EUROPEAN ECONOMIC AND MONETARY UNION

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EUROPEAN ECONOMIC AND MONETARY UNION

• LECTURER
• ITIR BAGDADI

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OVERVIEW

• Economic Integration
• One of the most powerful dynamics of this era in
  world politics
• Nations are increasingly driven to unite their
  economies for greater efficiency and growth
• Integrated markets do NOT necessarily mean
  integrated states

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EUROPEAN UNION

• Began life in 1957 as the European Economic
  Community (EEC) often called the Common Market
• 1980s - economic element in group's name was
  eliminated European Community (EC) created
• 1993 name changed to the European Union (EU)
• Fundamental question Is economics more important
  than politics?
• Does the individualistic motives of the market
  matter more than the unifying social values of
  the nation-state?

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20th Century in Europe

• Most violent century in history
• 2 common enemies
• External threat of the USSR during the Cold War
• Internal threat of a return to divisions and
  conflicts that created war and instability in
  Europe in the past
• Europe has been able to achieve political
  cooperation and even unify by using economics as
  a political tool

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21st Century

• Regionalism is a distinctive feature of IPE in
  the 21st century
• IPE is pulled in 2 directions
• On the one hand security concerns make the state
  as important now as it has ever been.
• At the same time, the forces of economic
  globalization are blurring the distinction
  between home and abroad. From an economic
  standpoint the world is defined by markets and
  they are global.

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Regionalism

• Refers to the process by which groups of
  nation-states, usually in the same geographic
  region, agree to cooperate and share
  responsibility to achieve common goals.
• Regional groups are clubs formed by
  nation-states to accomplish objectives that
  require coordinated or collective action
• The goals may be narrow and specific (ex.
  Ecotourism) or very broad and ambigous (like the
  EU)
• Regionalism takes many forms in IPE
• Regional environmental agreements, regional
  economic development programs, regional
  scientific and health regimes, and regional
  security arrangements
• Regionalism is not a new thing but what is new is
  its strength as an organizing force due to the
  incrasing importance of economic integration and
  the rise of regional trade blocs

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ECONOMIC INTEGRATION

• The process by which a group of nation states
  agree to ignore their national boundaries for at
  least some economic purposes, creating a larger
  and more tightly connected system of markets
• Several degrees of economic integration
• Free Trade Area (FTA)
• Customs Union
• Economic Union

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Free Trade Area

• Involves a relatively minimal degree of
  integration
• Nations in FTA agree to eliminate tariff barriers
  to trade for goods and services they produce
  themselves
• However, each nation still retains the right to
  set its own tariff barriers with respect to
  products from outside the FTA
• In essence, some goods are still subject to
  differential trade barriers while some goods are
  tariff-fee (for ex. Goods from other countries)
  this leads to complications

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North American Free Trade Area (NAFTA)

• Example of an FTA
• Goods from the USA, Canada and Mexico will be
  traded freely within NAFTA borders
• Goods from other countries will be subject to
  differential trade barriers of these three
  countries
• (ex. Chile has negotiated three separate
  bilateral trade agreements with each of the NAFTA
  members separately)

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NAFTA

• Trade bloc in North America created by the U.S.A,
  Canada and Mexico
• Came into effect January 1, 1994
• Between 1993 2004 trade among NAFTA members
  increased 129.3

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Customs Union (example Turkey - EU)

• A group of nations agree both to tariff free
  trade within their collective borders and to a
  common set of external trade barriers
• If NAFTA were to evolve into a customs union, the
  USA, Canada and Mexico would need to agree to a
  unified set of tariff barriers that would apply
  to products from other countries
• The Treaty of Rome, which created the EEC, was
  based upon the idea of a customs union
• The movement to a customs union is an important
  step in terms of economic and political
  integration

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Customs Union (cont.)

