Postponement: German economics professors call for delay of EMU

Financial Times FEBRUARY 9 1998

By Peter Norman and Wolfgang Münchau in Bonn

More than 150 German economics professors have called for an "orderly postponement" of economic and monetary union because economic conditions in Europe are "most unsuitable" for the project to start.

The call to delay Emu "for a couple of years" is made in a declaration signed by 155 university professors and sent to the Financial Times and the Frankfurter Allgemeine Zeitung newspaper in Germany. It signals intensified opposition to the government's euro policy.

The declaration was organised by Manfred Neumann, professor of economic policy at Bonn university and chairman of the Bonn economics ministry's council of expert advisers. It signals concern among professional economists about Bonn's determination to begin the single currency on January 1 1999.

The declaration that "the euro is coming too early" will press the government to explain its policy in economic terms. The statement points to the failure of large European Union states to meet the economic criteria for membership in the Maastricht treaty of 1992 and highlights worsening structural problems.

Postponement, it says, "has to be seriously considered as a political option". The professors do not oppose the euro, but make clear that Emu's success is more important than a prompt start.

The 155 names, published on the internet, include prominent members of the German economic establishment. There are six members of the economics ministry's advisory council besides Mr Neumann, two members of a similar advisory group at the finance ministry, and Ernst Helmstädter, a former member of the government's council of economic advisers, known as the "five wise men".

There are notable absences. None of the present "wise men" has signed, although Herbert Hax, the group's chairman, is a known Emu sceptic.

Separately, a senior member of the Bundesbank's central council has called for a delay. Reimut Jochimsen, president of the central bank of North Rhine Westphalia, said high unemployment and the large public sector debts of some EU countries endangered the viability of the single currency.

German economics professors convinced 'orderly postponement' of euro essential

Financial Times FEBRUARY 9 1998

From Professors Wim Kosters, Manfred J.M. Neumann, Renate Ohr, Roland Vaubel and others.


The following declaration on the planned start of signed by 155 German-speaking professors of economics:

There is no alternative to European integration. The single currency will be part of it - at least for the core of Europe. However, The euro is coming too early.

The consolidation of public budgets has made progress. Nevertheless, it has not advanced enough, especially in large countries such as Italy, France and Germany. The process of consolidation started too late and half-heartedly.

In spite of an unusually low level of interest rates, hence reduced costs of debt service, and in spite of numerous examples of creative accounting, the core countries have not succeeded in reducing deficits markedly and sustainably below the 3 per cent reference value.

Moreover, the average debt ratio of the member states has not come down since 1991 but has risen by 15 percentage points. As a result, it now exceeds the 60 per cent reference value of the Maastricht Treaty by a large margin.

This is contrary to the spirit of the treaty.

The treaty rightly requires persistence of convergence. To ensure this the so-called "stability pact" has been invented. However, the pact cannot guarantee budgetary discipline. The threat of sanctions is credible, if at all, only if the deficit reference value is violated by one country or very few countries.

Given that sanctions are not automatic, it is unlikely that a qualified majority will enforce the pact when a larger number of countries simultaneously violates the limit. The pact cannot ensure the stability of the euro.

Since 1991 the structural problems of Europe have worsened. Unemployment has continued to rise. Notably, Germany and France - the driving forces of European integration - are not well prepared to cope with the more rapid structural change and the stiffer competition in a monetary union. The euro does not solve the unemployment problem of Europe. Given that exchange rates are no longer available for adjustment, labour markets need to become much more flexible - in Germany as well as elsewhere.

An unambiguous change in the trend is missing in this respect.

If such a shift in the trend is not achieved before the start of monetary union, we will have to expect useless experiments of demand stimulation and, above all, political pressure on the European Central Bank.

The current state of economic affairs is most unsuitable for starting monetary union. An orderly postponement for a couple of years - supplemented by conditions on further progress with respect to budgetary consolidation - has to be seriously considered as a political option. Postponement must not be seen as a political catastrophe. No party can infer from it that the process of integration has come to an end. The persistent success of the euro is more important than its starting date.

An orderly postponement would not be a reason for any country to reduce its efforts at consolidating public budgets. Reducing effort would be a signal that the country either does not make budgetary discipline an objective of its own or that it is unable to take the necessary action. It would be a fundamental error to start monetary union with such a country.

Should the attempt of reaching unanimous agreement on an orderly postponement fail, it will be of utmost importance to apply the convergence criteria without any indulgence. Then it must not be declared a taboo that the monetary union starts with a smaller group of countries.

On the contrary, with regard to sustainability, the convergence criteria need to be applied as rigorously as possible - as strictly as the treaty permits.

