European Union Enlargement - a good idea?
Is it really a good idea? The general consensus is that it is, but has the case against been made? There seems a concerted effort not to make such a case. The CRCE itself has no point of view on the matter but its directors have been concerned at the lack of balance in the discussions.
When the esteemed Economics Editor of the Sunday Telegraph, Bill Jamieson, and historian and acknowledged EU expert, Helen Szamuely, approached the Centre with the idea of looking at the idea of Enlargement from another angle, we were delighted to publish their researches as an Occasional Paper.
A ‘Coming Home’ or Poisoned Chalice? - EU Enlargement with a Foreword by the Rt Hon Michael Portillo MP was launched at Politico’s Bookshop in London to great acclaim, and is a CRCE Bestseller.
In A ‘Coming Home’ or Poisoned Chalice? both the politics and economics of enlargement come under critical scrutiny. Clearly set out and packed with facts and figures, this is a must read for everyone who cares about Europe and her future.
See what the Reviewers said:
"An eloquent statement of the case that the countries of central and eastern Europe are wrong to give such high priority to joining the European Union!" - Samuel Brittan, Financial Times (London) 3 September 1998
"An EMU which imposes a ceiling on growth and employment will lead, probably to a breakout by at least one country, but only after longer and more bitter social tensions than exist at present. Only then will Europe awake to its lost place in the world. By then, the Eastern Bloc members, so Szamuely and Jamieson forecast, will be as far behind the present member states as they are now. Membership will eliminate the competitive advantage of their cheap skilled industrial labour. Far from winning a market for their agricultural products they will be eating subsidised German and French food exports. They are already having to give up new economic freedom in the quest for membership. The d envisaged in the EU budgets up to 206 will not be there, because it is predicted on GNP growth rates which the EU will not achieve." Alan S Milward, Times Literary Supplement, 25 September 1998
In the House of Lords, Lord Pearson of Rannoch spoke forcefully about the Enlargement issue: "I should have thought that all the CEECs really need is defence from NATO and access to the market, which, of course , is denied them, I am not alone in this view. I have here a serious study which I have recommended to your Lordships before. The study is called ‘A Coming Home or Poisoned Chalice? written by the distinguished economist, Mr Bill Jamieson, economics editor of The Sunday Telegraph and by Dr Helen Szamuely, a well known expert on Eastern Europe." - Hansard (Proceedings in the House of Lords), 7 December 1999.
Vaclav Klaus and Pedro
Mont Pelerin Society
9th – 12th September 2001
The Centre for Post-Communist Economies
The Constitution of the CRCE requires that its Trustees and Advisers dissociate
themselves from the analysis contained in its publications, but it is hoped that
readers will find this study of value and interest.
First published in November 2001
The Centre for Research
into Post-Communist Economies
57 Tufton Street
London SW1P 3QL
© The Centre for Research into Post Communist Economies,
Vaclav Klaus and Pedro Schwartz
All rights reserved
Occasional Paper No. 11
ISBN: 0 948027 39 8
Printed in Great Britain by
Instant Press West One
ABOUT THE AUTHORS
Vaclav Klaus is an economist and politician
and co-founder of the Civic Forum Movement (OF). He was the first non-communist
Finance Minister in Czechoslovakia. In 1992 he became Prime Minister of the
Czech Republic. Currently he is President of the Chamber of Deputies of the
Vaclav Klaus is also Professor of Finance at
the Prague University of Economics. He has written extensively on economics and
Pedro Schwartz is currently the Executive
Chairman of IDELCO. He holds a chair at the Department of Economic Analysis at
the Autonomous University of Madrid. He has been a Member of the Congress of
Deputies in the Conservative Interest and an economist in the Bank of Spain’s
Research Department. In 1990 the Queen appointed him OBE (Honorary Officer of
the Order of the British Empire).
The CRCE is grateful to Vaclav Klaus and
Pedro Schwartz for permission to publish these papers, given at the Mont Pelerin
Society Meeting in Bratislava, September 2001.
BACK TO EUROPE
AVANTI INTO THE EUROPEAN UNION
The formation as well as the development of
the European Union in the second half of the 20th century is a special case of
the contemporary globalisation and integration processes. It belongs to the
prevailing trends and tendencies but it contains something specific – I see it
in its dominant political aspect!
No one in this room is against opening up of
societies, against elimination of all kinds of barriers and obstacles to the
free, unconstrained exchange of ideas, of people, of goods and services, of
money. Some of us, especially from Central and Eastern Europe, know from our
personal experience what it means to live in closed, inward-looking, almost
autarchic societies where any form of contact with the outside world was
prohibited (or at least made very difficult). We know what it means to live in
the world of barriers, obstacles, borders, prohibitions and – eventually – of
permissions to be allowed to do something or to go somewhere.
Current European unification process is,
however, not only or not predominantly about opening-up, but at the same time,
about introducing massive regulation and protection, about imposing uniform
rules, laws and policies, about weakening standard democratic processes which
were evolutionary developed, about increasing bureaucratisation of life,
I am afraid there are not many people in
Europe these days who see this process with its two sides so clearly as we do.
It is, therefore, our task to express our critical views openly and
self-confidently, not to hide them, not to be afraid to be associated with them
– even if it does not belong to the current political fashion and to the
mainstream of political correctness. The title of my speech reflects both sides
of this process. We want to go ‘back to Europe’, to the freedom which we did not
enjoy in the communist era, but we hesitate to rush into the European Union
which is the embodiment of ambitions to create something other than a free
In this short luncheon address I am not able
to do more than to make a few comments to this topic.
For me (and for most of us in Central and
Eastern Europe), the debate about Europe has two main dimensions – the reality
of and the plans for the evolution of the European integration process on one
hand, and the EU dealing with candidate countries, with its potential future
members, on the other. Both topics are, of course, interconnected.
I will start with the second one, because –
especially in the recent years – membership or non-membership in the EU has
become a very simple differentiating factor suggesting who is and who is not a
‘normal, standard (or standardised), mature, decent, obedient European’ country.
To put it this way means, however, a big problem for us. Such an approach is
unfair (and for me difficult to swallow) but it has been more or less accepted.
Due to it, the countries of Central and Eastern Europe have no other alternative
than to make a maximum effort to become members of the EU as soon as possible –
regardless of their views about the currently realised model of European
unification and about ideology behind it.
This is – in a simplified way – our position
and our motivation. We live, however, in the world of asymmetric motivations. As
I said, non-members of EU are motivated to enter it. On the other hand, it is in
the interest of member countries to prolong today’s status quo as long as
possible. It is on their side an expression of rational behaviour. Member
countries already have full access to the non-member countries. They are there
and have a full possibility to realise their own comparative advantages in an
easy, one-sided, and for them painless way. The benefits they get from relations
with us exceed considerably the costs they have to bear.
This discrepancy is the main element of my
description of the European reality at the beginning of the 21st century. There
are several alternative scenarios as regards the future, because everyone will
be searching for optimal trade-offs. But I predict that the EU member states
will not be able to keep their club closed for a long time. The consequence will
be the phenomenon of an incomplete membership.
Another ‘reality’ in contemporary Europe is
the uncontested dominance of the ideology of unification, the ideology of
Europeanism – which is, however, only a very superficial substitute ideology, an
Ersatz-ideology. Its relative success is another modern fatal conceit. Its
concentration on the form, not on the substance, is a successful way how to hide
its real substance. It may be a rational strategy on the side of its exponents
to conceal its etatist characteristics.
The most respectable ambition of Europeans,
the ambition which most of us would whole-heartedly support, is to expand,
enhance and guarantee freedom and democracy for all Europeans. In this respect,
my question is: will the freedom and democracy in Europe be increased by
Europeanism which means
• minimising the role of one, indisputably genuine and evolutionary developed
level of human organisation, called ‘nation-state’;
• extending the distance between individual citizens and relevant
decision-making bodies in remote Brussels or Strasbourg;
• harmonising (or unifying) rules and policies instead of preserving
competition between different rules and policies?
My answer to these questions is clear and straightforward:
• I wish my country to remain a self-governing nation within the European
• I am convinced that it will be counterproductive to create an artificial
• I hope that the balance between intergovernmentalism and supranationalism
will not be fundamentally shifted;
• I believe that efficiency and strength will not come from uniformity but from
experimentation, diversity and competition.
I am frustrated that these issues have not been sufficiently debated in Europe.
The silent, uninvolved majority of Europeans does not care or does not see the
importance of these issues. Pro-European activists – an apparent minority –
claim to be the exclusive owners of truth. They dismiss all objections to their
struggle for supranationalism and ever closer union as undemocratic,
nationalistic and reactionary, and denounce all those who disagree with them as
potential Lukasenkos or Milosevices. We have to admit that they succeeded in
establishing a quasi-religious belief to see unification as a panacea.
Looking at the recent changes of institutions in Europe, we see that the
development goes in the direction where the pro-European activists want to have
it. The intergovernmental co-operation of independent countries has been slowly
but certainly converted into the system with many features of a supranational
European state, and we see many attempts aiming at centralisation of power in
Brussels and at elimination of European nation-states.
I see many dangers in this process of the accelerated unification of Europe
which was made possible by the Maastricht, Amsterdam and Nice treaties. My
approach is based on my over-sensitivity inherited from the communist era.
We used to live in a political and economic integration called COMECON, which
was also characterised by the fact that decisions were made not at home, but
abroad, by the belief that the whole is more than the sum of its parts and by
the concept that some know better than the rest of us.
The currently victorious europeanism should not lead us to forgetting the EU
economic and social practices (and the ideologies behind them). In my
understanding the existing system is, in the long run, untenable because it is
undermining European competitiveness in the globalised world.It needs marginal,
incremental, evolutionary changes (and they will be – eventually – realised),
but the system cannot be changed without more radical measures. Europe (or the
Euroland) has been in the past decades a victim of creeping bureaucratisation,
of increasing regulatory activism, of non-receding protectionism, of soft and
all-embracing paternalism and of increasing ‘planetary’ ambition vis-à-vis ‘Le
d’fi american’ or the Asian challenge. To discuss how to do it, however,
would be a topic for another speech.
THE EURO, FOR AND AGAINST
The euro, a bold and stupendous experiment in social engineering, puzzles many
of us libertarians. The avowed aims of European Monetary Union (EMU) and the new
European currency appear blameless. The object is to create a solid currency
that will free Europeans from the curse of inflation, do away with national
monetary borders, ease travel in a large area, free industry from a great deal
of exchange risk, bolster up budgetary and financial orthodoxy, permit the
comparison of prices and foster competition and productivity in Euroland. Is
this not the free market agenda?
Despite these golden prospects, however, we still look at the euro askance.
Obviously we who believe in competition cannot like the way it is being put in
place, by administrative fiat, with a new Central Bank politically imposed on
Member States, the new currency invested with legal tender status, the
democratically-elected governments being deprived of any say in the conduct of
monetary policy, the people’s referenda passed over unceremoniously. But if the
ends be acceptable and desirable, why quibble? John Stuart Mill, when asked by
an investigating committee on French banking whether there should be one
privileged national bank of issue or many competing private issuers of bank
notes, replied that, if the monopolist is made to obey the right kind of rule,
the final result will be the same as with competition. If the European Central
Bank (ECB) abides by the rule enjoining it to keep the value of the euro steady,
will not the final result be the same as that of a free competition among
national currencies, only with a simpler and cheaper mechanism? Was Mill not
right? Why do we repine?