• Nations involved give up some degree of
  sovereignty or national political economy since
  they can no longer set their own trade barriers
  without consulting their economic partners
• Nations gain a far greater degree of economic
  integration
• Products flow more easily within a customs union
  without need for border inspections or customs
  fees because of the unified trade structure
  (however, member nations still retain right to
  impose some non-tariff barriers such as health
  and safety standards

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Turkey EU Customs Union

• Came into effect on 31 December 1995
• Does not cover essential economic areas like
  agriculture (bilateral trade concessions still
  apply) and services
• Turkey applied for full EU membership in 1987
• Helsinki Summit (December 1999) Turkey given
  candidate country status
• October 3, 2005 European Council began
  accession negotiations with Turkey

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Turkish Exports
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Turkey in World Trade in Regional Perspective in
1993, 1996 and 2004
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Turkeys Foreign Trade By Sectors
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Turkeys Foreign Trade by Country Groups
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Direction and Dynamics of Turkeys Trade in 1985,
1995 and 2001-2004 (in millions of dollars and
percent)
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Change in shares in EU external imports in
1992-2004
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Economic Union (example EU)

• The final stage of economic and political
  integration
• Non-tariff barriers are eliminated along with
  tariff barriers creating an even more fully
  integrated market
• Member nations also agree to four freedoms of
  movement
• Goods
• Services
• People
• Capital

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Economic Union (cont.)

• Four freedoms represent significant limitations
  on national sovereignty but have significant
  effects on economic activity
• Free Movement of Goods
• Goes beyond the elimination of tariff barriers
• Requires a variety of governmental health, safety
  and other standards and regulations to be
  harmonized so that a product that can be sold
  somewhere in the economic union can be sold
  everywhere in it
• Free Movement of Services
• The service sector includes many industries such
  as banking and finance traditionally subject to
  heavy regulation that varies considerably among
  nations

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Economic Union (cont.)

• Free Movement of People
• Requires a unified immigration policy since a
  person free to enter and work in one member of
  the economic union would be able to live and work
  anywhere in the area
• Free Movement of Capital
• Individual nations give up their ability to
  regulate investment inflows and outflows
• Many nations have traditionally imposed capital
  controls to encourage domestic investment,
  promote financial stability or reduce foreign
  exchange variations
• These controls are not eliminated in an economic
  union but must be harmonized so that national
  regulations are similar enough to not become a
  barrier to economic activity

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Economic Union (cont.)

• If we consider the different state in an
  alliance, then the US is the most successful
  economic union in the world
• Economic integration is appealing because it is a
  way for nations to achieve greater efficieny in
  their use of scarce resources and higher rates of
  economic growth
• Leads to both static efficiency gains and dynamic
  efficiency gains

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Static Efficieny Gains

• With completely free trade within the area, each
  member nation is able to specialize in producing
  the goods and services in which it is most
  efficient
• Protective barriers that preserve inefficient
  industries and promote redundancy are eliminated
• The creation of a large, integrated market
  promotes efficiency in certain industries where
  large scale production or long production runs
  are possible. These gains from economies of
  scale make products cheaper and more competitive

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Dynamic Efficiency Gains

• Promotion of economic growth
• A larger and more competitive market is likely to
  be more innovative
• As internal trade barriers are removed,
  previously protected firms are forced to compete
  with one another and this makes them more
  efficient
• If economic integration is successful, economic
  growth rates tend to increase, which raises
  living standards

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Trade Diversion Effect

• Regional Trade Blocs became important and
  controversial in the 1990s because of the trade
  diversion effect of a FTA, customs union or
  economic union
• By dropping internal barriers members create more
  trade between and among member nations
• Some of this is newly created trade but some of
  it is trade that is lost from another non-member
  partner
• Ex. With NAFTA, Mexican trade to the USA
  increased while other developing nations trade
  decreased

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Trade Diversion

• Trade diversion is a two-fold problem
• It is an economic problem because it means that
  economic integration is not as efficient as it
  may seem. Trade blocs may be economically
  beneficial for the nations that form them but
  they create inefficiency and economic loss for
  other countries that suffer the loss.
• It is also a political problem since as more and
  more countries enter into regional economic
  groups non members find themselves locked out and
  vulnerable. They have a strong motivation to
  gain membership in an existing bloc to get trade
  creation effects or to form their own bloc with
  other countries in the same boat.
• The threat of trade diversion and of being left
  out has led to an expansion in size and number of
  trade blocs

