POLITICS On the Need for Political Union in Europe

versy over whether Maastricht’s deficit leges—primarily the revenues from target means somewhere around 3% or customs and the seigniorage from the exactly 3.0% would be a pointless exer- coinage of money—for the greater Jan-Peter Olters cise in political shadow-boxing if it good of a common German market. were not for the doubts regarding For reasons of economic dominance HE SCEPTICS OF EUROPE’S COM- insufficient political fora for fiscal co- in Germany, the Prussian government mon currency believe that its ordination in the post-1999 euro era. supported the pan-German business T measurable benefits are neg- The alternative strand of anti-Maas- community in its endeavour to over- ligible. Even if they are right, tricht arguments is motivated by the come regional protectionism. Their the sustainability of the cur- fear that the euro is only an interme- combined efforts, after several prelim- rent system of semi-fixed exchange diate step toward a European federa- inary stages and failed attempts, cul- rates will increasingly be threatened tion, which is likely to blur already minated in the customs union of 1834 by the rapid growth in the volume of threatened national identities. Much (Zollverein), which included a large international financial transactions. of British and Scandinavian euro- majority of the German states. The As the 1992-93 currency crisis and scepticism is driven by this concern. agreement on the elimination of inter- similar episodes elsewhere demon- Both strands of anti-Maastricht nal tariffs and the adoption of Prussia’s strated, central banks are struggling to arguments invite a couple of interest- external customs—which were very preserve an effective defence against ing questions regarding the relation- low by the standards of the time—uni- speculative attacks. European govern- ship between monetary and political fied the internal market and allowed ments have realised that they will unions. First, is political integration for the rapid catch-up of Germany’s eventually be confronted with the likely and inevitably to follow EMU? developing industries over subsequent choice between either a common cur- Second, is a political union, should it decades. Incidentally, Europeans were rency launched in a pre-emptive strike then occur, a desirable outcome? Both able to exploit a similar institutional against disruptive currency turmoils questions can be examined by placing impetus when they signed the Treaty of or a return to a pre-1979 system of Europe’s process of monetary unifica- Rome 123 years later. flexible exchange rates. Fixing curren- tion in the context of the only relevant In addition to forming a German cies without eliminating exchange- example in history—the economic, customs union, the Zollverein agree- rate risks has few, if any, advantages. monetary, and political unification of ment called for a harmonisation of its 19th-century Germany. members’ various currencies. Though What Comes After the Euro? all German states at the time used the Criticism of the Maastricht blue- A Little History silver standard (except for Bremen), print for the euro has swept from the The prospect of prosperity reduces the coins minted by German states dif- British isles over to the continent. It the propensity for war and conflict. fered widely in their monetary stan- would be misleading, however, to The economic unification processes in dards, weights, denominations, and interpret these objections as a general 19th-century Germany and in 20th- metal values. desire to untie currencies from EMS- century Europe were both driven by In contrast, paper money played constraints, just too intertwined are this belief, with the latter being mod- only a minor role in the 19th century, the continental European economies. elled after the experience of the for- in part as a result of the free-banking Rather, the institutional consequences mer. The Vienna Congress of 1815, movement of the time, and it did not of the euro are looked at with some sorting through the rubble of the possess any legal-tender status until degree of nervousness. In the discus- Napoleonic wars, left 35 sovereign 1909. As Carl-Ludwig Holtfrerich has sion about the single-currency project, principalities and four free cities on recently argued, bank notes “were two fundamentally different direc- German soil. Each of these 39 states generally considered as credit instru- tions of attack have emerged and are possessed complete control over fiscal ments for the purpose of facilitating intermingling in a confusing way. One matters, customs, weights, measures, payments among businessmen, like strand of euro-sceptic arguments cul- coinage and monetary systems. The checks or remittances.” The standard- minates in the concern that the com- resulting chaos that existed in trade isation of the coinage system used in mon currency will prove unsuccessful relations denied Germans the indus- intra-German trade was therefore the without a political superstructure— trial take-off observed in England or key event in the unification of mone- that EMU will remain reversible France. The emerging industrialists, tary standards in Germany. In the unless it is accompanied by further restricted in their ability to exploit the Dresden and Vienna Coin Treaties of institutional integration. The contro- growing opportunities in trade, pro- 1838 and 1857, respectively, the Zoll- duction, and finance, pressed the aris- verein governments agreed initially to Co-Editor, World Economic Affairs. His e-mail tocratic élites ruling the principalities specify the metal content of their address is [email protected]. to rescind their remaining fiscal privi- coins and later to adopt a common