A further consideration should allay the fears of those of us who instinctively
do not like the euro experiment: the increasing perfection of financial markets
and indeed the growing ability of individuals to bypass officious government
interference makes it less and less important which currency we use for our
deals and contracts. The theory of rational expectations, whereby individuals
one with another can be assumed to make full use of all the information existing
in the market, makes it likely that people in general will discount the defects
of the euro, with some deadweight loss but no fatal disturbance. In fact the
theory of rational expectations indicates that if the euro is so good markets
will adopt it spontaneously, including the British market, and if turns out to
be a bad currency, markets will spontaneously dollarise. So again, why bother
even to discuss the euro?
My worries persist in spite of all this. This essay will examine the pros and
cons of the euro in some depth – and, if the cons are substantial, will debate
whether it is a good thing that the British, and the Swedes and Danes, refrain
from adopting the euro, now that undoing the whole scheme would be highly
The euro seems to be working
The launch of the euro caused a mixed impression. It started with a value above
that of the dollar and quickly lost more than 20 per cent on the exchanges. It
is now recovering, apparently because the rate between the dollar and the euro
seems to be governed by the relative productivity of their respective
economies – an outcome which Ricardo predicted with his 1817 theorem on the real
exchange rate, which he called ‘the law governing the relative distribution of
the precious metals in the world’. But more of this when we come to discussing
the performance of the Irish economy. When monetary policies are prudent, the
movements in the relative exchange rates tend to reflect the perception of
returns to investment in the different economies and should not be a ground for
Though the euro has suffered no upsetting speculation of the kind that many of
us predicted would plague the European Monetary System (EMS), this says nothing
especially in favour of the euro. As Milton Friedman has noted, the weaker
currencies in a system of pegged exchanges are liable to bouts of adverse
speculation while full monetary unions only suffer from real, not monetary,
The transition to the euro was in fact smoother than I thought in my Wincott
Lecture ‘Back from the Brink’. The American-led boom helped but the Maastricht
conditions and the Stability Pact also contributed. Imposing a limit to the
Member States’ budgetary deficits previous to entry was an apposite rule if one
wanted to transmit the idea that EMU would not be a high inflation area.
Prolonging the rule through the Stability Pact was again the right strategy for
a fledgling currency that wanted to avoid the impression that the German
conservative tradition could be watered down by Italian and Spanish bad habits.
The Stability Pact recognises that a formal undertaking not to bail out
insolvent Member States would not exorcise the fear that some Governments might
follow a path of unsustainable debt creation (the interest rate of the debt
being higher than the rate of growth of the economy). Be that as it may, most
Member States have up to now shown themselves able to run substantial surpluses
on their primary budgets, no doubt helped by the world boom. But now the German
Economics minister is saying that the rule should be lifted when a recession
looms, which Germany could have done (whether wisely or no) with the German mark
(DM), but which Euroland cannot do with a dodgy euro.
An unforeseen development that helped make the euro popular in fringe countries
was the broad interpretation of the Maastricht rule precluding devaluation prior
to adopting the euro. It was lucky for Portugal, Ireland and Spain that the
markets forced them to devalue heftily while their currencies were in the EMS.
On the threshold of the euro, these three countries found themselves in the
enviable position of having a rate of exchange very favourable to export-led
growth and seeing their money interest rates converge to those obtaining in
Germany. These facts and the considerable funds coming from the EU explain much
of the glorious prosperity these three countries have enjoyed since signifying
that they would adopt the euro. The euro is now very popular there and will be
so in all ailing newcomers if they receive a similar treatment.
The monetary policy of the European Central Bank (ECB) has also been perceived
as quite ‘conservative’ for its refusal to disregard the danger of inflation for
the sake of an anti-cyclical monetary policy. The spirit of the Bundesbank
haunts the corridors of the new institution in Frankfurt. There is some worrying
tension between France and Germany around the Presidency and some controversy
about the instruments used by the ECB to carry out its strategy. However the ECB
has had a better start than many expected.
So far, so good. But it is the future of the euro that we have to consider. The
behaviour of the ECB, the course of the euro, the mettle of the politicians, the
backing of public opinion in the Member States have not been tested in a slump,
especially one delivering asymmetric shocks to the different countries and
regions. The need to fund automatic transfers demanded by the smooth functioning
of a currency area will need fiscal convergence on a higher level of taxation,
which will be resisted by countries enjoying lighter taxes. Also, many experts,
including Mundell, think that the ECB and the euro cannot succeed unless backed
by a central political authority akin to that of a nation state, so there will
be demands for a deeper union by some and protests about a hidden political
agenda by some others.
But let me examine all these questions in a systematic manner.
Costs and benefits of EMU and the euro
Despite the favourable initial impression caused by the euro, it is still very
early to try and evaluate the benefits and costs of this experiment. Some of the
main economic benefits claimed by its backers are still to come, such as the
boost a single currency will give the Single Market, important for consumers but
perhaps less so for sophisticated producers and traders. In a slump the ECB may
forsake its healthy scepticism about the ability of a Central Bank to counter
economic cycles. Also, the ECB may be tempted to intervene in the exchange
market if the rate of the euro with the dollar and the yen is thought not to be
‘right’. Nobody can tell whether there will be a ‘German re-unification effect’
for new entrants.
Even more difficult to foresee are the political consequences of the euro. What
will happen if some Member States stay out; will the euro make for greater
centralisation in Brussels making ‘subsidiarity’ even more unreal; is there
likelihood that some member country will be forced to give up the euro, just as
many gave up the gold standard in the 1930s; will a successful EMU harm Atlantic
relations and world free trade? There are so many difficult questions whose
answers we would prefer not to leave in the lap of the gods.
The case for the defence
I will try and make the strongest possible case both for and against the euro
because the question is so weighty and so difficult to decide. I hope I do not
end as when I was a student of law and used to attend to cases in Court: the
arguments of both the prosecution and the defence convinced me completely and I
was left thoroughly confused.
Economic arguments in favour of the euro
An independent ECB will make the euro a barrier against inflation; and also a
guard against deflation. According to the Maastricht Treaty (Article 108 of
consolidated Treaty of the European Union) the ECB cannot seek or take
instructions from the Community or Member States Governments, and neither can
national central banks nor any member of their several decision-making bodies.
The independence of Central Banks has even benefited Britain, as this part of
the Treaty is now applicable to the Bank of England. Independence is an
important condition of currency stability, since it shuts the door to any
temptation of monetising the public debt or financing budget deficits with money
creation. As for maintaining the internal value of the euro, Article 105 of the
Treaty establishes that the primary objective of the ECB is price stability. It
is only ‘without prejudice to the objective of price stability [that] the ECB
shall support the general economic policies in the Community’, such as ‘a high
level of employment’. This shows that the ECB will consider growth and
employment as aims subordinate to price stability. The Bank can treat the
external value of the euro with ‘benign neglect’, since exchange rate policy is
in the hands of the European Council.
The euro will reinforce the European Single Market and boost competitiveness,
thus creating a prosperous Europe.
The introduction of the euro will reduce transaction costs and simplify price
comparisons for consumers and other purchasers of goods and services. First, by
dealing in a single currency Europeans will not have to pay exchange
commissions; and though this will reduce the turnover of banks, commissions
should be considered a deadweight cost so there will be a net welfare gain.
Secondly, prices of tradable goods will be more easily comparable, and even
differences in non-tradables if they are large will stick out. Comparisons in
wages will also make for labour market convergence and reduce the amount of
unfair trade within Euroland.
Firms will be rid of exchange risk for EU transactions. Random movements in
exchange rates upset business calculations. Investment plans will be subject to
one uncertainty less.
The euro demands a zero deficit fiscal policy. A common currency makes it
imperative that no country free rides by being irresponsible financially, an
especially hard temptation for new entrants (and some older ones). After entry,
the Stability Pact will ensure general good conduct. If a country shows a higher
inflation rate than the average, ECOFIN will watch over its fiscal policy to
ensure that it is not expansionary.
The euro will force Member States in Euroland to re-balance their welfare
systems, to privatise their national monopolies, to reform their labour markets.
The Treaty of Rome purposely said nothing against nationalised industries or the
Welfare State. However the logic of the euro, by demanding ever more efficiency,
will force Member States to make their State monopolies face competition,
balance Social Security accounts and follow the Dutch and British example on
private pensions. The Danish ‘No’ in the euro referendum and the French refusal
to open its energy market are doomed. As for the labour market, reaffirming
German Mitbestimmung need not harm the Euroland economy and in fact is a
plus for the kind of Europe that is being built.
EMU will be a good deal for new entrants. The expectation of their joining EMU
will give new entrants the advantage of lower money interest rates, with minimal
default insurance spreads, as they will profit from the macroeconomic reputation
of Germany, while the Stability Pact will ensure that this reputation persists.
This much reduces the pain of bringing money interest rates down on one’s own.
EMU will function as a currency board for new members, since their economies are
small in relation to those of the existing Member States and their influence in
the ECB Council will be negligible; this will bring their inflation rate to the
level of the average of in Euroland, an important result for new entrants.
No inflation, the obligations of the Stability Pact, and generous Convergence
Funds will set them on a steady growth path.
The monetary policy of the ECB, backed by the ECOFIN Council, will help untie
the EU from the US cycle and relay the American economy in its role of world
locomotive. When the euro runs fully, when the Single Market seriously
functions, Euroland will be much more self-sufficient as far as trade and
activity are concerned. The Community Authorities will have the opportunity of
carrying out a macroeconomic policy that will stabilise Europe more efficiently
than other areas and may even become the growth leader of the world.
Asymmetric shocks will be less likely in Euroland with a single currency and a
single Central Bank, especially because EMU will increase internal trade. There
are two views of the likely industrial and services distribution in a Currency
Area. One is that of the European Commission holding that the more trade passes
between two countries the less cyclical divergence there will be between them.
The other is that of Krugman who predicts that in an integrated monetary and
economic zone industrial activity will tend to form clusters and germane
industries will tend to form nuclei. Empirical evidence shows that the cycles of
Member States within unions such as the EU tend to converge, so that a monetary
zone will not be torn apart by transversal shocks.
The euro will soon become a world currency and thus will be a source of
seignorage for the EU. The remit of the ECB and the size of Euroland
guarantee us that it will be able to look the dollar and the yen in the eye.
As for the UK joining, whether the pound is kept or
not, the euro will be used in the UK especially for financial and export
transactions, so why not go the whole hog?
The Chancellor Gordon Brown’s five criteria can be fulfilled in time for the
By giving up the pound sterling, British
industry will be free of the exchange risk and will cease to be overvalued in
relation to its main commercial partners, so no harm will come to British
industry. The risk of a once-and-for-all price rise can be largely avoided by
not going to far in giving in to exporter interest groups and setting a sensible
initial rate of exchange; the risk of continued inflation will not materialise
if the ECB functions properly.
British labour laws and the more flexible UK
labour market will keep unemployment lower than that of other Euro-partners in
the event of a deflationary ECB stance. Price competition propitiated by a
common currency will increase consumer welfare and can be accommodated by the
more efficient British labour market.
Entry can be delayed until the British
economy has converged with the Continent. But adopting the euro will foster that
convergence, as experience on the Continent has shown. Thus the importance of
asymmetrical shocks can be discounted. The City will remain a European and
world-class financial centre only if its main unit of account is the euro.
Political arguments in favour of the euro
The euro will be a powerful symbol of European unity and will make Europeans
proud to belong together. In fact the creation of the euro is well within the
spirit of Jean Monnet, to use convergence brought about by economic institutions
slowly and carefully to promote European political unity. Since the strength of
national feelings makes it very difficult to move directly to a European
federation it has been best since the days of the European Coal and Steel
Community and the Treaty of Rome to use the indirect and modest way of deeper
and deeper economic collaboration to pave the way for an ever closer political
Everyday use of the euro will allay the fears of individual citizens before EMU,
expressed in a number of negative referenda.