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Sovereignty at Risk The Politics of Integration

• There are many political implications that should
  be considered when looking at an economic union
• Trade-offs between economic benefits and
  political costs
• Cooperation in economic sphere cooperation in
  political sphere
• Example an economic union requires that a nation
  negotiate a new immigration policy, safety
  standards, methods of financial regulation and
  adopt a harmonized system of investment controls
• Political choices no longer influenced mainly by
  domestic voters and groups now the wishes of
  groups in other member states must also be
  considered

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Politics of Integration (cont.)

• Fundamental problem loss of sovereignty that
  occurs when nations form regional trade blocs
• At some point each member state risks being
  forced to ignore national interests as a
  consequence of maintaing its international
  obligations
• This tension between national interest and
  international obligations poses a severe dilemma
  for states which tend to value security and
  autonomy
• Another school of thought that does not believe
  that economic integration weakens political power
  states that integration weakens the hold of
  national interest groups on political decisions
  specific interest groups are less likely to
  benefit and resulting policies will reflect the
  public interest

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Politics of Integration (cont.)

• Another argument states that individual nations
  may actually gain political power, especially in
  relations with other nations, by being members of
  a powerful economic alliance.
• Example Belgium a more powerful political
  presence as a leading nation of the EU than if it
  were simply a small but autonomous European
  nation
• Basically, it is argued that smaller countries
  are far more powerful as members of a larger
  group than tney would be as separate,
  unaffiliated individual nations

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European Economic Community (cont.)

• Movement toward a united Europe was founded upon
  two important ideas
• It is possible for nations to live in a state of
  perpetual peace (attributed to Immanuel Kant)
  under a federal system of governance, where each
  yields some sovereignty and sacrifies some
  national interests in return for like actions by
  others. However, it was difficult to transform
  an environment of nearly perpetual war (Europe
  from 1914-1945) into one where Kant's vision of
  perpetual peace would take hold
• Economic cooperation and the gains therefrom
  would strengthen the cooperative ties that bind
  European nations together (attributed to David
  Ricardo)

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European Economic Community (cont.)

• More than perpetual internal peace was desired.
  Postwar Western leaders sought to create strong,
  democratic, capitalist nations to a firm wall of
  resistance to the spread of communism
• Marshall Plan (1948)
• The first formal postwar step toward building an
  integrated European economy
• President Harry S. Truman's Secretary of State,
  General George Marshall called upon the nations
  of Europe to form a continentwide economic market
  like the USA
• Marshall Plan aid was designed to hasten economic
  recovery by providing a resource base on which to
  build a European community

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How different states viewed European integration

• USA saw European integration as a strong
  anticommunist ally
• Many Europeans supported it as a solution to
  the German problem the need to embed German
  political and economic power in supranational
  insitutions
• Germany wanted to be reintegrated into the
  international community after the disaster of
  Nazism
• Great Britain Winston Churchill saw the United
  States of Europe as a balance to US influence in
  the postwar era
• France President Charles de Gaulle imagined a
  Europe of States in which the structure of
  regionalism would enhance the sovereignty and
  status of all its members

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European Economic Community (cont.)

• An integrated Europe also needed European
  leadership
• Jean Monnet, a French political economist,
  provided the intellectual guidance
• He proposed an alliance along functional economic
  lines a zone of free trade uniting the heavy
  industry regions that spanned the French-German
  border
• This plan for the European Coal and Steel
  Community (ECSC) was implemented by Robert
  Schuman, a French statesman, in 1950
• ECSC was a critical test for Europe and provided
  a model for futher integration in Western Europe

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European Economic Community (cont.)

