Open letter from European economists to the heads of government of the 15 member states of the European Union

Published 12 June 1997 in several European papers

On 16 and 17 June you will be in Amsterdam in order to discuss European integration. You will consult with one another about the progress made towards the Economic and Monetary Union. Many questions are still unanswered. Will the EMU begin as planned at the end of this century? Which countries will take part in the euro from the beginning? Will all the Maastricht Treaty criteria be met? These are important questions, but they do not address Europe's essential problems.

You know that Europe is contending at the moment with high unemployment, poverty, social marginalisation and ecological deterioration. The current design of Europe's economy does not provide adequate prospects of reining in these problems. The member states' national policies are clearly insufficient. The key question is whether the current plans for further European integration, and in particular for the EMU, will bring us closer to solutions.

Your economic advisers have told you that the EMU, as laid out in the Maastricht Treaty (December 1991) and further regulated in the Dublin Stability Pact (December 1996), will bring Europe more jobs and prosperity. We, economists in the EU's member states, are afraid that the opposite is true. This project for economic and monetary integration not only falls short from a social, ecological, and democratic perspective, but also from an economic one.

This is a missed opportunity. A single European currency could be very advantageous and help to find the way to full-employment with good quality jobs and social security. This and other relevant objectives could be reached through a common budgetary and fiscal policy favouring sustainable economic growth, and through the convergence towards high labour standards on wages, working time and work conditions. But this EMU is not a starting point for a modern European welfare state; instead it institutionalises the dismantling of the public sector in the member states and reduces the maneuvering room for active social and fiscal policy. The following six points lay out briefly the basis for our concern.

SIX CRITICAL POINTS

1. According to the Maastricht Treaty, the member states must fulfill five convergence criteria in order to take part in the euro. Along with requirements in the areas of long-term interest rates, inflation and national debt, another norm is that a state's budget deficit may not be higher than 3 percent of its Gross Domestic Product (GDP). Almost none of the member states now meets this requirement. Without regard to economic conditions, they have been put under great pressure to pass the EMU test: many among you have experience by now with the draconian austerity programmes that must be put in place in order to do so.

What is remarkable is that this norm, which is doing so much social harm, has absolutely no economic basis. Not only economists like us see this. One of your hosts in Amsterdam, Dutch Minister of Finance Zalm, said in March 1992, when he was still director of the Dutch Central Planning Bureau (CPB): The norms for government finances in the EMU treaty have no solid economic foundation.

The reasoning behind these convergence criteria is drawn from monetarist doctrines that are not accepted by the majority of economists. According to these doctrines, reduction of budget deficits leads to lower inflation, and lower inflation automatically leads to more growth and employment. Recent economic research by renowned economists such as Akerlof, Dickens and Perry (1996), Barro (1995), Bruno (1995), Sarel (1996) and Stanners (1995) shows that this assertion cannot be verified empirically.

2. Even if you manage through enormous exertions to bring your budget deficits under 3 percent in 1998, you will still not have qualified for the euro. As long as your national debt is above 60 percent of GNP and is not falling as quickly as is required, you will have to implement still more austerity programmes. This will certainly be the case if economic growth continues to be slow, which is not inconceivable given the ongoing spiral of austerity.

The pressure on your budgets will remain high for still another reason as well: the Stability Pact that you adopted in Dublin forces participating EMU countries to reduce their budget deficits still further in the direction of balanced budgets.

In short, in the years to come all member states will simultaneously have to adjust their national budgets further. Current and future recessions will be exacerbated as a result.

3. You may have acted in Dublin under the assumption that the Stability Pact would leave you some room in which to carry out countercyclical policies. But it will be many years before you have created the necessary budgetary maneuvering room: first your budget deficit must be brought far under 3 percent. Exceeding this 3 percent limit during economic recessions is virtually impossible: the room left by the Stability Pact for temporary exemptions is in fact extremely narrow.

4. Although this is often denied, the previously mentioned budgetary adjustments will take place chiefly through harsh austerity programmes. Since ‘Maastricht’ and ‘Dublin’ included no restrictions on competitive fiscal policy, tax rates and revenues will be pushed downwards. This virtually rules out the possibility of member states' reducing their deficits through additional tax revenues.

Our fear is that policy competition will increase considerably in other areas as well. The fiscal battles among member states are becoming steadily fiercer, and the consequences are already visible in the form of increasingly great income inequality, forced privatisations and social deprivation. We also foresee in the coming years growing competition in the area of ecologicaly harmful infrastructural projects (for example, hundreds of millions of euro's will be spent to build new or expand existing airports). So policy competition in many different areas will undermine national revenues and force reorganisation of national expenditures.

5. The policy to be expected from the European Central Bank (ECB) will worsen the deflationary pressure that results from this merry-go-round of austerity. The ECB is in fact obliged to aim at price stability, and will work one-sidedly to watch over the hard euro. The well-known North American economist Krugman has already expressed fears about the negative effects that this will have on employment.

As the ‘only’ significant European body making socio-economic policy, the ECB will encounter scarcely any meaningful opposition; the 'Stability Council' seems destined above all for a symbolic role. Parliaments and governments will soon lack any possibility of acting to correct ECB policies if the bank takes extreme measures to ward off inflation, because the ECB will act with complete autonomy. As George Soros recently remarked, the economy is too important to leave in the hands of central bankers!

6. In sum, the countries that are about to join in a common currency are giving up important instruments of macro-economic policy. Inside the Union, this is of course true of exchange rate adjustments, which will of course become impossible once the euro is in place. And because interest rates will soon be roughly the same everywhere, the mobility of labour across European frontiers is (still) slight, and financial transfers have not been provided for, the countries in the EMU will soon have only one instrument left at their disposal in order to cushion economic shocks: government expenditures. But as we have just seen, even that instrument has been taken out of governments' hands by the Stability Pact. This means that labour will be handed the bill for economic recessions, in the form of rising unemployment, falling wages, and still greater flexibilisation.

CONCLUSION

This EMU is, in short, not a good model for extensive European economic integration. You may have been operating under the assumption that economists are in agreement about this EMU, and that all the adjustments might be very distressing from a social and political point of view but are nonetheless truly necessary from an economic point of view. This is not the case. There is no solid, scientific foundation for the EMU, and many of us have drawn attention to this fact in the past in professional journals and elsewhere.

We therefore call on you to reconsider this EMU project. Not that we ask you to put an end to European co-operation; on the contrary. A common currency and monetary policy could offer considerable advantages. But this EMU is governed by timeless criteria and dogmas. Wise economic policy must not be replaced by rigid rules, but must be determined essentially by circumstances. This is also a question of democracy: the framework of the EMU is wrongly discharging you and your colleagues from your precious democratic duty to take responsibility for your political choices. Under the current conditions, this EMU offers no perspective whatsoever of an adequate response to environmental problems, of improvement in the lot of Europe's 20 million unemployed and 50 million poor or for the defense and extension of the welfare state.

As critics of the EMU, we are reproached with putting European co-operation in danger; we are told that we would do better to keep quiet. We are firmly convinced, however, that the greatest danger for Europe lies in fact in the design of this EMU, which has already led millions of Europeans to identify Europe and the euro with austerity policies and social suffering. It is high time that politicians realise: the peoples of Europe have the right to an economy that serves the interests of human beings.

The general line of this open letter (which has been coordinated by the Dutch economists Geert Reuten, Kees Vendrik and Robert Went) is supported by the following 331 economists in the EU.

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