The use of the physical euro will make new entrants feel real Europeans at last
and help them over the sacrifices that entering the EU will demand.
The use of the euro, together with the Schengen Accord doing away with borders,
added to the strengthening of the ‘second pillar’ on a common space for justice
and the ‘third pillar’ on a common foreign and defence policy, will act as an
antidote against narrow nationalism, the putrid ground for the rank growth of
European civil wars.
A single currency demands a single political authority with centralised fiscal
powers to underpin it, as the history of previous monetary unions shows: the
euro will make it imperative to set up a European Federal Union with a
democratic Constitution. The theory of optimal currency areas shows that they
cannot function unless there is an automatic system of fiscal transfers. The
ridiculously small tax income of the EU, capped at 1.75 per cent of Union’s GDP,
is a brake on the movement towards a united Europe. The inevitable need for
fiscal transfers if the area is to function smoothly will push Europeans towards
moving some taxing powers from Member States to the Community.
The convergence of the fiscal and monetary policies of the Member States
necessitated by the euro will slowly make for a common economic policy and thus
reinforce the cohesion of the EU. The euro will make the citizens of the
different Member States accept measures that would be ‘politically impossible’
without the authority of the Union.
Europe is trying to define a distinctive Third Way in social and economic
matters, neither old style socialist nor neo-liberal. Europeans must accept
globalisation but they must tame it and control it, so as to put economic forces
and transnational companies at the service of man and community. Having a common
currency will help create a space where this more humane society can flourish
with the help of the more positive forces of capitalism.
Reining in excessive German power and making for a more balanced Community is
one of the effects of merging the DM with other currencies to form the euro. The
ECB is not the Bundesbank: all European nationalities and the Governors of all
the participating Central Banks are represented on its Governing Council. Thus
joining EMU and adopting the euro is better than setting up a currency board,
since all participating nations will have a say in the policy of the ECB, within
the framework of its constitution.
Having a single currency and a common Central Bank will reduce friction among
Member States. Not only has the Commission shown that more trade means more
convergence (and the use of the euro will mean more intra-European trade) but
also the euro rules out beggar-your-neighbour devaluations and forces agreement
on a common macroeconomic policy. Episodes of friction there may be but they
will take place in the open and dressed in a technical monetary garb.
The euro will reinforce the perception that Europe is becoming one of the
world’s major power blocs, able to hold its own with the US and emerging Asian
economic powers. The end of the Cold War propelled the US to the role of the
only Great Power. Other centres of power may be forming in the Far East. It is
only prudent that there should be a Europe aiming to take on the role that
Britain played in the 19th century, holding the balance of power vis-à-vis the
Britain will at last pull its due weight in the Community by adopting the euro.
It may seem incredible, but Britain lost an Empire half a century ago and has
still not found a role. Throwing its lot with Europe is the most sensible and
realistic line of policy. By rejecting the euro the UK reinforces the prejudices
of Continental nations that the perfidious Albion is bent as ever on wrecking
the European experiment.
The free market and free world trade will have a greater chance of being fully
adopted by the EU with the UK fully in EMU and using the euro. Many ideological
forces are at work in Europe and old style socialism might still raise its ugly
head, with the help of the French bureaucrats and barely converted ex-Communists
from the old Soviet Empire. Tony Blair’s Third Way does not stand a chance of
being accepted unless Britain is seen as a full member of the Club. And the
efforts to launch a new trade round within the WTO could be jeopardised.
Confusion worse confounded
Before starting with the case against the euro, I must underline that two
developments have moved the goal-posts for both teams, for the friends and the
foes of the euro: the revolution in macroeconomic theory and the crisis of the
Firstly, the economic arguments for and against the euro have been traditionally
based on a model of the economy originating with Keynes and his disciples that
has not worked in practice and is unacceptable in theory. Secondly, the
political arguments for and against the euro have been based on assumptions
about the functioning of democracy and the viability of the State, which are
turning out to be superficial or outdated.
Old hat economics
Take any textbook on EMU – for example, the most pedagogical of them all, Paul
de Grauwe’s Economics of Monetary Union, now in its fourth edition.1 The
basic concepts generally used are aggregate supply and demand curves, the
Phillips curve, static demand for money, and even the IS/LM model – all of them
rejected by the literature as giving badly distorted pictures of reality.
Thus, de Grauwe starts with diagrams showing: differently positioned aggregate S
and D for Germany and France; the depressing effect an asymmetrical shock on
French aggregate supply (and employment); and how a devaluation of the franc or
a revaluation of the DM corrects the imbalance by increasing French exports.
Then de Grauwe introduces fundamental qualifications, to the effect that a
nominal devaluation will end by pushing French prices up; that this will turn
the real exchange rate against France; and that the only way to even out the
imbalance between the two countries is structural reform in France, which could
and then could not be helped by the devaluation; and only puts back the need for
structural reforms. De Grauwe knows that what matters are real exchange rates,
which devaluations affect randomly. He ought not to start with bad
macroeconomics just because they are ingrained in today’s political discourse.
By doing this he panders to the belief that devaluations effected by Governments
are a powerful weapon to right the balance of payments while the qualifications
indicate that perhaps devaluations are not useful after all.
Again, he uses our old and treacherous acquaintance the Phillips curve to
examine the possibility of a trade-off between inflation and unemployment. On
this basis he typifies two kinds of government policy towards monetary policy,
hard-nosed and wet, as if governments could after all choose lower inflation and
higher unemployment, or vice versa, at will. Then, as an up to date economist
that he really is, he introduces the natural rate of unemployment as an
afterthought and suggests that expansionary monetary policies can have no effect
on employment and that wielding sovereign power over monetary policy may be
irrelevant for the labour market (unless it be as sand in a delicate mechanism).
He uses Phillips curves all through the book as an expository device to analyse
the costs and benefits of monetary unions, when it is well known that such
curves are unstable. This precludes him from pointing out that introducing the
euro, as also as keeping the national currency, is irrelevant for long-term
Even the IS/LM curves are used to explain the possibility that fixing the
exchange rate does not necessarily reduce the volatility of output compared to
fixing the money stock. Again, these curves are well known to be mis-specified
and are too unstable for predictive purposes.
A defective model, however much qualified, is an unstable base for explanation
and a defective guide for policy. Thus de Grauwe says at one point, ‘in a
monetarist world the cost of a monetary union is really zero’, a misleading and
unbalanced statement. What he means is that monetary instruments, such as the
nominal exchange rate, are very ineffective instruments for correcting real
imbalances, and that therefore the costs for countries joining a monetary union
and giving up their currencies are very low. What he would have said if he had
started with the appropriate theory is that, since money is a (fluttering) veil,
then keeping or giving up your currency is (almost) indifferent. He concludes
that adopting the euro changes nothing fundamental in the real growth path. He
fails to add that neither would refuse to adopt the euro.
If, on the other hand, one uses rational expectations theory to evaluate EMU and
the euro, rather than mongrel Keynesian models, the picture is much more exact.
It is then possible to present a truer qualitative analysis of the economic
costs and benefits of adopting the euro.
As is by now well known, the rational expectations theory does not assume that
individuals have perfect information; rather, that they can and do learn to make
efficient use of all the information existing in the market about the future.
Individuals guide their actions by real prices and calculate Bayesian
probabilities of future outcomes: they are not content with nominal values and
mere adaptive expectations. They are not inert pawns in the hands of the
Authorities, but continuously discount economic policy decisions. Hence
discretionary monetary and exchange policies become impossible or
self-defeating, because they are necessarily time inconsistent. The only
possible economic policy is one based on simple and stable rules and a
reputation for abiding by them. An optimal growth path is attained by direct
institutional reforms to increase the efficiency of markets.2
This removes much of the ground from under the feet of the defenders of
constructivist impositions, such as the euro. But it also emasculates many of
the arguments of the critics of EMU.
Critics of the euro must be careful not to rely overly on arguments based on a
Keynesian view of the world, such as the need to keep sovereign control over
money, interest rates, and foreign exchange. What if a successful anti-cyclical
policy is not within the reach of a Central Bank? What if Central Banks cannot
directly and permanently contribute to full employment by expanding money supply
or reducing interest rates in the money market? What if Central Banks prove
unable to change the real interest rate on long-term credit? What if the real
rate of exchange cannot be managed discretionally? And even more centrally, what
if today’s free capital movements, by allowing investors to choose what currency
they will use in their contracts, make legal tender laws an ass? What if
individuals turned out to be indifferent to the currency they use?
All this indicates that a whole family of economic arguments for and against the
euro loses relevance as national economies become more flexible and open. To
those in favour one may ask why they want to impose a new more centralised
currency if people will increasingly be able to choose whatever money suits them
best. To those wishing to retain monetary sovereignty one may say that there is
little point in wanting to control monetary policy, or wield the instrument of
Bank interest rate, or intervene in foreign exchange markets, as economies
become increasingly globalised.
When criticising the economics of EMU and the euro we must now distinguish
between two kinds of objections: some have a transient character, for they
emphasise that money matters in the short run, especially when a country is
rigid and inefficient; others have a more permanent character, as contrasting
the institutions of flexible and competitive economies within the EU setup and
monopolistic arrangements symbolised by the euro.
Democracy and the State
A parallel deficiency ails the political arguments around EMU and the euro. Many
of the political points levelled for and against are also based on a
badly-focused view of the world. The defenders of the euro base their demands
for a pan-European organisation on what they see as the terminal crisis of the
nation-state. The critics of the euro argue that the traditional nation-states
are indispensable for democracy to work. If both are right, what is the way
In a world where capital moves quickly, where trade takes goods and services
over tariff and non-tariff barriers, information is dispersed and available;
people can travel more widely and cheaply than ever, migrants move across
seeping borders in irresistible waves, and crime is becoming international: it
is more and more evident that the levers of national power have less and less
effect on social reality.
Though this seems to me quite true, the reaction of the europhiles is a peculiar
one. In the realm of money, they saw that the national Central Banks of the
European nations, except perhaps the Bundesbank, had lost most of their power;
curiously, they decided to move one step up and create a larger old style
Central Bank, a European cartel of failed national monopolists. In the realm of
politics, the people who want to use EMU to bring about ‘an ever closer Union’
and so ease the way for a European State, with all the trappings of a Federal
Constitution to define subsidiarity, a European Parliament, a senatorial
Council, an elected President, a governing Commission, a single electorate,
again seem to have no quarrel with today’s nation-state but its small size. The
very people who descry old style nationalism for its belligerence want to
nurture a new European nationalism to give a soul to a Continental super-state,
a new world power able to look America and China and Japan in the eye.
To the defenders of the euro for political reasons, one could ask the question,
is the answer to the slow decay of the nation-state to try and create another
organisation of the same ilk, the enlarged copy of an old sepia photograph of
Leviathan? Is not the EU a cartel of impotent States aspiring to world
On the other hand, true as it is that nation-states are in crisis and that
sovereignty is a 19th century notion with diminishing content in this global
world, the critics of the euro are right to fear that their democratic
traditions are in danger in the hands of the constructivists in Brussels. It is
understandable that countries like Italy, which has had no State to speak of, or
Spain, with a chequered history of liberties, or Portugal, always worried by a
large neighbour, or the ex-Soviet nations, should want to merge and forget their
shortcomings. But Britain, Denmark, Sweden, Norway and Switzerland
understandably want to preserve their hallowed democratic traditions.
Some critics of EMU and the euro, however, adopt a jingoistic tone when
defending the individuality of their country against back door unification and
in that way weaken their own case. The nation state is certainly not dead,
especially as the only constituency for the exercise of democratic liberties.