• 1957 Treaty of Rome
• Created the European Economic Community (EEC, or
  the Common Market) a customs union that brought
  together the markets of Italy, France, Belgium,
  Luxembourg, the Netherlands and West Germany
• This union of the six was a great success
  because these nations were natural trading
  partners
• Great Britain participated in the negotiations
  but decided against it for fear of losing
  political and economic autonomy and preferential
  trading relations with the Commonwealth nations
  and the USA

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European Economic Community (cont.)

• European Free Trade Area
• Great Britain did not want to be isolated from
  the rest of Europe and organized a weaker
  alliance of trading nations called the European
  Free Trade Area (EFTA)
• EFTA brought together Denmark, Sweden, Austria,
  Switzerland, Portugal and the United Kingdom
• An FTA, being more restricted than a customs
  union, could never offer these nations the
  benefit of a common market
• Geographic separation, deep cultural divisions,
  huge economic gaps between rich and poor members
  contributed to limit trade and growth
• EFTA members soon sought EEC membership

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European Economic Community (cont.)

• Trade among EEC members was never entirely free
  non-tariff barriers to trade abounded and
  sometimes nations would simply refuse to accept
  imports of any items from another member, in
  violation of the Treaty of Rome because of
  domestic political or economic concerns
• It was also necessary to create an elaborate
  system of agricultural subsidies across the EEC
  to defuse political opposition from powerful farm
  groups
• The Common Agricultural Policy (CAP) provided for
  a complex pattern of payments to farmers in all
  EEC nations

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European Economic Community (cont.)

• Although a far cry from free trade and
  laissez-faire, CAP was the price of achieving
  greater liberalism and cooperation in other
  spheres of economic life.
• The CAP eventually led to a budget crisis in the
  1980s
• The EEC changed its name to the European
  Community (EC) in 1967 signaling intention to
  move beyond purely economic issues

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Common Agricultural Policy

• One of the most controversial and divisive
  elements of economic and political integration in
  Europe
• An EU-wide system of agricultural subsidies,
  financed through value-added-taxes imposed by EU
  member nations
• Largest item of expenditure of the EU and has
  been a point of contention both within the EU and
  in its relations with other nations
• Perfect example of the use of economic means to
  achieve political ends

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Common Agricultural Policy
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Common Agricultural Policy (cont.)

• When the EEC was being formed, farm interests
  were a major political obstacle
• Farmers feared a more comopetitive market would
  make them suffer to sell their own goods
• Since farm groups could have potentially blocked
  the European integration the CAP was created
• CAP created a unified system of farm subsidies
  that insulated farmers from many aspects of
  competitive market forces
• CAP can be thought of as a system that collected
  some of the economic gains of European
  integration in the form of taxes that were then
  paid to farmers in exchange for their political
  support

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Common Agricultural Policy (cont.)

• Provides Europe's farmers with high prices
  through a system of price supports the EU
  purchases excess farm produce to keep prices from
  falling and farm incomes from declining a
  system that benefits farmers at the expense of
  the tax-paying public
• Over the years the CAP's guarantees have
  encouraged European farmers to over-produce
• CAP is now a source of deep political disagreement

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Common Agricultural Policy (cont.)

• Problems of CAP
• As the EU expanded, the cost of maintaining
  agricultural subsidies has grown. Rising costs
  have pitted nations that are net recipients of
  CAP funds against nations that are net payers of
  the taxes that fund the program
• The future of the EU's expansion into Central and
  Eastern Europe have created additional pressures.
  The countries that believe they unfairly pay the
  bills are worried that the bills will get larger.
  At the smae time, current EU members are fearful
  that more subsidies to new EU members will come
  at the expense of payments to their own farmers
• EU is under pressure from the US and other
  countries to reduce agricultural subsidies
  generally as part of the WTO's process of trade
  liberalization
• - Plans are in the works to reduce agricultural
  subsidies

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Common Agricultural Policy
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The European Community, 1973-1993

• The second stage of development of the EU lasted
  from 1973-1993
• Great Britain, Ireland and Denmark entered the EC
  in 1973
• Greece entered in 1981, followed by Spain and
  Portugal in 1986
• EC membership for these three countries was in
  part a reward for the triumph of democratic
  institutions over authoritarian governments.
  Free trade and closer economic ties were intended
  to solidify democracy and protect it from
  communist influence

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The European Community (cont.)

