Monetary union has always been vital to Europe's integration

 

If I had a euro for every newspaper article and academic paper which confidently asserted that the European single currency would never happen, I would be a rich man.

The conventional wisdom among journalists and economists is that the economic logic of monetary union is weak and the project must be understood as essentially political. The long and difficult road to the euro proves the limited economic logic, whereas the progress reflects the strength of political conviction of key European governments. While this view has a superficial plausibility, it is wrong. It ignores Europe's long quest for exchange rate stability and the connection between economic and monetary integration.

Post-war Europe has been anxious to avoid volatile exchange rates. The hyper-inflation and competitive devaluations of the inter- war years are seen as having contributed to the rise of fascism and the second World War. From as early as the 1960s, monetary union was seen as an essential aspect of European integration.

The programme to complete the internal market, launched in the mid-1980s, reopened the issue of full monetary union. It became widely accepted that only through monetary union could Europe avoid damaging exchange rate volatility. There was a strong sense that the US could not have developed its internal market or have remained the world's leading economy if its states or regions had retained separate currencies.

A single currency is required to maintain the level of deep economic integration achieved in Europe. Without the protection of national technical standards, State aids and regulatory regimes, countries will suffer import penetration and export collapse if their neighbour's currency devalues sharply.

Competitive devaluation is seen as conferring an unfair advantage and would eventually provoke political resistance to economic integration, causing an erosion of the European internal market, as occurred in the 1970s.

It is striking that so many member-states have a strong individual motivation to adopt the euro, given their particular economic history and political culture.

Indeed, the experience of Europe's peripheral member-states and advances in economic analysis have given rise to a new perspective on the regional effects of integration. In the 1960s, it was believed that it was the monetary stage of integration which presents weaker or peripheral regions with the greatest problems.

By the late 1980s, there was more focus of the economic forces unleashed by free trade and mobility of labour and capital and less belief that devaluation could offer protection from competition.

This new perspective, borne out by Irish history over the past two centuries, took Irish concern away from monetary integration and focused it on the real factors which determine international competitiveness. Consequently, from the late 1980s it was the working assumption of Irish leaders - in government, business and unions - that we would adopt the euro. In 1992, Ireland ratified the Maastricht Treaty which set us the road to the euro.

Across Europe there is a strong, long-standing, widely-held and increasing economic motivation for monetary union. This explains much of the progress and casts doubt on the conventional view that the project is essentially political. The truth is almost the opposite. The economic motivation for the euro is strong; the difficulties experienced in getting there largely reflect the political complexity of creating monetary union in European circumstances.

The need to gain the consent of member-states and to build institutions meant a gradual approach had to be adopted, yet most new currencies are not created gradually. Monetary union raises issues of identity to a much greater extent than market integration.

Europe is both extending the integration project and breaking with international monetary and political history. It is creating a monetary union democratically and without a hegemonic power. It is creating a single currency without creating a state. Instead of a single European government, it will co-ordinate the economic policies of national governments.

It is creating monetary union where there remain national systems of industrial relations. It is these political factors that explain many of the difficulties experienced on the road to the euro.

Most of the critiques of monetary union are based on theoretical formulas of little relevance or on various (previously) successful national models.

While the critics enjoy denigrating what they call a "one-size-fits-all" system, most of them adopt a "one theory-explains-all" approach to the world. They thus ignore the diversity of motivations for joining the euro and the unique experimental nature of the EU.

Journalistic commentators and academic economists in the Anglo-Saxon world have consistently underestimated the capacity of the EU to create monetary union. What was taken by Europe's leaders, businesses and citizens as a definite plan was seen by these commentators as a faint probability.

When theory and practice conflict, it is theory rather than practice which requires revision. This is doubly true when dealing with the EU, since it is essentially an experimental union. Ireland's goal in the coming review of EU treaties and institutions should be to ensure Europe does not abandon its pragmatic and experimental development.

Rory O'Donnell is Jean Monnet Professor of European Business at UCD. His book, Europe - the Irish Experience, was published by the Institute of European Affairs