But with their insistence on national sovereignty, whatever its content, the
eurosceptics fail to spell out and address three problems of democratic politics
in an open world. The first is the ‘Tocqueville problem’ or how to govern a wide
territory with a large and diverse population liberally and democratically. The
second is the ‘underground economy growth’ problem, or how to conjoin governance
and globalisation. The third is the ‘Tammany Hall’ or ‘Mayor Daley’ syndrome, or
how to avoid the takeover of a small state by a corrupt band in the name of
The Tocqueville problem was a traditional one in political philosophy and
Tocqueville offered a solution to it after his journey to the US. It was assumed
since Classical Greek political thought that the polis was the ideal size
of a democratic state and that large states, especially if composed of many
nationalities and religions, had to be ruled by a central authority not
answerable to the large and dispersed population. Tocqueville discovered a
solution in the federal organisation of the US, allowing for the answerability
of the central government to its citizenry. For such a devolved system to work
he listed four conditions: a habit of local self-government (which exists in
many parts of Europe); a common language (conspicuously lacking in the EU); a
political elite that is felt to be part of the people (rather than a remote
bureaucracy); and some shared moral beliefs (certainly not there in Euroland).3 When
these conditions obtain, the feeling of the people for their country is one of
‘relaxed patriotism’, as Siedentop calls it. This feeling is the same that
Jurgen Habermas has called ‘Constitutional patriotism’. But Siedentop, who would
like to see a Federal Constitution of Europe on the lines of the American
Constitution, nurtures the fond illusion that such a moderate love of Europe can
be kindled in the breasts of the several citizens of twenty or thirty-odd
historic states with wildly differing histories, cultures, habits and polities.
The easiest part to transform into a commonality is the economy, and that will
prove difficult enough.
The usual answer of ambitious state builders is to have recourse to that most
dangerous of social metaphysics, nationalism, in this case European nationalism.
Instead of Tocqueville, the patron saint of nationalists is Ernest Renan, who
defined the nation as ‘a permanent plebiscite’. Now we know what sort of beast a
plebiscite is. Instead of an affectionate pride for a common political
democratic procedure, the nationalist wants to excite in the populace a
unanimous passion for a common project, for a communal goal.
The Tocqueville problem cannot be solved on the European plane – not for the
foreseeable future. If we want to live in liberal democratic societies, the
present nation states will have to stay. Further, the experience in the Basque
country, in Ireland, in Corsica and in Yugoslavia indicates that changing
borders is a dangerous exercise and that peaceful divorces such as that of
Czechoslovakia are very much the exception. The use of devolution as in Spain
under the 1978 Constitution could help solve the tension between traditionally
centralised governments and disparate nationalities.
The growing impotence of the nation state to make its rule felt in important
fields cannot be ignored by the eurosceptics. The traditional nation states must
enter into arrangements with their neighbours to come to agreed common action on
the environment, justice, health, crime, international transport,
telecommunications, free movement of people and whatnot. International treaties
can deal with all these.
A large part of these problems, however, will have to be solved by a retreat of
state power – the state must try to interfere less with the contracts among
individuals. The evasion of state fiat through the underground economy will have
to be minimised by giving citizens much more latitude in their affairs.
The trouble with international treaties in the EU is that they have been misused
in the same way that the single market is being misused to bring about an ever
closer union without the people noticing much. Through the various European
Community treaties and taking advantage of the rule that ‘international law is a
part of the law of the land’, increasing powers have been granted to
supranational bodies to legislate on domestic matters.
‘Small is beautiful’ has a limit in political matters. With state expenditure
running at 40 to 50 per cent of GDP, secession and local autonomy can turn out
to be a recipe for a small clique putting their hands in the till. If those
small new governments can wrap themselves in a nationalist flag and whip up
local sentiment by appeals to a defence of the local language, customs, culture,
guilds and corporations, the ethnic bosses will soon see the possibilities of
universal adult franchise, as V.S. Naipaul put it in The Suffrage of Elvira.4
My suggestion to both the europhiles and the eurosceptics is that they should
not lightly turn the fight over the euro into a political battle around the
rival attractions of a European Federation or the sanctity of national
The way forwards for the europhiles is less evident: the chances of a
continental union ‘from the Atlantic to the Urals’ look pretty slim to me. But
europhobes should not be led to defend even a bloated welfare state just because
the people have chosen it democratically. True, the democratic nation state is
the only credible repository and guarantor of individual freedoms. But if it
tries to do too much it will be circumvented and undermined by its disgruntled
citizens who can use the instruments of globalisation to hide, evade and
disobey. The only sustainable role for the nation state is to concentrate on
what it can do on its own. A project for the nation state that deserves to be at
least examined and discussed is: rule-governed economic policy, sound money,
democratic government, minimal state powers, good neighbour policy,
international free trade and competition, open doors to genuine economic
migration – all within the framework of a military alliance of free nations.
Economic arguments against the euro
I shall now review alleged benefits of the euro. I shall distinguish long-term
effects from the mid-term repercussions that mainly affect new entrants and
present members with rigid economies. Given the rational expectations model used
here, the mantra is:
• attention must centre on real reforms to make countries more free-market
• the long-term benefits of economic union will not be changed either way by
• the political consequences of the euro are much more worrying than europhiles
The independence of the ECB seems to be sufficiently assured. With some
amendments the scheme is working very well with the Bank of England, which was
given its independence thanks to the Maastricht Treaty provisions. One big snag
is that big decisions on the exchange rate are not in the hands of the ECB but
of the European Council: if a political agreement intervened to fix or set bands
to the exchange rate of the euro, the dollar and the yen, as has been attempted
more than once by officious politicians, the autonomy of monetary policy would
go out of the window. This is because, as Robert Mundell pointed out in 19605,
monetary policy is penned within an iron triangle: only two of the following
three conditions can be attained, free capital movements, an autonomous monetary
policy, a stable exchange rate.
The remit of the ECB to maintain price stability suffers however from a number
of defects. First it is the Council of the ECB who have defined what is meant by
price stability, i.e., a long-term increase of the harmonised consumer price
index of not more than 2 per cent and no less than 0 per cent. These are
self-imposed limits and there is no other security in them than the confidence
we may feel that the Bank will not play games with its remit. There are no
sanctions on the Council or the Bank officials for failing to deliver, of the
kind the Bank of England Act or New Zealand have to work under. Also there is
much argument as to whether some prices or the index itself should not fall if
there are great productivity gains in the country.
Experience shows, it is true, that sudden and very large falls in money supply
can put an economy in a tail-spin. This, in my opinion, is not so much due to
nominal money being an important argument in the reaction function of consumers
and investors, as due to sudden changes in discretionary monetary policies.
All this holds, in so far as individuals are supposed mainly to money or nominal
prices. If, on the contrary, they try to base their actions on information about
what is happening in the real economy, then falling prices may be a better
indication to laggards that they have to pull their act together.
The Maastricht Treaty seems to have de-emphasised the possible effect of
monetary policy on employment and activity in general, by saying that such
economic policy aims may be pursued by the Bank ‘without prejudice to the
objective of price stability’. However, during the present slump we shall
witness a great deal of pressure being put on the ECB to lower interest rates
for the purpose of reviving growth and in imitation of the Federal Reserve. The
uselessness of Keynesian public works and expansive monetary policies in the
case of Japan does not deter the believers in discretionary macro measures.
Setting a rule for the Central Bank, especially if accompanied by an incentive
scheme, may be a workable system to avoid inflation. The most effective sanction
however, in monetary matters as in the production of all kinds of services, is
competition. Individuals should be able to choose the monetary standard for
their contracts and to have a market at hand where the different currencies are
quoted by the minute. In fact there is no reason for precluding that a composite
currency might appear, or a private moneys exchangeable at par for options on a
defined basket of goods. Each issuer of a currency would advertise and abide by
the rules it thought most convenient for obtaining the maximum seignorage.
There would be no ban on fractional banking, which is a way of redistributing
the seignorage among the banks of a club headed by an issuer.
Reducing the number of foreign exchange deals is a net gain, especially for
tourists (who wield a great number of votes). For other transactors the net gain
is not so clear, since the absence of the foreign exchange automatic shock
absorber may mean an increase in output volatility, which will be a greater cost
in as far as the economy is less flexible. It is of the essence of prices that
they should change and getting rid of one price (the foreign exchange) does not
reduce the overall price volatility.
The importance of Europeans being able to get better terms after they can
compare prices more easily because they are quoted in the same currency has been
somewhat exaggerated. The gain depends on the assumption that people suffer from
a large degree of money illusion, which may true for consumers but not so much
for others. In the production markets there will appear arbitrators and
speculators whose deals will reduce margins. In a labour market made imperfect
by unionisation, comparing wages easily with more productive economies may be
The creaking economic institutions of Euroland are not very promising for a
happy life under monetary union. The forces of finance will push towards more
efficient markets in a larger area with keener competition. But the bad habits
of social democracy will endure and make recessions much more painful than is
The labour market will be a good indicator of how far Euroland will be
approaching the status of optimal currency area. As long as average unemployment
stays higher in Euroland than in the US, European labour market law and
institutions will be judged inefficient. Whenever unemployment rates and
proportion of people at work will differ greatly among the several regions and
other factors of production tend to stay put then Euroland will be seen as a
non-optimal currency zone.
The idea is again that reforms of the real economy are indispensable whatever
the monetary arrangements. If the single currency be the spoon to ram the bitter
medicine down the throat of unwilling patients, so be it, but be ready for the
There is no set recipe for modernising backward economies, but experience shows
that the process will be long and hard. Certainly EMU will prove no magic wand.
For the new entrants, fulfilling the Maastricht conditions is indispensable,
especially the ratio of debt to GDP, if they wish to enter the EMU without too
much mishap. Servicing too high a foreign debt is very tricky, both under
floating and fixed exchange rates, since the country has to run a large surplus
on the balance of payments anyway. However doing it with floating exchanges is
easier in a populist country not accustomed to controlling costs overtly. With a
single currency, for example, the demonstration effect tends to push wages up.
The example of Argentina is very telling on this point. For these countries
money matters a lot during a prolonged period, because they are inefficient and
very difficult to reform.
If candidate countries will insist on joining EMS, they must do it at the
‘right’ exchange rate. That means they should try and imitate the path taken by
Spain, Portugal, and Ireland and have as large pre-entry devaluation as
possible. Trying for a devalued rate will make it difficult to fulfil the
inflation condition. Entering with an overvalued exchange will plunge them into
East German despair, another case where money mattered a lot in view of the
dreadful political traditions, bad working habits, nil entrepreneurial spirit
and outdated equipment of the DDR. It would have been better if the two marks
had run in parallel. Convergence and structural funds are not much help in cases
such as these.
Still, as we said, joining EMU will give new entrants the advantage of lower
money interest rates based on the macroeconomic reputation of Germany, while the
Stability Pact will ensure that this nectar will not be watered down. This is a
shortcut on the painful road to bringing money interest rates down by one’s own
effort, as Canada did over ten years, but it simply means taking the pain after
joining rather than before. The economic cycle will become a world cycle
whenever America stalls. The European locomotive is still in the Coal and Steel
One cannot tell whether industry and services will, in the end, be evenly spread
over the whole of the Community, or whether the pattern will be more like that
of the US, with geographic specialisation and liability to transversal
asymmetric shocks. One prediction can be made drawn from the Italian experience:
too much aid will create Mezzogiorno problems. Also, the slow attrition
of the Common Agricultural Policy will force more people off the land and into
the great cities, a force making for unevenness. I think Krugman will be proved
right and that as in any united market, industries and regions will boom and
bust at different moments.