• The entry of poorer nations of Ireland, Greece,
  Spain and Portugal magnified a variety of
  tensions within the EC
• Lower living standards limited the extent of
  their trade with richer member states
• Lower wage structures threatened some jobs in EC
  industries
• The entry of four largely agricultural nations to
  the EC institutions, like the CAP, put severe
  fiscal strains on the other nations

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The European Community (cont.)

• These economic and political stresses caused a
  split in the EC.
• Jacques Delors, the new president of the European
  Commission tried to find a way to reunite the EC
  and he produced a proposal for the creation of a
  single market by 1992 the Single Market Act
• Although it seemed as if the EC was already a
  single market, it was still far from its goal
• The goals were the four freedoms
• Free movement of goods
• Free movement of servies
• Free movment of capital
• Free movement of people

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The European Community (cont.)

• National sovereignty and economic growth were
  often in conflict
• For example Germany wanted its stringent
  environmental laws applied to the EC but Portugal
  and Greece objected because it was too costly
• The four freedoms required sacrifice of some
  domestic freedoms, such as the right to
  self-determination of environmental and safety
  standards
• Not all of the goals of the Single Market were
  achieved by 1/1/1993, the basic thrust of the
  program succeeded, however, Europe did not
  immediately experience economic growth

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1995-2003

• 1995
• Accession of Austria, Finland and Sweden to the
  EU
• Schengen Agreement (abolishing border controls)
  implemented by Germany, France, Benelux states,
  Spain and Portugal
• 1997 - European Council agrees on the Treaty of
  Amsterdam strengthening EU institutions
• 1999 The Euro goes into effect in 11 of the 15
  EU member states
• 2000 European Council agrees on the Treaty of
  Nice
• 2002 Euro coins and banknotes enter circulation
  and replace national currencies
• 2003 The Draft of a Constitution for Europe
  presented

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EU-27
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EU-27

• 2004
• 10 new states (Czech Republic, Slovakia,
  Slovenia, Hungary, Poland, Cyprus, Malta,
  Lithuania, Latvia and Estonia) joined the Union
• The European Council signs the treaty
  establishing a Constitution for Europe
• 2005 The treaty for establishing a constitution
  is rejected in referanda in France and the
  Netherlands
• 2007
• Bulgaria and Romania join
• Today
• Croatia, Turkey and Macedonia await future
  membership

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Political Institutions of the EU

• The Treaty of Rome did more than commit six
  nations to economic integration it also began
  the process of developing a set of political
  institutions to make policy, settle disputes and
  provide leadership for Europe
• The most important political institutions in the
  EU today are
• The European Commission (and its President)
• The Council of Ministers
• The European Council
• The European Parliament
• The European Court of Justice

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Political Institutions of the EU (cont.)

• Each of these institutions plays a specific role
  in setting the delicate balance between the
  national interests of member nations and the
  collective interest of the EU

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President of the European Commission

• Head of the state of the EU
• Leads the European Commission
• Represents EU to other nations
• Jose Manuel Barroso, the former Prime Minister of
  Portugal, began his term in 2004, taking over
  from Romano Prodi, the former Prime Minister of
  Italy

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European Commission

• The executive branch of the EU serving much the
  same function as the cabinet in the USA or UK
• Proposes legislation to the Council of Ministers
• Administers EU programs
• Represents the EU in economic relations with
  other countries or international organizations
• Each commissioner has a special portfolio of
  responsibilities, such as competition or
  agriculture

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Council of Ministers

• Main lawmaking body of the EU
• Composed of a single representative from each
  member nation
• The Council can accept or reject legislation
  proposed by the European Commission, but it
  cannot draft legislation itself
• Intended to provide a balancing forum for more
  narrow national interests
• The voting rules of the EU allow a minority of
  member states to block action in the European
  Commission when they believe their national
  interests are threatened