Governments which do not take the examination of convergence seriously undermine the confidence in the actual independence of the European Central Bank and in the stability of the euro. The start of monetary union would suffer from a heavy burden if the euro is expected to be weak - inside and outside the monetary union.

Wim Kosters (Bochum), Manfred J.M. Neumann (Bonn), Renate Ohr (Hohenheim)

and Roland Vaubel (Mannheim), Institute for International Economics,

University of Bonn, Lennestrasse 37, D-53113 Bonn, Germany

European backlash

Financial Times ledare FEBRUARY 9 1998

It is a remarkable achievement getting two economics professors to agree on anything. Getting 155 to speak as one is almost unheard of.

So today's statement by that many German professors, calling for an "orderly postponement" of European economic and monetary union cannot be dismissed lightly. The letter, published on the opposite page, also reflects the views of many ordinary Germans who have remained deeply dubious about the benefits of a single currency, in spite of their political leaders.

The letter, coinciding with challenges to the euro in the German constitutional court, also indicates that the battle is being joined with a vengeance. Yet it is almost certainly too late, politically, economically, and legally. Not only that, but an orderly postponement is no longer feasible.

Postponement of Emu is simply not foreseen in the Maastricht Treaty. There is a constitutional commitment to proceed. Some members of the EU will qualify on any reasonable interpretation of the treaty criteria. They are supposed to go ahead. So any postponement would scarcely be orderly: it would be seen as a disorderly retreat, and the markets would not believe it could happen at a later date.

The professors make some valid points, questioning the progress towards economic convergence made by some member states. They suggest that the reduction in budget deficits has not been marked or sustainable; that the average debt ratio of the member states has risen, not declined, since 1991; and that the euro will not solve Europe's unemployment problem. They conclude that "the current state of economic affairs is most unsuitable for starting monetary union".

Their criticism of the progress on budget deficits is not entirely justified. On almost every measure, structural deficits in Europe have shrunk. They are now well below 3 per cent of GDP - the Maastricht criterion - and any slippage has been largely cyclical or, in Germany's case, the result of unification.

Unemployment is not in the Maastricht criteria, but it certainly matters. It is not clear whether a single currency will help or hinder job creation. But if unemployment is very high at the start of Emu, if citizens are angry, and if there is no widespread public agreement to accept the necessary structural reforms, then the political context of the early years of the project will be very difficult.

The debt criterion will arguably be just as difficult. There is a strong case that a marginal reduction in the last two years before Emu is not likely to be sustainable. It is right to insist that when the process starts, it should only include those who are going to be able to live by the rules. That means that Italy, in particular, has yet prove it can last the course.

No doubt the good professors have the Bundesbank in their sights, in hoping to ensure the strictest possible enforcement of the Maastricht criteria. They certainly have some allies in Frankfurt. But by now, they have very few in Bonn, Brussels or Paris, and fierce enemies in Rome.

However valid some of their points, this effort comes far too late.

Bundesbank: Studying countries' readiness

Financial Times FEBRUARY 9 1998

By Wolfgang Münchau in Bonn

A Bundesbank report on European economic and monetary union will include detailed country-by-country examinations, according to a senior German central banker.

Reimut Jochimsen, head of the state central bank in North Rhine Westphalia and a member of the Bundesbank's central council, said at a meeting in Bonn that he "could not imagine" that the Bundesbank's report would not be based on an examination of EU members' economic convergence efforts.

This raises the prospect that the Bundesbank could express reservations about individual countries' fitness to participate in Emu. Previously, it had been unclear to what extent the Bundesbank would judge other EU members.

The Bundesbank has yet to fix the format of its report, and the manner and timing of its distribution. Mr Jochimsen said it would be drawn up after March 25, the day when the European Commission and the European Monetary Institute, the forerunner of the future central bank, publish their own convergence reports.

Markets will watch out for nuances or disagreements between the reports. Some attention will focus on what the Bundesbank might have to say about Italy.

Italy is expected to have met the Emu qualifying criteria in 1997, after recent improvements in the budget deficit and inflation rate. But privately some German central bankers and many economists doubt the sustainability of Italy's convergence performance.

It is thought likely that the Commission and Emi reports will use a form of words that will let heads of state and government accept Italy as a founder member when they meet to decide the first-wave Emu group on May 2. Many expect the Bundesbank report to be blunter.

Mr Jochimsen's comments came in response to questions at the launch of his latest book on Emu, in which he gave a sceptical assessment of future economic prospects under the single currency. He stressed that he was no opponent of Emu but would prefer the project to be delayed: "Starting the final phase [of Emu] on time will be child's play compared to the massive and sustained efforts that will be necessary to sustain the euro's permanent stability."

Like many German officials, Mr Jochimsen believes monetary union is viable only if supported by political union. He expressed dismay that Emu itself had turned into the main vehicle of European integration.

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