Year XXVII, 1985, Number 1, Page 6
The Economic and Monetary Prospects
ALBERTO MAJOCCHI
To cope with the challenges of the future, Europe must advance resolutely along the road of strengthening Economic and Monetary Union. This is the main lesson that may be drawn from the difficulties that Europe has had to grapple with after the completion of the Customs Union.
Freed from tariff obstacles, the European market has reached the necessary continental size to develop industrial production on a large scale: national income has grown very rapidly and even wage-earners have been able to benefit from levels of prosperity hitherto conceivable only for the more well-to-do classes. Mass production has thus finally begun in Europe too, roughly half a century after the United States (which already had a market of supranational size at its disposal).
But today, once again, Europe risks falling behind the United States and Japan, where a new phase in the industrial revolution has begun. In fact, without political union, it is impossible to create a fully-fledged European Common Market, or to equip Europe with an adequate budget and a common currency. As a consequence, Europe is not in a position to tackle effectively the deep changes made indispensable by the economic evolution of the seventies.
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A widespread belief now exists that the process of European unification has reached a decisive turning-point. In fact: a) at the monetary level, the Community has no currency of its own at its disposal and is therefore subject to monetary decisions imposed by the United States; b) at the level of the territorial distribution of income, the Community cannot use the instruments of public finance to level per-capita income between areas characterized by different degrees of wealth; and c) at the level of industrial restructuring, the Community cannot achieve a transition to the scientific mode of production and thus open a new phase in the growth of the European economy, compatible with Third World development.
There is equally a widespread belief that the most effective methods for a definitive response to these problems are:
1) the completion of the European Monetary System and the adoption of the ECU (European Currency Unit) as a means of payment;
2) an increase in the Community budget, to at least 2.5% of European GDP, in accordance with the recommendations of the MacDougall Report;
3) the launching of a new type of Third World aid policy, so that European development is consistent with the development of economically backward areas.
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1. The completion of the European Monetary System.
The introduction of the EMS was made possible by the new political prospects opened up by the decision to hold direct elections to the European Parliament. It also represented a decisive factor for reversing the trend towards the disintegration of the Common Market which characterized Europe during the seventies. But the transition to the second phase of the EMS, planned to occur within two years of the launching of the system, has still to take place.
In spite of this failure to complete the institutional phase, the European Currency Unit’s private market has undergone enormous development and the ECU today represents a very widely used instrument for bond issues and contracts, even with countries outside the Community, and in general for providing a measure of value less volatile than the dollar.
The full potential of the EMS cannot, however, be realized without further institutional progress. To constitute an effective alternative to the dollar and so resolutely initiate a transformation of the international monetary system on a multilateral basis, the European currency must be guaranteed by the European Monetary Fund. And, at the same time, only the guarantee of a lender of last resort can turn the ECU into a universally accepted means of payment and store of value. It is essential, therefore, that the institutional development of the Community should also make provision for the extension of Community powers in the monetary field, i.e. for the establishment of a European Central Bank, responsible for guaranteeing the ECU’s value.
2. The strengthening of the Community budget.
The Community’s budget has in recent years been one of its permanent crisis points, especially following British requests for a fairer distribution of budget contributions and expenditure benefits. To this should be added the fact that the ceiling of the Community’s own resources has already been reached and hence the launching of new policies is not even conceivable, because of the lack of the necessary resources. From this point of view, even the Fontainebleau summit decision to raise the VAT quota earmarked for the financing of the Community budget to 1.4% already seems cancelled out by the higher costs deriving from the admission of Portugal and Spain.
New resources thus need to be allocated to the Community if the necessary policies are to be implemented which will ensure the restructuring of the European economy and a leveling-out of per capita income between rich and poor regions, made all the more urgent by the admission of two new Mediterranean countries to the EEC. Yet these redistribution policies must not be conceived of as a “hand-out” policy. The Community must finance a plan for the provision of infrastructures useful for European countries as a whole, thus closing the infrastructural gap that characterizes the weaker areas. And, at the same time, to promote the creation of fully-fledged internal market, the Community must introduce harmonized provisions and standards for the industrial sector and activate a common market for public procurements, even by expanding direct demand financed through the Community budget. Such financing must be mainly earmarked for the development of technologically advanced productive sectors, together with funds supplied by the private sector, as is already occurring in an embryonic fashion with the ESPRIT programme. In general, therefore, Community funds must be spent under a European development plan.