Transversal shocks will not be lightened by the size of the market but by the
flexibility of factors of production. The more goods and services become ‘tradeables’,
the less will the capital value of non-tradeables be affected by uneven
fluctuation: internal migration, free movement of investible capital,
re-engineering of factories and companies are all forces making for balanced
There is little doubt in my mind that the euro will become a currency used not
only within Euroland but also around the world by money managers and traders of
goods and services. The doubt is how much larger this role will be than that of
the DM, the answer will depend on the behaviour of the ECB. A new world currency
is to be welcomed if it increases currency competition. For this reason, it
would be a loss if the pound sterling disappeared, except for power-hungry
European politicians and public relations officers.
If giving up the pound for the euro is profitable for the several individuals
and firms that use the British currency then the euro will be used increasingly
in contracts, securities, deposits. Whether legal tender laws are in operation
or not, the switch will occur, despite ‘network effects’ in some uses of
currencies. This is what is happening, it appears with the Swedish krona,
because companies keep more and more of their balance sheet in foreign
currencies, hold a larger proportion of their deposits in foreign moneys, and
demand for the krona is driven only by demand for Swedish equities on the
Stockholm Stock Exchange. I have no quarrel with that sort of competition, which
indeed should have been the method used to introduce the euro, – as a parallel
Whether the use of the pound will be reduced to paying for bus fares will depend
on the size and profitability of the British economy. It will in fact be a good
indicator of the progress of British society towards becoming a venue for all
sorts of activities.
When a currency spontaneously revalues, as the DM used to do in the 1960s, it
reflects the increase in productivity of a large part of its economy and becomes
an instrument in pushing the whole country towards those especially profitable
The exchange risk inherent in changes of the real rate cannot be done away by
entering a monetary union. Eire has been a case in point. The Irish economy has
been very productive, due to English being the national language, to a young and
educated population, and to a well-designed policy of attracting foreign
investment. The nominal exchange rate of the punt cannot move, since Ireland has
adopted the euro. Tradeable goods and services are priced at world prices. Non-tradeables
must rise in price to effect the inevitable real appreciation of the punt.
The flexibility and adaptability of the British economy will be reduced by its
adopting Euroland legislation. Being a Hong Kong to the Republic of China is
profitable in itself, with no need to give up the dollar for the renmimbi with
the object of contributing to the increase of productivity of the mainland.
I have never understood why it would be a good thing to have the British cycle
converge with that of Euroland. A cycle is a troublesome phenomenon because
variables that should move so as to compensate, move in sinister harmony
instead: in a slump, prices, wages and interest rates fall; but so do
consumption, output, employment and investment instead of going the other way.
It would be good for the world economy if not everybody caught the flu at the
The City seems to be doing all right as a financial centre by quoting prices in
all sorts of currencies, even in euros.
Political arguments against the euro
With a double entendre typical of the Jean Monnet method, the euro is
presented as a currency issued by a Central Bank that is independent of all
political pressures, and also put to work to cement European political unity. If
at some point painful frictions appear in the Council of the ECB, there will be
calls to modify the proper monetary policy to soothe the feelings of those
nations that cannot cope.
In any case, imposing a currency willy-nilly is a curious way of heightening
pro-European feelings. I have heard menaces to the Swiss that they will rue the
day when they did not join the EU. But if capital moves freely from one country
to another, if trade is free, if money is a matter of choice, if work permits
are freely given to nationals of both sides, why should Switzerland (or Norway,
or Britain) be punished for not wanting to play the Brussels game, unless it be
war by other means?
A multilateral disposition in all the nations of the Atlantic world would be
more constructive. The legend has been fostered that ‘European civil wars’ have
not happened in the second half of the 20th century because the Common Market
has brought France and Germany together. In my view, peace in Europe is due to
American intervention and generosity.
Politicians love to spend and if need be, they will tax for it. If the point of
the euro is to open the door to more taxation, I would rather stick to currency
competition and flexible exchange rates.
It surprises me to see that so many European democrats accept the ‘chastity
belt’ theory of politics. It is one thing that the citizens of a country should
come to a Constitutional agreement on a ‘self-denying rule’, such that no group
should be granted privileges denied to other groups, and quite another that hard
decisions should be conjured away from public discussion and the responsibility
shifted to the bureaucrats of Brussels. National politicians, instead of
convincing their electorates that they should refrain from their populist
habits, clamp on them some directive and blame the EU for the pain that hard but
necessary measures cause to the man in the street. It is the same dangerous
trick that Governments from underdeveloped countries play on their citizens by
blaming on the IMF the measures that they should have taken long ago. I fear
many ordinary European citizens are turning against the EU and the free economy,
just as so many anti-globalisers are turning against the international
organisations and capitalism.
The ‘Third Way’ is their fig leaf. They cover the sleight of hand by which they
say they are forced to take the policy measures that it is their duty to take
and explain. They cover our inhumanity to the peasants of the developing world
with our agricultural protection. They cover the barriers erected against
immigrants who are ready to do the work Europeans refuse, and even to compete
with overpaid European specialists.
A common mistake that politicians make when they discuss economics is to think
that it is a power game. If the market is wide and competition keen, the
heavy-weight corporations of today are the dinosaurs of tomorrow. It is a
different story when governments favour their companies, but I thought that the
point of the single market was to open the Continent to competition and foreign
There has been surprisingly little friction among the founder members of the
euro. I sincerely hope a recession does not sour tempers. I may be a critic of
the euro but the last thing I would want as a European is a falling apart of
There are two dangerous elements in the hope that Europe will become a world
power, politically and economically: one is the fissure it opens in the Atlantic
community; the other the boost it will give to a world divided in economic
blocs. The US as the hegemon is presented with many temptations, including
isolation and concentrating on the Pacific. The political and military alliance
with America should be the guiding principle of European foreign policy.
One of the fondest ideas of ‘sensible’ economists is that the best way, if not
the straightest, to world free trade is the creation of customs unions and
economic communities. Professor Bhagwati is right in asking the question
‘building blocks or stumbling blocks?’ The EU, NAFTA, the Group of Rio, and
ASEAN are at various stages of consolidation and enlargement. The effort of the
Atlantic nations should concentrate on helping the WTO, so that the countries
that are kept out of the block game can profit from freer trade. Why should
India (an old and miraculous democracy), Russia, the African countries outside
the Lomé Pact, Australia and New Zealand, and many others, be thrust out where
there shall be weeping and gnashing of teeth?
There is nothing a successful Prime Minister like Tony Blair enjoys more than a
touchy-feely photograph with important world leaders. Politicians think that the
economy has to be governed if it is to function properly. They do not want to
understand that the essence of a free economy is that it functions on its own
within the framework of abstract laws. To be able to throw his weight about and
‘do something’ Tony Blair is ready to accept what Britain does not need: to send
the Old Lady of Throgmorton Street to an old peoples’ home and be ruled by
Die alte Fraulein von Frankfurt. Britain is no Struwelpeter, who
refused to brush his teeth, cut his hair, and trim his nails.
Alfred Hirschman thought there were two ways to influence a club or a
corporation: ‘Voice or Exit’. There may be a third way, if you will pardon the
expression: playing games of disloyalty to force the group to move in the
direction. By keeping the pound and staying in the EU, by rejecting the euro and
pushing in the free market direction, by engaging the US and betting its all on
the next round of the WTO, Britain may be of more service to itself, Europe, and
humanity than by submitting meekly to Jacques Delors’ gospel.
We start from here, as Buchanan says: Britain is in the European Community, so
how can it make the EU change direction? By showing that one can prosper under
free competition, including currency competition.
Paul de Grauwe, Economics of Monetary Union, Oxford University Press, 4th
See: R. Febrero, “La moderna macroeconomía neoclásica y sus consecuencias para
la formulación de la políticia económica, MS prepared for publication in
Economía y economistas españoles, E. Funetres Quintana, ed.
Cf. Larry Siedentop, Democracy in Europe, Penguin Books, 2001, chapter 1
“Democratic Liberty on a Continental Scale”.
V. S. Naipaul, The Suffrage of Elvira, André Deutsch, 1958, chapter 1.
R. Mundell, ‘The Monetary Dynamics of International Adjustments under Fixed and
Flexible Exchange Rates’, Quarterly Journal of Economics (1960).
A Delayed Homecoming:
An Update on European Union Enlargement
Based on a talk
given to the CRCE
on 1st December
The Centre for
of the CRCE requires that its Trustees and Advisers dissociate themselves from
the analysis contained in its publications but it is hoped that readers will
find this study of value and interest.
First published in
The Centre for
2 Lord North
London SW1P 3LB
© The Centre for
Research into Post-Communist Economies
and Helen Szamuely
Occasional Paper 8
ISBN 0 948027 33 9
Printed in Great
The talk was given just before the Helsinki Summit where the
predicted widening of the enlargement process was decided on. Bilateral
intergovernmental conferences will be called in February 2000 and negotiations
will begin with Romania, Slovakia, Latvia, Lithuania, Bulgaria and Malta. There
will be interim reports on the progress each country makes towards incorporating
the full acquis communautaire. Turkey, too, has been accepted as a
candidate state, subject to various conditions relating to its human rights and
economic records. Solution of the Cyprus problem has been postponed until
negotiations with that country are completed. Similarly, the European Council
has suggested that the dispute over the Aegean Islands be submitted to the
International Court of Justice in 2003.
Even in Turkey it was recognized that the country’s status as
a candidate member was little more than symbolic, since the possibility of
actual membership is far in the future. The offer has been greeted with great
joy, however, as it confirmed Turkey’s status as a European state, just as the
status of the former Communist countries as full members of the Western
community had been confirmed by negotiations being opened with them.
Whether, having achieved this coveted status, the candidate
countries will continue to strive will be interesting to watch. In particular,
it is worth noting that the first development in Romania was a full-scale
political crisis that had clearly been suppressed prior to that point in order
to allow the European Council to make a decision in that country’s favour.
To turn to the vexed question of the Common Agricultural
Policy, two things need to be added. The first is that the hopes centred on the
WTO were disappointed even more spectacularly at Seattle than anyone had
expected. The second is the confirmation in an article written for the Sunday
Telegraph by a newly elected MEP who sits on the Estonian Joint
Parliamentary Committee in the European Parliament that much of the negotiation
with that country consists of pressure being put on it by the European Union to
reverse many of its free-market reforms in agriculture. (Sunday Telegraph,
December 12, 1999)
January 4, 2000
About the Author
Dr Helen Szamuely is on the Advisory Council of the CRCE. She
has written extensively on Russia, Eastern Europe and the European Union and is
the co-author, with Bill Jamieson, of A “Coming Home” or Poisoned Chalice?.
A Delayed Homecoming:
An Update on European Union Enlargement
Based on a talk
given to the CRCE
on 1st December
The obvious question to start with is why does one need an
update on European Union enlargement at this point? There are two reasons: the
process of negotiating with the East European countries has now gone on for
about eighteen months or just over, so it is probably quite a good point to have
a look at what has been achieved and what, more to the point, has not been
achieved. Also, a number of things are happening at the end of this year which
indicate that perhaps these negotiations will take a slightly different turn.
One does not, however, necessarily expect anything to move any faster, or in
what one might call a sensible direction. It looks fairly likely that at the
Helsinki Summit in mid-December, the participants will accept the idea that the
other five countries – Slovakia, Latvia, Romania, Bulgaria and Lithuania –
should also start accession negotiations, on the grounds that most of them have
now reached what they call the Copenhagen standards in their political
development: they have established democratic systems and have made serious
progress towards opening up their economies. There are certain conditions laid
down for Romania and Bulgaria. In fact everyone is feeling extremely worried at
the thought of Romania coming anywhere near the European Union. But,
nevertheless, they cannot just leave Romania out.
