Why Maastricht will fail

National Interest, The, Summer, 1993 by Martin S. Feldstein

ONLY A YEAR AGO there was widespread agreement that the European nations were marching inexorably toward monetary union and, through monetary union, to a political union that would gradually replace the twelve nation states of the European Community with a centralized form of continental government. Jean Monnet's dream of a United States of Europe looked as if it would become reality before the end of the century. The Maastricht treaty embodied and extended the strategy of gradualism that Monnet had advocated nearly a half century ago for shifting power from national governments to European institutions.

In this process of European unification, monetary union was far more important as a political symbol than as a substantive economic reform. Replacing national currencies with a single currency for all of Europe would promote a popular perception that Europe had become a "single nation." Replacing national central banks with a European Central Bank would shift the real locus of economic power away from national governments and would eventually lead to a centralization of budget and tax decisions along the lines already proposed by EC President Jacques Delors. The Maastricht treaty made the political goals explicit by combining monetary union with a commitment to a political union that would have responsibility for the domestic and international policies that are now decided by the individual national governments.

In the last year, the perceived prospects of European monetary and political unity have fluctuated widely. In 1992, the initial optimism faded rapidly under the impact of two major events: the crisis in the European system of exchange rates and the 1992 Danish referendum rejecting the treaty. The collapse of the European Monetary System (EMS) left the British and Italian currencies floating outside it, and thereby destroyed what many regarded as a major step along the way to monetary union. The initial Danish rejection of the Maastricht treaty was particularly striking because it occurred despite support for it by the leaders of both the government and the opposition parties. And while some advocates of monetary union dismissed the first Danish vote as a reflection of the opinions of only a handful of voters in a continent of more than 200 million people, subsequent testing of opinion in France, Switzerland, and Britain showed that the Danes were not alone in having serious reservations about the desirability of monetary union in general and the Maastricht agreement in particular.

In the French referendum, only a 1 percent majority favored the Maastricht treaty despite massive pro-treaty government advertising. The Swiss referendum, which overwhelmingly rejected membership in the European Economic Area, showed how far the Swiss are from joining the European Economic Community. And the problems that John Major had with his own party indicated the lack of support for European Monetary Union (EMU) in Britain.

More recently, there has been something of an apparent recovery in the Maastricht treaty's prospects. In May of this year, the Danes ratified it in a second referendum. Immediately afterwards, the Major government succeeded in having the treaty approved by the House of Commons (by 292 votes to 112, with no fewer than 246 members abstaining and with 41 conservatives voting against their leadership).

There is less to these recent developments than meets the eye, however, and their impact is destined to be rather superficial. Among informed private individuals, and even among government officials when they speak privately, there is widespread agreement that the prospect of monetary and political union remains remote, and will continue to be so even if all twelve countries of the EC should eventually ratify the treaty. As a practical matter, countries that do ratify the Maastricht treaty will have ample opportunity to reconsider the substance of their decisions. The treaty explicitly grants Britain the right to decide later whether to accept the single currency. Even more significant exemptions were explicitly given to Denmark in order to induce the Danes to ratify the treaty. The German parliament has made it clear that it also reserves the right to decide later whether it will abandon the deutschemark, even though it has not been explicitly given that right in the treaty. It is unthinkable that France would not demand for itself a right given to others, and indeed President Mitterrand's televised statement to the French nation that European monetary policy would not be left to European central bankers but would be under the control of national politicians implies a fundamental French reinterpretation of monetary union.

Apart from these reservations, only three of the twelve current members of the European community now satisfy the "convergence conditions" on inflation, interest rates, and budget deficits set forth in the Maastricht plan as preconditions for joining the monetary union. There is substantial reason to doubt that all twelve will satisfy a literal interpretation of those conditions anytime in the next decade. And before the end of the century the European Community is likely to add several new members who will have their own problems in achieving these preconditions for monetary union.