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European Council

• Meetings of the EU heads of states and
  governments are called the European Council
• Meetings are held at least once every six months
  by the country holding the Presidency of the
  Council of Ministers

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European Parliament

• The only body of the EU whose members are
  directly elected by the citizens of its member
  states
• European Parliament committees review legislation
  proposed by the European Commission and may
  propose amendments to the legislation before
  submitting it to the Council of Ministers
• May veto a proposal after it reaches the Council
  of Ministers if it does not agree with the
  Council's position
• Has 736 members as of 2009

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European Parliament (cont.)

• Organized along political party lines, not
  according to national citizenship
• For example socialists from all EU nations act
  together, as do conservatives and other groups
• Provides a forum for debate and discussion from
  the perspective of political ideology, not
  national interest (Council of Ministers) or
  European interest (European Commission)
• Not a legislative body but can have important
  influence over EU policies

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European Parliament
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European Parliament

• National apportionment of MEP seats (2009)
   Germany99 France72 Italy78 United
  Kingdom72 Spain50 Poland50 Romania33 Netherlands25
   Belgium22 CzechRepublic22 Greece22 Hungary22 Port
  ugal22 Sweden18 Austria17 Bulgaria17 Finland13 Den
  mark13 Slovakia13 Ireland12 Lithuania12 Latvia8 Sl
  ovenia7 Cyprus6 Estonia6 Luxembourg6 Malta5
• Total 736

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European Court of Justice

• Supreme Court of EU law
• Composed of 15 judges who are appointed to
  six-year terms
• Deals with disputes between member governments
  and EU institutions and among EU institutions and
  with appeals against EC rulings or decisions
• Made up of one representative from each of the EU
  member nations

64
European Central Bank

• EU's central bank
• Created after the decision to adopt the euro
• Executive board, appointed for eight-year terms,
  and a governing board which includes the
  executive board and the heads of all EU member
  nation central banks
• Currently responsible for the monetary policy of
  the 16 member states of the Eurozone
• (Austria, Belgium, Cyprus, Finland, France,
  Germany, Greece, Ireland, Italy, Luxembourg,
  Malta, Netherlands, Portugal, Slovakia, Slovenia
  and Spain)

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The 1990's

• The collapse of communism eliminated the threat
  of Soviet domination but not the need for
  peaceful cooperation
• The questions for Europe now are
• Is Europe just a geographical unit that lies
  north of Africa and west of Asia?
• Will it be united by money (its common currency,
  the euro) alone?
• Or will it become more Europa a people with a
  common will?

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Post-Cold War Issues Confronting the EU

• The EU was confronted with at least several
  issues at the end of the Cold War
• The Ever-Wider Union
• How to accommodate the new demands for membership
  in the EU without hopelessly alienating current
  EU members
• How to deal with rising membership applications
  at the end of the Cold War
• 12 countries filed formal membership
  applications
• Cyprus, the Czech Republic, Estonia, Hungary,
  Poland and Slovenia were given top priority
  joined in 2004
• Bulgaria, Latvia, Lithuania, Romania and Slovakia
  were given second priority joined in 2004 (with
  the exception of Romania and Bulgaria which
  joined in 2007)
• Croatia awaits membership and Macedonia has
  received candidate status
• Turkey's application continues to be snubbed
• New members were and will continue to be poorer
  than current members causing tension between
  member states
• Like it or not, the EU opened its gates to these
  countries to ensure democracy persists

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Post-Cold War Issues Confronting the EU (cont.)

• The Challenge of the Regions
• What to do about demands for greater regional
  autonomy within the EU
• As nation-states secede power within the EU,
  regions have begun to assume more importance
• Sometimes the regional focus is rooted in
  culture, for ex. Catalan region in Spain
• In other places the issue is money and the
  perceived need to be free of the shackles of
  national government, for ex. Bavaria in Germany
  and Northern Italy
• The EU needs to find a way to address the desires
  of richer regions while trying to accommodate
  newer members

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Post-Cold War Issues Confronting EU (cont.)

