The dangers of EMU : an industrial policy viewpoint - article ; n°1 ; vol.59, pg 204-221

Sergio Bruno

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Revue d'économie industrielle - Année 1992 - Volume 59 - Numéro 1 - Pages 204-221
18 pages
Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

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• Publié par: REVUE_D-ECONOMIE_INDUSTRIELLE
• Publié le: 01 janvier 1992
• Nombre de lectures: 8
• Langue: English
• Poids de l'ouvrage: 1 Mo

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Sergio Bruno
The dangers of EMU : an industrial policy viewpoint
In: Revue d'économie industrielle. Vol. 59. 1er trimestre 1992. pp. 204-221.
Citer ce document / Cite this document :
Bruno Sergio. The dangers of EMU : an industrial policy viewpoint. In: Revue d'économie industrielle. Vol. 59. 1er trimestre
1992. pp. 204-221.
doi : 10.3406/rei.1992.1415
http://www.persee.fr/web/revues/home/prescript/article/rei_0154-3229_1992_num_59_1_1415Sergio BRUNO
THE DANGERS OF EMU :
AN INDUSTRIAL POLICY VIEWPOINT
I. — INTRODUCTION
Until very recent times, the process of construction of Europe as a unified poli
tical entity was regarded as made of the gradual achievement of an ordered sequence
of steps. The free movement of goods, firms and workers should have come first,
together with the coordination of the exchange rates policies ; then a major coor
dination in tax, social and industrial policies should have come, together with an
increasing coordination of budgetary policies. This should have eased the gradual
enlargement of scope for fiscal federalism. Political and monetary unification
(EMU) should have been thus the ultimate step (1) In the course of the eighties
these attitudes drastically changed, and now there are pressures to anticipate
the EMU, letting it follow market unification the soon as possible.
Two major questions arise :
1) which might be the causes and the strategies which are behind such a radical
change of attitudes (1) ;
2) how solid and reliable the arguments in its favour are.
To shed some light upon such questions is the aim of this article. In the mean-
While I shall attempt to establish a more cautious frame of reference for this rather
complex choice problem. Such a frame is based on the one hand upon a critical
appraisal of the theoretical basis upon which the supporters of EMU argue the
advantages of their proposal, and, on the other one, upon the use of an empirical
and theoretical background which embodies the viewpoint of economic scholars
more aware of the complex patterns of the present microeconomic reality and of
the structural relationships within it. The task is eased, but also complicated, by
the recent publication of an "evaluation of the potential benefits and costs of for
ming an economic and monetary union", prepared by the Directorate-General
for Economic and Financial Affairs of the Commission of the European Comm
unities (1), to which reference will be made as "OMOM". On the one side, in
(1) One market, One Money, special issue of European Economy, October 1990, n° 44.
204 REVUE D'ÉCONOMIE INDUSTRIELLE — n° 59, 1" trimestre 1992 a really effective critical evaluation of this vaste book (2) would require a spefact,
cific essay ; but on the other one it avoids an extended research of sparse material,
it represents an official perspective and, on the whole, it conveys a picture from
which it is partially possible to outline the rationale underlying the EMU proposal.
While there are several different interests supporting the proposal (3), there is
a unique cultural rationale cementing all of these scattered, often not well medita
ted interests. Such a rationale, which is well visible in OMOM, is a technocratic
one, and is based on the hypothesis that economic affairs are too serious to let
them be managed by political representatives, who are subject to electoral cycles
(4). Therefore a disciplinary power has to be put in the hands of a really indepen
dent Federal European Bank, which will warrant each member country to harvest
the goodies (5) made available by the scrupulous implementation of the principles
of the mainstream economic theory at the least, and anyway very moderate, cost (6).
When facing an option that offers the "promised land" I am inclined to inves
tigate what would happen should things go differently from how it is said they
will go. Doing it in this case is risky. The smallest risk is to be accused of oppos
ing the political union of Europe, of which the EMU would be the only possible
strong foundation (7). However, the decision to move to a single currency system
introduces a heavy type of discontinuity in the European evolutionary path. While
under the present regulatory system of EMS the degree of coordination may be