WORLD ECONOMIC AFFAIRS ● AUTUMN 1997 62 currency. By 1857, Prussia’s thaler had unions that economists usually view tion will not proceed unless it brings effectively been accepted as German as undesirable is the inherent necessi- additional benefits to Europeans. Fur- money. Even more important in ty for political co-operation among the ther economic integration—which is a today’s context is the fact that these member countries. Yet this feature purely political process as it results in treaties allowed the money-supply appears to have been the ultimate a change in jurisdictions—will have to process to be separated from any motivation for the German and Euro- be justified by demonstrating that undue political influences, as did the pean customs unions. Both in 1834 “Europe” rather than the nation-state Maastricht Treaty with the European and 1957, signatories had an implicit represents the optimal size of govern- Central Bank. understanding to increase the degree ment for the provision of certain The cautious three-step fashion of co-operation at a time when the goods and services. through which Germany had created explicit statement of the goal of polit- For the Zollverein states in 1834, the the economic foundation for a politi- ical union would have been detrimen- benefits were immediate. Not only did cal union—the 1834 customs union, tal, from the perspective of third coun- it facilitate the unification of the eco- the fixed exchange rates of 1838, and tries as well as one’s own citizenry. nomic area and the important task of the common currency of 1857—served Calling instead for monetary unions, customs collection, but it also allowed as a model for the future European as explicitly done in both the Zollverein the combined region to fully exploit governments to agree on the Treaty of agreement and the Treaty of Rome, the new technologies (particularly rail- Rome in 1957, the EMS in 1978 and has proven a much less controversial ways) and gave it the political weight finally on the EMU to be in place by way of achieving the same goal. to negotiate favourable trade deals 1999. Once the euro has been introduced with the technologically superior Both the economic and monetary and the participating countries have neighbours to the west and across the union proved sufficient for Germany’s surrendered their ability to run their English Channel. Had sovereignty not economic ascent, despite the fact that, own monetary policies, the impor- been gradually transferred to the Zoll- with the commercial crisis of 1857, the tance of co-ordinating fiscal, social, verein, which allowed for the industri- shortage of raw cotton following the and labour policies will increase al take-off to become apparent by the American civil war, and Prussia’s wars accordingly. Any single country’s costs late 1830s, the princes and dukes against Denmark, Austria, and France, associated with large fiscal deficits, for might have been successfully swept off the external factors were far from opti- instance, will now be dampened since their thrones during the revolution of mal. The customs and monetary greater integration of capital markets 1848. unions, combined with the rapid con- implies that the resulting rise in inter- Whether it is globalisation or the struction of railways, allowed for an est rates will be less pronounced. But dynamic innovations in the informa- active trade across the different eco- that rise will also spill over onto the tion sector, businesses are again press- nomic regions of Germany. The foun- other member countries. Though the ing for a unification of the economic dation of the German Empire in 1871 monetary union requires harmonised region. With North America and Japan merely sealed what had already fiscal policies, the common market seen as the economic and technologi- become an economic reality. The polit- already mandates a large degree of cal powerhouses, the acceleration of ical co-ordination among German conforming social policies as it is nei- the integration process has been vocif- states (in customs and monetary mat- ther in the governments’ nor in the erously demanded by the European ters) had created an economic unity voters’ interests to engage in intra- business community. In that sense, the that, in turn, further strengthened the European competition over location situation is actually very similar to the movement toward political union. As by reducing corporate taxes, labour one in 19th-century Germany. The Holtfrerich concluded, the 1876 foun- standards, and environmental regula- narrowness of the domestic markets in dation of the Reichsbank that accom- tions. Such a competitive outcome Europe has kept a lid on many poten- panied the introduction of the mark would generally be undesirable. tial productivity gains. The increased and the switch from a silver to a gold Since the only alternative to closer degree of intra-European competition standard was cosmetic and represent- political co-ordination would be eco- alone, which follows the introduction ed a monetary unification process nomic adjustments through the mem- of a common-currency area, will create with other gold-standard countries. ber countries’ unemployment rates, a economic dynamics that should find hesitant public’s reservation toward its ultimate reflection on the labour Conscious Designs and closer political ties will much more market, the Achilles’ heel of the Euro- Implicit Goals easily be overcome. Even though pean economies. With success comes Though customs unions generate direct historic comparisons are confidence, and with it acceptance. benefits from increased trade among fraught with dangers, several factors Periodic elections to national and the member countries, they often also clearly support the expectation that European parliaments ensure that the lead to trade discrimination against the euro will indeed force pan-Euro- integration process will occur at an third countries. Given the trade-off pean political institutions to evolve acceptable speed and only if the eco- between beneficial trade creation and even further. nomic benefits justify this process. And harmful trade diversion, economists the more the benefits of this process tend to favour a unilateral tariff reduc- Safeguards Against a become apparent, the more willing the tion to customs unions that are fre- Harmful Political Union electorates will be to support a political quently characterised as being protec- Democratic constraints will ensure union in Europe. Time will not end tionist devices. One feature of customs that economic and political integra- with the arrival of 1999. ࡗ

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