The one country which is still going to be left out is
Turkey. Just as Slovakia, Latvia, Romania, Bulgaria and Lithuania have moved up
one notch, in the sense that they are going to start accession negotiations,
Turkey has moved up one notch as well in the sense that it is now accepted that
Turkey is a candidate . We are not yet negotiating with the Turks, however,
because their human rights record is terrible and their economy is up the spout,
particularly after the earthquake. So to deal quickly with Turkey for a moment,
because it is not really part of the talk – the idea is that we go on having
various agreements with Turkey, helping them and having a customs union with
them. As a matter of fact every agreement with Turkey gets spoiled by Greece,
who refuse to hand out money. A great deal of the money that should have gone to
Turkey to help them develop their economy has actually been held back, because
the Greeks have said no, until we have sorted out the Cyprus question and
various other problems like those islands that nobody actually wants to live on.
The Cyprus question does not look like being sorted out for some time, although
Cyprus is one of the countries that is high up on the negotiation scale.
So after Helsinki we are going to have a situation where we
have up there somewhere the five countries to start with, with Hungary quite
high up, Poland and Slovenia next, the Czech Republic has slipped down – you get
these little races, where one country has gone on a bit and another has slipped
back, and so on and so forth. Then you get Latvia and Lithuania, which are
coming fairly close to reaching the stage where we might just start accession
negotiations, and then Bulgaria and Romania which are nowhere near in sight but
we cannot just leave them out. Somewhere between those two groups is Slovakia,
which has, since Meciar’s defeat, according to the EU, made tremendous progress
towards setting up a democratic system and slightly less tremendous progress
about opening up its economy, in that privatisation has not really taken off.
So that’s one thing: the decisions that will be taken in
Helsinki. Then, in order to achieve the right decisions, Romano Prodi has
commissioned only three “wise men” this time – as opposed to last time when
there were about five or six of them – to produce a paper as to the sort of
institutional reforms the EU needs in order to enlarge. Not surprisingly, they
came up with the idea that what we need is more qualified majority voting, more
centralisation, more powers to the Commission, only one Commissioner per
country, re-rating the votes in the Council of Ministers – and all this because
once we have twenty countries, and maybe more, we obviously cannot cope with the
system we have now. In parenthesis, they also mention that we are finding it
hard to cope with it even as things are.
That paper is quite interesting, because it is the only one
that is very gung-ho about enlargement: enlargement is an absolutely wonderful
thing, it is going ahead, and it is going to transform Europe into something
totally marvellous. When you look at the Commission paper which has just come
out [Composite Paper – Reports on progress towards accession by each of the
candidate countries (12053/99)] as a sort of an update on what is really
going on, it says quite frankly that the reason there was felt to be a need for
a paper which was a bit more than the usual monthly update, was because
negotiations had clearly stalled and needed another kick-start.
When you look at the recent House of Lords report
Enlargement of the EU: Progress and Problems you find that it says the same
thing: there are clearly serious problems in the enlargement negotiations. For
example, there are tremendously upbeat reports from the countries: they have
installed this and they have privatised that; then all the way down at the
bottom of the report it states that they are not putting the acquis
communautaire into practice – for which one does not blame them, exactly –
but unfortunately they cannot come into the EU until they have actually
installed the acquis communautaire and integrated it into their legal and
economic system. They have not kept up with their environmental standards; even
the privatisation programmes have been “iffy” in some of the cases; there are
problems with human rights including with Roma, whom everyone else calls
Gypsies. So there is a feeling that after eighteen months the whole thing has
slightly ground to a halt. The idea is that by bringing the other five countries
into the negotiations the process will be given a kick-start and take off again.
At the same time there have clearly been reactions against
enlargement in some of the member states and applicant countries. Opinion has
changed quite considerably. I think everyone has followed the success of Jörg
Haider’s party in Austria. It is quite hard to work out what Haider’s policies
are, but the one discernible part of them is that his party and the people who
voted for him – which is actually a sizeable proportion – do not want
immigrants, and they do not want enlargement to happen in a hurry because the
East Europeans are going to flood into Austria and Germany. Actually there are
quite a lot of East Europeans in Austria and Germany already, but there are
going to be some more.
The Wall Street Journal has a monthly Central
European supplement, and they recently published some opinion polls in it. The
Western attitudes are quite interesting. The polls show that in Austria, the
support for enlargement is down to 38.7 per cent. In Germany it is higher, at 60
per cent. In France, not surprisingly, it is about half and half – about 45 per
cent support enlargement while 44 percent oppose it. In the United Kingdom,
which is supposed to be so gung-ho for enlargement, only about 41 per cent
support it. Italy, for some reason that no one can quite understand, is very
much for it – 67 per cent support it, which is plain against what everyone says,
that the southern states are against enlargement. I notice that they did not ask
Spain, which is the crucial one, because the Spaniards have already said that
they are not giving up one peseta of the money they receive from the structural
fund and the cohesion funds in order to help Eastern Europe.
In Eastern Europe, opinions have changed as well. Hungary
is the only country in which support for enlargement has gone up since 1995,
from 73 to 83 per cent. In Poland, Slovakia and the Czech Republic it has gone
down. For some reason Slovenia and Estonia were not listed. But I think what has
happened in these countries is that as negotiations have carried on, and as they
have realised that the European Union is not being terribly helpful to them, and
as the trade between the EU and Eastern Europe has not opened up much more, they
have become a little less interested in joining the EU. The other point, of
course, is that most of these countries wanted primarily to join NATO. Once that
has been accomplished for some and became a possibility for others, the EU has
started to matter less, although with the building up of the European Union’s
security and defence identity, the question of defence of Eastern Europe may
well come up again.
The last reason why it is an interesting time to have a
look at this is that it has become absolutely obvious that all attempts to
reform the Common Agricultural Policy have failed, yet again. There is now talk
of yet more reforms in about two or three years’ time. What makes this all so
interesting is that the Commission paper, which talks at great length about
trade and about institutional reform and about what is required from the East
European countries and so on, hardly ever mentions the Common Agricultural
Policy, whereas of course it is perfectly obvious that you cannot bring in
countries that are both largely agricultural and poorer than the European Union
average while the CAP is in place as it is. The rather weak attempts to reform
the EU agricultural policy, which were proposed in Agenda 2000 – they were not
huge attempts, just a certain cutting-back of support here and there – were
watered down by the discussions of the Finance Ministers, and again at the
Berlin Summit. The reforms are all falling apart. So now the great hope is that
the WTO negotiations will actually force the European Union to reform the CAP.
On past record, I would say that was very unlikely, but other people may have
different ideas and may think the WTO will actually be able to do something
So the Commission is saying that we really must inject a
new momentum into the negotiations. The Commission is also saying that the
reason we want successful enlargement negotiations is because “we want to
reunify Europe”. I looked in vain to see when they thought Europe was last
unified. One gets this all the time – people saying they want to reunify Europe
– but when was it unified before? The Roman Empire, Charlemagne, Napoleon? Not
one of them unified Europe for very long – the Roman Empire lasted a long time,
but it was hardly a European empire. If the idea is to create a Europe of
democratic nations then that is contrary to the clearly professed aim of
political, economic and monetary union. This has never existed before, and it is
very questionable whether if it does come into existence, it will produce the
desired result of a stable, democratic society.
When we have ten countries negotiating, as the Commission
and the House of Lords Committee have acknowledged – I am leaving Cyprus out
because the problems with Cyprus are so completely separate, sui-generis
– there is going to be a problem in that these countries have reached very
different stages in their political and economic development. Since accession
negotiations are contingent on these developments, clearly these cannot happen
in the same way as with, say, Hungary and Romania, taking the two that are at
the furthest ends of the spectrum. A highly complicated system has been
proposed. The acquis communautaire is broken down into several chapters,
and the chapters are negotiated in batches of seven or eight at a time. So the
idea is that the Commission will decide with each country what chapters to start
negotiating first. There will be a core set of chapters, which are going to be
negotiated with all the countries. Therefore, some of them will start with only
three, and some will start with five, and some will start with ten or seven or
eight, or whatever, which is a bit like a game of Grandmother’s Footsteps. It is
difficult to imagine how any of them are going to reach this wonderful finishing
line: all of them joining the European Union.
The other problem with negotiating the acquis
communautaire chapter by chapter is that, not surprisingly, all the really
difficult chapters have been left to the last batch, even with the first five
countries. We have not even started negotiating on agriculture, which is,
predictably, where sparks will fly. Yet another problem is that as the chapters
are negotiated and are closed, it is only a temporary closing. They may well be
reopened next year for two reasons. First, in the meantime the Commission wants
to know whether these countries are continuing to implement all that they are
supposed to implement. There is evidence that some of the countries have simply
implemented a lot of the rules leading up to the negotiation – this is
particularly true in the Czech Republic – and then once negotiations began they
decided they did not have to implement anything further. It is a kind of
psychological barrier. They want to be among the countries which are
negotiating, but they do not actually want to implement all of these rules. And
again, one cannot actually blame them, because there are already far too many
rules and most of these countries cannot afford to implement them all. An
earlier House of Lords report on enlargement calculated that for Poland to
implement all the environmental rules would bankrupt the economy. This is not a
cheerful prospect either for Poland or anyone around Poland.
The other reason why a chapter is only temporarily closed
is, of course, because the European Union keeps changing the rules. Because each
country has to come in on the whole of the acquis communautaire, every
time it changes and new legislation, new regulations new institutional set-ups
are put in, negotiations have to be reopened. One can see this carrying on for a
long time, especially as there is a new inter-governmental conference coming up
next year, which will change all the institutions – that is its purpose. So all
the institutional negotiations with Eastern Europe that have happened up to now
will have to be restarted. In case any of the negotiators think they are out of
the woods, they will have to think again.
One of the suggestions made by the House of Lords Committee
is that, this being so, representatives from the East European countries should
take part in these negotiations or, at the very least, have observer status at
the IGC. It is not entirely fair, the Committee suggests, for these countries
not to know what is going to be thrown at them in six months or a year’s time.
Either way, at the end of the year there will be a new institutional set-up, and
all the applicant countries will have to start negotiating again, and they will
have no idea until the Treaty comes out at the end of the IGC what these new
institutions will be. At present, it is just a suggestion, and no one has agreed
to it. In fact the British government is on record several times in the shape of
Robin Cook saying that the only way the East European countries can come in is
on the whole of the acquis communautaire: there can be no derogations, no
transitional arrangements. They will just have to sit back, wait, and then lump
The requirements from the East European countries – the
list of what they must do in order to become worthy members of the European
Union – fall into what I would designate as two parts – there is the sensible
part, and the somewhat less sensible part. The two are often contradictory. The
sensible part includes the strengthening of the democratic political system, the
strengthening of the judiciary, the freeing up of the economy, opening up trade
with other countries, removing tariff barriers – something the European Union
could start thinking about a bit more seriously itself - then the Commission
goes on to the next stage and says that they must implement the whole of the
acquis communautaire, and integrate their economy with the European Union
(which, apart from anything else, means the erection of tariff barriers against
other countries that may be the neighbours and trading partners of the
applicants). So you have this extraordinary set-up whereby certain basic
political and economic ideas are mixed in with something which is actually
Is it the best thing for East European countries to
integrate their economies with the much more advanced, much stronger economies
of Western Europe? It certainly has not proved to be the case in East Germany.