either reinforced or relaxed, without implying major or irreversible ruptures in the
ongoing trends towards political cohesion, once the EMU would have been reali
sed, the possible event of its failure and the ensuing dismantling of it would tr
emendously disrupt the cohesion among European states. The risk of a major inter
ruption of the process aiming at a political unification of Europe is thus very high.
On the other hand, it cannot be denied that also an early adoption of the EMU
aims at such a unification, either because the "promised land" on which OMOM
indulges might be actually reached, or because the profound unbalances arising
from too precocious an EMU would compel an upsurge of solidarity, which would
force more serious steps to be taken towards the political unification of Europe.
However, the question is whether I am too cautious, or rather the plans leading
to an early adoption of EMU are either too naive or too cynical, in both cases
too dangerous to be accepted without further reflections.
(2) The publication is of around 350 double pages, dense of tables, graphs, "boxes" dealing with
single issues, appendixes and annexes.
(3) From those of the political leaders who want to accelerate the construction of European political
unity to the industrialists who want to reinforce the pressures for wage moderation.
(4) "... which may at times make it attractive to exploit short-term gains against long-term costs"
(OMOM, p. 22).
(5) Namely, low inflation, higher growth, employment and efficiency (encompassing the catching
up of less developed regions) and a reassuring climate of macroeconomic stability.
(6) OMOM, Executive summary and Ch. 1.
(7) A second accusation is likely to be of you being in favour of those politicians who are responsible
for the public budget deficits and the wastage of collective resources. In any case you run the
risk of not being credible as an economist, since you dare to mistrust most of the mainstream
beliefs, as interpreted by their most chartered speakers.
REVUE D'ÉCONOMIE INDUSTRIELLE — n° 59, 1« trimestre 1992 205 II. — THE RATIONALE OF THE EMU
The bulk of the proposal is centred upon the creation of a common European
central bank (EuroFed), rigorously politically independent (8) and strictly com
mitted to price stability (9). According to the Report this statutory duty "...is effec
tive only to the extent that the central bank does not have other policy goals"
that can make such a duty "impossible to achieve ... this implies that EuroFed
would have the means to pursue price stability only if monetary financing of public
deficits (at the national or the Community level) is excluded and if it does not
have to stabilize the exchange rate of the Community ... currency ... against the
rest of the world" (10).
Price stability, that would correspond to the curbing of the rate of inflation
of the more inflationary countries to that of the least inflationary one, is regarded
as the strategic key carrying to the attainment of all of the other major benefits:
macroeconomic stability, higher growth and per capita income, lower unemploy
ment (1 1). As a consequence, however, member-states will not only loose the poss
ibility of using the national currency exchange rate as an instrument for adjus
ting to macroeconomic shocks (12) or to compensate for their differential infla
tion (13), but they will have to keep their budget under strict control. Let us con
sider such arguments.
A — According to the Report the loss of the possibility of changing the nominal
exchange rates is not as important as it might appear. The whole of Ch.6 and the
two major annexes address this. The main arguments are the following :
"front-load" the required real (i) the nominal exchange rates adjustments may
exchange rates ones, dampening the negative initial real effects of the shocks ;
however, later on, the feedbacks originating from import and export prices will
recoup the initial effects, unless a more substantial adjustment in relative prices,
i.e. a real exchange rate adjustment, takes place. Remarkable efforts are made
(8) See section 4.3.2. OMOM goes so far as to reproduce, without any warning, the politometric
analysis by Alesina 1989, who regresses upon the average inflation of different countries an index
of central bank independence. The results are, in such cases, highly dependent on the properties
of the necessarily arbitrary scale. Years ago, dealing with similar analyses which regressed GNP
cross-section data with indexes of education, Mark Blaug went as far as saying that "the sins
of the transgressor are nothing as compared with the sins of the regressor".
mandate" (OMOM, p. 96). (9) Price stability is described as "the overriding
(10) Pp. 96-97. Italics are mine.
(11) Ch. 4.
(12) This is actually acknowledged as being the major cost of EMU ; however it is not regarded