at market prices); and that its express goal be to keep prices stable.

The negotiators also agreed that to join the EMU, countries would have to meet strict fiscal targets.

  • Each country must reduce its annual government deficits to 3 percent of Gross Domestic Product (GDP) and total government debt to 60 percent of GDP.
  • However, few of the countries that signed the treaty have met these goals.
  • In fact, Germany ran a budget deficit last year of 3.6 percent of GDP and almost hit the debt limit, with a government debt of 59.5 percent of GDP.

European governments have used inflation to postpone the consequences of high taxes and government spending. Since an independent central bank would take away this power, they will have to cut spending, entitlements and taxes or accept higher unemployment.

If the EMU comes about, it would be the only case in which different countries established a common money before establishing a central government, either by conquest or mutual agreement, according to Otmar Issing, a board member of the German Bundesbank.

Some supporters of European unity believe that creating one currency and a European Central Bank will further the goal of political unity. However, Issing says that it could undermine European solidarity by increasing tensions among the member states.

Sources: Otmar Issing, "Europe: Political Union Through Common Money?" Occasional Paper No. 98, 1996, Institute of Economic Affairs, 2 Lord North Street, Westminster, London SW 1P 3LB, (0171) 799-3745; and Hermann Remsperger, "Germany's Fiscal Debate Poses Critical EMU Test," International Economic Scoreboard, 1996, Vol. 2, No. 1, Conference Board, 845 Third Avenue, New York, NY 10022, (212) 759-0900.


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