• The Security Issue
• How to deal effectively with security issues
  other than the Soviet threat
• EU is surrounded by conflicts (the Balkans,
  Middle East, North Africa) and threats
  (terrorists, environmental dangers, organized
  crime, illegal immigration)
• Europe needs a common defense policy, however, a
  collective policy would require a good deal more
  political unity than the EU has ever demonstrated
  in the past

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Post-Cold War IssuesConfronting the EU (cont.)

• The German Problem
• How to make sure that Germany remains committed
  to a united Europe without dominating it
• The German problem was one of the original
  problems that the EC was meant to address
• Germany today, a decade and one half after
  unification of its Eastern and Western sections,
  finds itself bound by the EU to the rest of
  Europe but faced with very serious economic,
  social and political problems at home, both in
  the poorer Eastern provinces and in the rising
  tensions between East and West
• Germany has so many domestic problems that it
  would be natural for it to put domestic issues
  above those of European unity
• RISING NATIONALISM a new problem??

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Post-Cold War IssuesConfronting the EU (cont.)

• The Political Challenge of the Euro
• Once the Euro was launched in 2002 the member
  nations faced a transformed political environment
• Their ability to influence domestic economic
  conditions was much reduced and interest rates
  were now set by the ECB and not the policymakers
  of these states this left national leaders in
  an awkward position.
• One states economic problems also become
  problems of other member states (ex. Greek
  financial crisis)

71
Post-Cold War IssuesConfronting the EU (cont.)

• The Constitutional Challenge
• In its movement towards an ever closer union
  the EU is aiming at political union and an EU
  constitution this raises issues of national
  sovereignty.
• The draft of the Constitution was rejected in
  referanda in France and the Netherlands in 2005

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Monetary Union

• Discussed in Maastricht in 1991
• France proposed a single currency
• In theory, a monetary union was supposed to
  address the four issues mentioned previously
• A single currency would make European markets
  more efficient and Europe's economies more
  dynamic
• It would provide economic gains to offset the
  costs of enlargement and boost the prospects of
  the regions the German problem would be soved
  because Germany would be chained to the rest of
  Europe with money

73
Monetary Union (cont.)

• Finally, political cooperation would be
  accomplished through an indirect mechanism with
  a single currency EU nations would need to
  cooperate more on political issues
• Germany did not have much interest in a common
  currency. It saw more to lose than to gain
  because of its strong deutschemark however
  Germany wanted a political union

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Monetary Union (cont.)

• A deal was struck Germany would gets its
  political union and France would get its monetary
  union (before Maastricht)
• However, at the end of Maastricht, the monetary
  union had been adopted and the political union
  was not
• The criteria for nations to be part of the single
  currency
• Low government debt
• Low inflation rates
• Low interest rates
• Greece initially failed to qualify on economic
  grounds and the UK and Sweden opted to remain
  outside the euro zone

75
Political Economy of the Euro

• The euro is still a political issue
• The name euro was chosen because it means nothing
  in any European language (ECU European Currency
  Unit was considered but was rejected because
  France once had such a coin in medieval times)
• Images on any euro currency look like what
  appears to be classic Europe but none of them are
  authentic because putting any real European scene
  could lead to disagreements
• The euro symbol means nothing

76
Political Economy of the Euro

• Three levels of political issues that surround
  the euro
• The monetary union has created a reason for
  nations to unify in the absence of a common
  security threat. Being left out of the euro might
  mean being doomed to peripheral status.
• Qualifying for membership in the monetary union
  has forced European nations to make very
  difficult political decisions like cutting
  government spending, increasing taxes and
  becoming more laissez-faire.
• The single currency changes the domestic
  political environment member nations will not
  longer be able to spend their way out of a
  recession or print money to pay for unemployment
  because fiscal autonomy is surrendered.