It integrated its economy with West Germany, and currently unemployment is
running at about 25 per cent. Most of the East German factories have had to be
dismantled because they cannot produce anything. It is not a particularly happy
situation, especially with the Communists making electoral comebacks in those
countries. I find it very interesting that in the midst of all these official
discussions about how wonderful it will be when Eastern Europe integrates its
economies with the European Union, nobody has actually suggested looking at the
German case – looking at what happened with East and West Germany – and
questioning whether this is actually the best way of helping Eastern Europe. In
fact, the integration of the economy and trade with the European Union have
grown recently as a result of the Russian economic collapse. Many of the
countries that were trading with Russia a great deal can no longer do so and are
now turning to the West. While on one level that shows that they have very
flexible economies – at least the ones that have managed to turn to the West –
the other part of that is that these countries have become very dependent on the
fluctuations within the European Union, and especially on German economic
development, which is not terrific at the moment.
In response to the East Europeans putting all these rules
and regulations into place the European Union must reform its institutions,
which will probably happen; it must do something about the cohesion funds
because more of the money will have to be directed towards Eastern Europe, while
at the same time it is agreed that no more money will be extracted from the
member states because no government is going to agree to raising the European
Union contribution above 1.27 per cent of the GDP. The amount will, therefore,
depend on what the GDP is like, and while there are predictions of higher growth
in the European Union, there has not been a great deal of it recently. Finally,
there is the need to reform the Common Agricultural Policy, which, as I said
before, has not yet happened.
One of the thorniest questions is that of the transitional
period. Because it has been acknowledged that unlike the last lot of countries
which came in, which were mostly the fairly well-off Scandinavian ones, the East
European countries actually do have quite serious economic, political and social
problems. Their environmental standards are very different, some of them are
economically backward and so on, and so there is this question of a transitional
period. Such transitional periods have existed before – for instance, on the
fisheries and on labour mobility when Spain and Portugal came in – so there is
not really anything very new about the concept. The problem is that because
there are so many of these countries, and the transitional periods might well be
very long, there is a great deal of opposition within the European Union,
although it looks as if there will be a transitional period on installing all
the environmental rules. Some of the environmental rules may well be installed,
but one must remember that most of the West European countries are already
groaning under the weight of all these rules.
It is a firm ruling within the European Union that anything
to do with the single market will stay as is. There are no transitional periods
on the single market, although the House of Lords Committee has suggested that
perhaps it might be worth looking at this issue more closely. One cannot see
that happening, because all discussions of flexibility always fall down, and
indeed any kind of repatriation of rules always falls down over this idea that
nothing to do with the single market can be left to the discretion of the
countries. If the new countries are allowed to stay out of that and to take
certain rules of the single market and say that they do not actually want them,
this would have enormous implications for the existing members. If Hungary and
Poland, for instance, are allowed not to obey the rules of the single market,
well why not Britain? And indeed, this may become Conservative policy. William
Hague has certainly mentioned the possibility that once one has introduced
flexibility for Eastern Europe, one might well have flexibility for other
countries as well, although it looks as if the Conservative Party has not quite
made up its mind as to what ‘flexibility’ means. Nevertheless, the European
Union and its fervent advocates have scented problems there.
There could also be a transitional period for mobility of
labour. That actually comes from the European Union, because they are rather
worried about East Europeans coming into the West European countries, accepting
work – mostly highly-qualified people who are willing to accept work at a lower
wage, and certainly lower social security, or perhaps no social security, than
most people in Western Europe. Germany and Austria are especially worried about
Finally, there is the question of agriculture. As things
stand, the offer to Eastern Europe is that Eastern Europe will have half a CAP.
They will be governed by all the rules and various quotas, but they will not
have any of the money that goes with it, which cheers everyone up no end. So
clearly there will have to be some sort of negotiations. Personally I am rather
looking forward to the negotiations over agriculture. The Hungarian and Polish
agriculture ministers have already been making rude noises about “oh no, you
don’t cut us out of all this money that you are dishing out to other farmers!”
and so it will be quite interesting to see what happens about that.
I shall quickly sum up the main difficulty, as I perceive
it. We come back to the problem we covered in our book A ‘Coming Home’ or
Poisoned Chalice? – the question as to whether this is really the best way
forward for the two parts of Europe.
The assumption behind all of this – integrating with the
European Union economy, accepting the acquis communautaire, and so on –
is that it is treated as the best possible arrangement in this best of all
possible worlds. At no time is there a suggestion that there is quite a lot
wrong with the European Union’s structure. It is all very well for us to preach
democracy to East European countries and to tell them they must have an
independent judiciary and a strongly democratic system, but the European Union
does not have an independent judiciary. It has a European Court of Justice which
is not an independent court: its aim is to promulgate the integration of the
European Union, not to interpret the law. By no stretch of the imagination can
that be called an independent judiciary. We have a Commission that is of
questionable democratic value. We have a European Parliament, which seems
progressively to lose support the more powers it acquires, and a great deal of
the European Union legislation goes by regulation, not directives but
regulations which are promulgated by the Council and the Commission, and simply
become law. They are never discussed and never debated. There is nothing anyone
can do about it. Clearly this is a very questionable sort of model to put in
front of people who have just spent fifty years under Communism.
Another great thing that we preach to East Europeans is the
idea that they must free up their economy. They must not have tariffs, and they
must open up their economy to foreign investment. Fine – these are wonderful
ideas, and indeed foreign investment is pouring into some countries in Eastern
Europe faster than it is pouring into Western Europe. Clearly they are doing
something right. But then look at the negotiations that the European Union
itself has conducted with Eastern Europe: it has removed all tariffs from
industrial goods, but the tariff on agricultural goods has remained. Indeed I
hate to say it, but it is the Commission that has been pushing for the speedier
removal of tariffs from agricultural goods. All the same, it has just not
The reason is obvious. We can sell industrial goods at
great advantage; with agricultural goods we are not going to do so well, as more
agricultural goods are produced in Eastern Europe and they are often of higher
quality. Not only are East European countries prevented from exporting their
produce to us, at the same time agricultural goods from the European Union are
subsidised and they are dumped upon East European countries. This has caused a
great deal of trouble in Poland. In fact a Polish activist was recently arrested
because he protested about this in various violent ways, and there have been
demonstrations in Poland throughout the year about the dumping of subsidised
agricultural goods on the country. While Polish agriculture could probably do
with some reforming, this is not the way to go about it. So there is a problem
about how can you exhort people to free up their own economy if we have not
freed up ours? The CAP is not an example of a free economy, quite the opposite.
There is also a problem with saying that Eastern Europeans
must develop their small and medium sized enterprises. Again, it is a very good
idea, but certainly what you get in Britain is the small and medium sized
enterprises complaining vociferously about the amount of regulation which is
imposed on them from the European Union. So we go to Eastern Europe and tell
them they must develop their small and medium sized enterprises, while at the
same time saying that they have to accept all the regulations which are killing
our own small and medium sized enterprises. If they don’t like it, we might give
them some money to support them. This is clearly not the ideal situation.
Therefore, one really has to abandon the idea that people
have advanced, particularly here in Britain, that enlargement will somehow be a
catalyst for reforming the European Union. The only reforming that will happen
will be greater centralisation as advocated by the Commission. There will be no
reform of the regulatory structure or the agricultural policy or anything else
that would turn the European Union into a vibrant forward looking economy. So
the question remains: is this the best way forward for a relationship between
Eastern and Western Europe, and for development in Eastern Europe?
In our book A ‘Coming Home’ or Poisoned Chalice?
which was published last year we put forward the theory that this is not the
best way for Eastern Europe. Instead, what we ought to be doing is negotiating
free trade agreements with East European countries, making it easier to invest
there, and in the process it might become easier to invest in some of the
Western European countries. I have to say, eighteen months on, I still stand by
Questions & Answers
Dr Eamon Butler, Adam Smith Institute:
The Adam Smith Institute once calculated that there were 42
countries in the European region which could credibly become members of the
European Union, just on geographical terms. I would like to see every one of
them in the European Union – let the French try to run that lot!
They can come in under one set of rules, but it will not be
too long before people start re-negotiating, and thank goodness for Spain and
Portugal, because once these countries like France start becoming net payers
rather than net receivers, it does actually put the system under some strain. At
least we are now talking about the Common Agricultural Policy – these are
arguments which never previously existed. It is not the best way, and certainly
not the best for Eastern Europe, but I think it would actually reform the
institutions of the European Union inexorably.
Well, I am delighted to say that Hungary is leading the
field because, knowing a little something about Hungarians, I would love to see
them in the European Union. They are a nation of natural anarchists, so they
will come into the European Union, probably take over a number of the
institutions, and then wreck them just for the hell of it. So the sooner Hungary
becomes a member, the better!
But the truth is that the European Union cannot actually be
run. The whole thing is grinding to a halt even with fifteen members. Spain and
Portugal are a great help there, of course, particularly Spain. Whenever
anything is to be reformed or not reformed, the Spanish Prime Minister comes
along and bangs on the table and – for reasons I fail to see, since Spain lives
off the European Union – everyone says “all right, all right”.
However, the general trend is the opposite of that,
whatever will happen in the long run. The only way to run even twenty members is
to centralise much more. In fact it is happening already with the institutional
proposals. The French are actually net contributors, although not that high, and
I cannot say I have noticed that much change in their attitude. They are still
absolutely determined to keep the Common Agricultural Policy as it is, and to
keep everyone else out.
Robbie Millen, The Spectator:
Is there any significant body of free market opinion in
Eastern Europe which says ‘let’s not bother with the European Union, it’s going
to retard what economic progress we have made’, or do people generally hold as
an article of faith that European Union membership is a good thing, full stop?
It is not very significant, although CRCE is doing its bit
– sending out publications such as A ‘Coming Home’ or Poisoned Chalice?
and so on. I think the main problem is that the advantage of joining the EU has
been an article of faith for some time. I remember attending a round-table
discussion in the Hungarian Embassy. There was someone there from the Foreign
Ministry, and I was saying “Is this actually the best thing for you?” and he
said “Look, we just want to belong.”
Some of the shine is now going off that. “Belonging”, after
all, does not necessarily mean belonging to the European Union. But there are
problems. One is that the people in all these countries who vociferously oppose
membership of the European Union tend to be the extreme nationalists and the
unreconstructed communists. So those who have, say, free market doubts about
membership do not want to be seen to be part of a group containing such
extremely unpleasant people. Extreme nationalists in Eastern Europe do tend to
be extremely unpleasant. It is not like nationalism in many other countries.
I am sure doubts will grow once they are inside the
European Union, but they are probably not there now. It is still true that most
people in Eastern Europe do not know what being part of the European Union will
involve. How can they? Most of the British do not know what part of our
legislation comes from the European Union, and we have been members of that
wretched organisation for more than twenty-five years now. So I am afraid we
cannot rely on that.
Merrie Cave, Salisbury Review:
Is it really true that no one has pointed to the experience
of joining East and West Germany? You would have thought the Germans themselves
would have pointed to it. As you say, all the factories with the old names have
been closed down.
What has actually happened is that Eastern Europe has
benefited by that, in that the West Germans have leap-frogged over East Germany
and invested in factories in Eastern Europe. It is actually quite logical,
because they are much cheaper. East Germany has all the problems of a former
communist state, plus all the problems of the West, because everything has been
integrated. So all these factories which perhaps ought to have been in use in
East Germany are not there now. They are now in Poland, Hungary, and the Czech
I think what will happen is that when these countries have
to obey all our rules, investment will move even further east. Investment will
go to Ukraine – possibly not Russia, Belarus maybe. In the Soviet days, Belarus
was actually quite an industrialised, developed place, although at present it is
going through a very bad phase. But if the Germans do decide to invest there,
assuming that Lukashenko does step down at some point and there is some kind of
relatively sensible government there, they could easily bring some of the old
industrial factories back into play. In the end, people vote with their wallets.
