Feeling the Monetary Union Blues? Print Bonds!
As things stand, the move toward a single currency could break rather than make Europe. Monetary union requires budget deficits no higher than 3 percent of gross domestic product (GDP) - a criterion that could cost member states an added million and a half unemployed. National debt can't be more than 60 percent of GDP, which would cost millions more.
This portends a self-inflicted recession that would be bad for trade with the United States and the rest of the world and damaging for Europe-US relations.
It now is clear that even Germany, the linchpin of the whole project, is unlikely to meet the conditions for a single currency on schedule. Germany currently has the highest registered unemployment since 1933. Chancellor Helmut Kohl promised to halve unemployment and the reunification tax, but now can do neither. There are open strains within his party and the governing coalition.
European Investment Fund
Dramatically, however, the way out of this crisis already exists. The Maastricht Treaty has been amended to enable the European Union to borrow and spend on its own account, thus providing a framework for offsetting recession caused by meeting the deficit rules.
The instrument is the European Investment Fund in Luxembourg. The means are union bonds - the European equivalent of the United States Treasury bonds that in the 1930s helped finance the Tennessee Valley and federal road programs and opened the way to full employment and welfare.
The new fund was inspired by the role of US Treasury bonds. Its borrowings and investments - as union financial instruments - would not count against national debt any more than US Treasury bonds count against the debt of California or Delaware. In fact, the US should be as fortunate as Europe could be now. The debt and deficit of the European Union - rather than its member states - is zero. In US terms, it is as if the Treasury secretary could tell the president tomorrow that he had abolished the federal debt, and ask him if he wanted a New Deal Mark II for his second term, expanding Medicare, restoring universal welfare and unemployment benefits, and launching a major urban renewal program.
As governments cut national spending to fulfill the Maastricht criteria, the union could increase its own borrowings and investments to offset this and thereby make it possible for most member states to join a single currency. In turn, this deepening of union would create the right environment for meaningful enlargement on a sufficiently rapid schedule to avoid a power vacuum in Central and Eastern Europe.
The new fund's terms of reference already make this possible. They cover not only the trans-European networks in energy, transport, and telecommunications, themselves strikingly similar to the Tennessee Valley and federal road-building programs of the New Deal. They also allow for a new venture capital market for small and medium firms. There are proposals to widen the terms of reference to embrace urban regeneration - hospitals, schools, training centers. This could massively generate jobs and income.
The statutes of the fund already allow borrowing and investing up to 60 billion ecu - some $70 billion - equivalent to three quarters of the European Commission's annual resources for agricultural, regional, social, and other funds. As far back as 1994, the commission recommended investment on this scale. Had that been done then, Europe would not be facing crisis now. Sixty billion ecu is just under 1 percent of European Union GDP. But multipliers and co-financing could triple the initial investment and income effects, offsetting recession and sustaining trade.
Germany's potential gain
Germany in particular would gain from such borrowing and investment. As the fund directly financed a higher share of the reconstruction costs of the new German states, the reunification tax could be reduced and the trend to higher unemployment reversed. By taking the pressure off the federal budget, this could enable Germany to meet both deficit and debt criteria for a single currency. Reinforced by German expansion rather than recession, most of the other member states would be able to do the same.
So far, only the United Kingdom and Germany have opposed the issue of the new union bonds. In Britain this May, with a different government, this should change.
The key question is whether Chancellor Kohl can grasp the US parallel. He showed vision before, when he overrode his Finance Ministry and the Bundesbank on parity for the Ostmark and the Deutschmark. In so doing he united Germany. Will he see the case now for issuing union bonds to unite rather than disunite Europe?
* Stuart Holland is a former member of the British Parliament and Shadow Financial Secretary to the Treasury.
