|Issue No 13||14 May 1999|
Superman Goes to Berlin
By Mark Lennon
I recently attended a conference in Berlin that focused on the impact that the European Monetary Union is likely to have on both the European and World economies.
The EMU commenced on January 1 this year and means that some 11 nations in western Europe now have the same currency-the Euro. At present the Euro is used for all financial transactions but from 1/1/2002 Euro notes and coins will be in use and the currencies of the member nations will be withdrawn from circulation.
The introduction of the Euro is another stage in the evolution of European economic integration that commenced in the 1950s when founding member states agreed to free up trade by removing tariffs and quotas and eliminating border controls.
The 1980s saw further moves towards integration with agreement to remove further impediments to trade that arose through having different regulatory structures in each of the member states. This involved harmonisation of regulations and also adoption of the principle of mutual recognition.
This decade has seen the European Union concentrate on the macroeconomic picture. This was a logical consequence of the changes in the 80s which allowed for freer flows of capital. As capital became more mobile then the various Governments were limited as to the type of monetary policy they could run. In practice the monetary policies of the member states was synchronised by default.
The ultimate outcome was the Maastricht Treaty, named after the Dutch town where the treaty was signed,in 1992. The treaty provided for three things, a single currency, a European Central bank,and a single European interest rate.
What this treaty means is that the European economy is now the size of the United States and the Euro is in the position to challenge the US dollar as the world's premier currency.
For consumers in the European union the Euro should result in cheaper prices as the single currency will introduce more competition into the marketplace particularly through the fact that any differences in prices of particular products and services between member states will be more transparent.
There are, however, some problems. Many economic commentators believe that the European labour markets need to be freed up to allow for more flexibility in wage fixing and greater mobility of labour. If this occurs then this will cause enormous dislocation to workers as has been the experience in Australia.
One would argue to that probably a greater challenge for the European economies is to create job opportunities in growth industries such as information technology, an area where they lag behind both the United States and Australia.
Another outstanding question is that of the role of Britain. At the moment Britain remains outside the EMU. However that are to finally determine their position in a referendum in the next few years. Some would argue that it is to Britain detriment rather than Europe's if they choose to remain outside.
The larger problem for the EMU is whether it can survive without political union.
If some form of tighter political union does not occur then there is the likelihood that the EMU will fail. For the new economy to function effectively it is argued that there needs to be a centralisation of political institutions.
It will be an interesting time for Europe, who knows the outcome; but I can certainly recommend Berlin in the spring.
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