A panel of supporters and sceptics agree that Emu will get off to a flying start. They also agree that it represents a significant sacrifice of sovereignty. But what about its longer-term prospects? And is Britain's choice one between staying out and becoming a Canada or joining and becoming a California?by Charles Goodhart / December 20, 1997 / Leave a comment
Published in December 1997 issue of Prospect Magazine
CHARLES GOODHART: What kind of Emu will be born in 1999, and how well or badly do each of you expect it to perform-economically and politically-over the next five to ten years?
BERNARD CONNOLLY: I think there will be a “wide” 11-country Emu. The Bundesbank will have one last go at trying to keep Italy out, but it will be a half-hearted one. How will it work? For the first couple of years it is going to look great. To the peripheral countries, such as Spain or Portugal, it will seem as if they have died and gone to heaven. They will have strong growth, falling interest rates, low inflation, and business and consumer confidence will be high. France and Germany will have monetary policy set-broadly speaking-in their interests and will continue a sluggish sort of recovery. But by 2001 the boom in the periphery will go bust. These countries will not be able to devalue their currencies; their budget deficits will grow rapidly. There will be a conflict with the stability pact rules; I suspect the pact will be suspended. The likeliest outcome from this crisis is the ejection of at least some of the peripheral countries and a solidifying of the core, with much stronger elements of political union. France will then have to make a final decision on whether to join a core dominated by Germany.
GAVYN DAVIES: The British have had a habit of first denying that Emu was ever going to happen and then saying that it was going to break up as a result of currency speculation in the transitional period. Now people are falling back on a third position: that Emu will break up shortly after its launch. On the contrary, it will be extremely difficult for it to break up in anything other than Armageddon circumstances. I also think it will start with 11 states, although Italy may be kept out for a year or two.
I think the nature of the European central bank (ECB) within a wide Emu has been misunderstood in the financial markets. People think that having Italy and Spain on the ECB board will weaken its counter-inflation policy. If you had ever met the central bank governors of Italy or Spain, you would not say this. They are counter-inflation hawks and will sit on the board of the most independent central bank yet devised by mankind. If anything, the currency is going to be too strong for the good of the European economy.