Today there is a major imbalance in the Community budget’s structure, as is amply demonstrated by the fact that in 1984 less than 3% of expenditure was used for research, energy and industrial policies, while roughly a fifth went on supporting dairy products. With the creation of a European Union, a very important step forward in history of modern States’ budgetary policy will be achieved: indeed, most expenditure on typical welfare policies – health, pensions, education, unemployment benefits – will be managed by the decentralized levels of government, i.e. by the member States of the Union. The Union will then be able effectively to use the budget resources, firstly to accomplish the new industrial revolution, a major feature of which is science as a factor of production and, secondly, to develop policies designed to guarantee a new quality of life. In the European development plan, discussed above, a major role will have to be attributed to major environmental protection projects, in the wide sense of the term, in addition to the initiatives mentioned above.
But this division of tasks between the Union and the member States, together with the transfer of monetary sovereignty to the European level, may effectively contribute to overcoming the crisis of the welfare state, today common to all countries, and to the achievement of “buongoverno”. This transfer would in fact assign the task of currency control to the European government, which has only a restricted budget at its disposal (because it is only responsible for the definition of the economic policy guidelines and the harmonization of the basic conditions in the various areas of the Community). On the other hand, the national levels of government, which retain responsibility for policies designed to redistribute wealth between individuals, and administer the huge quantity of resources required by the typical policies of the welfare state, would no longer finance themselves through monetary creation. All the government levels would thus be compelled to collect their own taxes to cover their expenditure, in accordance with the principles of fiscal federalism.
It should be pointed out, lastly, that in the new society made possible by the spread of the scientific revolution at the European level, an increasingly large proportion of social demand is destined to be satisfied by means of voluntary work.
3. A policy for the Third World.
Awareness of European responsibilities towards the Third World countries is gaining ground. But the policy prescribed is still of the “hand-out” type. At the same time, the national division of aid policies makes them largely ineffective and, in any case, precludes the qualitative breakthrough on which the economic and social take-off of these countries depends.
The transfer of resources is not in itself sufficient, as is tragically demonstrated both by the chronic indebtedness of the developing countries, and the progressive impoverishment of such a large part of mankind. The Community must therefore concentrate the national aid in its hands, and implement a large-scale “Marshall Plan” for the Third World. But this firstly presupposes the establishment of a common plan by the countries that decide to associate themselves with Europe in this major partnership for growth project. Secondly, it presupposes effective political control over the use of funds which might be exercised immediately by joint bodies. This might begin, in fact, with the consultative Assembly already set up by the Lomé Convention. These bodies would also be given the task of promoting every appropriate initiative to ensure the success of this plan.
While the European policy of industrial restructuring must be concentrated in the technologically more advanced sectors, the Community must provide sufficiently wide scope for developing countries’ exports in the traditional sectors, thus guaranteeing the project’s internal coherence.
In this case, too, European financing must be allocated directly to projects considered to be of decisive importance for development, and must be distributed, on this basis, to the governments concerned, in such a way as to prevent corruption and wastage which have often characterized aid policies in the past.
This new “Marshall Plan” could be financed with greater ease if the ECD effectively took on the role of an international currency, since a common European financial market would be able to attract available capital at the world level and so allocate it to furthering the development in the more backward areas.
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It is clear that this plan for the progress in Economic and Monetary Union is inconceivable without the realization of the European Union. The Community is, in fact, paralyzed by its inability to take decisions. And, consequently, Europe is economically losing ground to the United States and Japan. But if the Draft Treaty for the European Union is ratified, then the indispensable political and institutional minimum for running an effective economic policy will have been achieved, in the interest not only of the Europeans, but of the rest of mankind.