This was actually mentioned in one of these absolutely priceless House of Lords
reports – although no one ever pays any attention to them, they do actually come
up with some interesting ideas.
The other thing that ought to be mentioned when considering
how these places ought to be developed economically is what happened when some
of the southern states came in. Spain is one example, but Greece is perhaps even
more interesting. Greece has now been a member for twenty years or something
like that – perhaps going on for twenty-five years – and lives totally off
European Union handouts. There is not the slightest sign that it is developing
anywhere. Indeed, this comes up year after year over the tobacco subsidy. The
European Union spends vast sums of money banning tobacco and tobacco
advertising, but spends even more money subsidising tobacco grown in Spain and
Greece, and a little bit grown in Italy. Since it is apparently unsmokable, I
think it is dumped on the Third World, and once the subsidy is collected a great
deal is burned.
But whenever that subject comes up and someone says that
this must be stopped – saying that this is not logical and is a waste of money –
the answer is always the same: that the people who grow the tobacco are totally
reliant on this subsidy. There is not the slightest sign that there is any kind
of development that would mean those particular areas might become less reliant
on this ridiculous subsidy, which produces nothing. And this is twenty-five
years after Greece joined the European Union.
So there are all these arguments about how the East
European countries might be backward now, but give them a chance and they will
come into the European Union and will develop very quickly. Well, it has not
happened with the Mediterranean countries – I don’t mean Italy, but the later
entrants. There is no real guarantee that it will happen in Eastern Europe.
Possibly there is a reasonable chance as things are developing now that if there
were free trade agreements, they would develop in a way that would stop Eastern
Europe being reliant on Western handouts. There is not a chance of that
happening if they come into the European Union. It is like East Germany, which
relies on West German handouts.
Wiktor Sobkow, 1st Minister, Polish Embassy:
I have various short remarks. Regarding the Gypsies, the
reason we call them Roma is that they call themselves Roma. We used to call them
Gypsies, but they insist on being called Roma, and so we respect that.
As far as the environment is concerned, you were saying
that imposing the European Union regulations 100 percent was not possible
because it would ruin the Polish economy. But could you name one country in the
European Union which has adopted 100 percent of the rules? The European Union
cannot force newcomers to adopt 100 percent of the rules when they have not
adopted the rules themselves.
As for opinion polls, this is a very tricky question. It
depends if you look at elites or the average people in the street. The average
people in the street have no idea about Central Europe, and they have no idea of
the European Union. They have never been to Central Europe. Maybe they have seen
some people begging in the streets or washing the windscreens, and they say they
do not want that. But the elites take a different view. They see enlargement as
beneficial to Europe as a whole, to the European Union and to Eastern Europe.
You talked about the competition between the various
applicant countries as part of the negotiations, of some being “better” and
others “worse”. There is no competition. It depends which chapters you open. If
you open the chapter on audio-visual, for example, Estonia could not close it
because the rules are that 51 percent of the production has to be European, and
they have US television almost exclusively. So you cannot say that Estonia is
worse at the moment in this respect. Hungary will be negotiating agriculture,
and for example the question of wine will turn up. Italy, France, and perhaps
Spain will try to block Hungarian wine. And then there will be a kind of
impasse. We have potatoes; maybe other countries will have something different.
I do not think it is possible to say who is the best. This is not a competition,
it is just that some chapters are more difficult for some countries than others.
Regarding East and West Germany, I do not think there is
any comparison. It is no wonder there has never been any comparison, because
there cannot be. That was an annexation, a liquidation of a country, and
everything was imposed automatically from the western part. I think if Eastern
Germany had followed the course of other Central European countries, they would
not have high unemployment and other things, because they would work it out
themselves, they would create the economy themselves. They did not have any
choice. Everything was imposed on them. They did not have to think about it,
they did not have to strive for solutions and find out some good rules which
were suitable for them. They had to be passive. They were fired from work and
everything was imposed on them. So you cannot compare Poland, Hungary, Latvia,
Estonia, Slovakia to East Germany. The situation is completely different.
You ask if integration is the best way forward for two
separate parts of Europe. But tell me if there is any other alternative. Norway
is a rich country, Iceland is a rich country – they have oil and gas, for
instance – and Switzerland is another good example. What is the alternative for
Poland, or for Hungary? Can we form another economic alliance? And with whom –
with Ukraine, or Russia? There is no alternative.
Then you spoke about democracy and the economy, and whether
the European Court of Justice is fully independent, whether the European
Commission is democratically elected. Yes, but I do not think anyone in our
countries really thinks about democracy in the European Union. The economic
aspect is the most important. It is not so important for people in our countries
that the Commissioners are not democratically elected, or the balance of power
in the European Parliament. Maybe in ten or twenty years we will engage in this
discussion. At the moment, the economic aspect is the most important. No one
will think we have had the domination of the Soviet Union and now we have the
domination of the European Union. You have some groups of people they say that
they are anti-European anyway, so it is not anything specific.
You also said that we will not get any money from the CAP.
This is not true. We will get money, but not direct payments, not direct
subsidies. Nevertheless we will receive help from the European Union. The
question is about direct payments. Of course farmers protest in the streets of
Poland. They say why, if we are to be a full member of the European Union, are
we second class members? There is no second-class membership – either you are a
member or you are not. Our former Foreign Minister said that there is no partial
membership, like there is no partial pregnancy. So they protest in the streets
to say that when we become a member of the European Union, we should have equal
rights with the present members.
The last point relates to transitional periods. Again, you
should divide them very clearly into two groups – transitional periods that are
demanded by the European Union, and other transitional periods. I have the
impression that you might think that we wanted a lot of transitional periods and
long transitional periods, which is not the case, at least in Poland. We want
short transitional periods, and as few as possible. The problem is that if you
have a lot of transitional periods which last a very long time, you have
second-class membership, which we do not want. If you have one hundred
transitional periods for twenty years, you have second class membership. But we
have also asked for some long transitional periods, like the purchase of land.
Some people say this is because we fear Germany, but that is not the case. The
price of land is one tenth of the price of land in the European Union. If we
opened the market to the European Union, we would have thousands of farmers – we
have requests from Holland, from Denmark, from Ireland, and also from Britain –
a lot of farmers ask at our embassy about when we will open this market. They
want to come and buy the land because it is cheap. We will sell it, but later.
So if our land is one tenth the price of that in the European Union, we cannot
just open the market. It is not fear of Germany or any other country, it is an
economic and political point.
I did not mention the particular problem about land
ownership. Poland is not the only one; I think that is a problem in Hungary and
the Czech Republic as well. Inevitably, as you say, in economic terms it would
make enormous good sense for people here to buy the land, and it would force
people there off the land. There is the other part of it, which is that it would
possibly be quite good to have some foreign input – some of the land bought by
farmers from Western Europe who have more advanced methods of farming – but
probably not all, and it is unlikely that East European farmers or governments
who depend on their votes should see it that way.
A lot of what you were saying sounded as if you disagreed
with what I said, but you were actually agreeing. I did not say “better or
worse”, because that would actually suggest that I thought the standards that
the European Union was putting in front of the East Europeans were some sort of
absolute standards. It is just a question of the EU negotiators occasionally
saying that a country has come up to scratch and closed this chapter or that
chapter. The problem there is that closing a chapter is only temporary, but even
on that level it means that these countries have somehow integrated into the
European Union rules and somehow accepted the European Union rules. The aim is
to ensure that there is very little difference between what is happening in the
East European countries and the European Union, which is insisting that its
rules should be accepted totally. I agree that of course no one implements 100
percent of the rules. This is why there are all sorts of tables showing how much
of a certain legislation has come in and how much has not, and how much of it is
properly implemented and so on, even within the EU.
Nevertheless, that is what is happening – EU rules are
being imposed on Eastern Europe. It may not happen from one day to the next as
it did in East Germany, but this is not a negotiation between equal partners, so
the East German example is not that far off mark. The European Union is
definitely insisting on the acquis communautaire, that all these things should
be included. And they can definitely whip up support for that by saying that
they do not want all this food which is being produced under worse environmental
rules, or that the East Europeans do not look after their animals properly, or
whatever. It does not matter whether this is true or not, or whether the
environmental rules are entirely necessary. In fact a great many of the
environmental rules that we have in the European Union are not necessary. But
they can always whip up support for them. They do that now in order to prevent
proper implementation of free trade in agricultural goods.
I agree with you that most people in the West do not know
about Central Europe. Sorting out all these different people is difficult – it
is bad enough with the Balkans – and most people here in Britain just do not
know. And what people do not know they are afraid of. This is not a fear I have
much sympathy with, because I think if people come and work here, that is fine.
But there is a fear that people are coming here, they will get our jobs, they
will not pay the social security that we have to pay, they will just earn the
money and go away, and so on.
As for the agricultural negotiations, yes – that is more or
less the point I made. When we come to agriculture, there is going to be a great
deal of trouble. May I just quote what the State Secretary of the Foreign Office
of the Federal Republic of Germany in 1987, whose name was Dr Hans-Friedrich von
I can sketch out what will happen
when we come to that junction [enlargement on agriculture]. We will have the
German representative at the Council table who will make a very, very strong
pitch saying “Yes, we are for enlargement, but no Polish potatoes. Not one.”
That is, as they say, from the horse’s mouth, and that will
be repeated with other products by various countries. Those negotiations are
going to be very, very difficult. All the really difficult issues have been left
to the end, and so that will take a very long time.
As for the institutional changes, it is not entirely clear
how long that will take, as one never knows how long these IGCs will take. The
time-table at the moment is that at the Helsinki Summit they will call the IGC;
everyone is making noises that we must make this one shorter than the last one;
and also the idea is that the treaties must be separated, with only the core
part of the treaty having to be voted through by every single member state, and
so on. But I can foresee endless negotiations there. They will not involve the
East Europeans, although there has been a suggestion in the House of Lords
report that the applicant countries should have observer status, so they will at
least know what is going to hit them at the end of it all, rather than just
passively accepting what is happening.
Miss Lubica Vasekova, 1st Secretary, Slovak Embassy:
As I understand it the IGC will have a limited agenda
precisely because its aim is to prepare for enlargement and, therefore, nobody
wants to drag it out too much. Therefore, flexibility will not be discussed only
the particular institutional changes that are needed to make it possible for the
EU to enlarge in 2002, which is the date given at the moment.
There are problems with IGCs anyway. All these things were
supposed to be solved at Amsterdam, but they were not. If you limited it this
time, what will happen will be the same thing – they will say that they need to
have another IGC. Indeed I can see them saying the same thing in 2003 – that
they cannot actually enlarge because they have not solved this problem or that
problem. If you have a time limit, then you clearly have to limit the agenda.
I am afraid that I come back to my original point, which is
that institutional reform is only one part of this. The European Union, in order
to prepare to enlarge to the east, will have to reform the Common Agricultural
Policy, which is nowhere in sight at the moment, and will have to reform the
whole structure of the cohesion funds, which again is nowhere in sight – partly
thanks to our friends in Spain, who are absolutely determined that they are not
going to lose anything. They can and have in the past vetoed any kind of a
treaty. We saw this before in the case of the previous enlargement, where they
threatened to veto the treaty unless they got their agreement over the fish.
They are quite happy to use the veto, whereas the British always agonise over
anything like that. So those two outstanding problems still remain. They are in
some ways more serious than the institutional issues, which can be adjusted.