European Monetary Union will collapse within 10 years

[02.01.2006, Kristian Slovák and Ján Záborský, NEWS]

TREND - Týždenník o ekonomike a podnikaníExtract from an interview with William A. Niskanen, Chairman of the Cato Institute (USA), who was a guest speaker at the CEQLS winter lecture held by the Conservative Institute in Bratislava on December 8, 2005.

Q: Why will problems with pension systems lead to the collapse of the European monetary union?

photo/niskanen01.jpgWilliam A. Niskanen at CEQLSA: The tension is already visible; France and Germany are not meeting Stability and Growth Pact obligations. Isn't the fact that nobody seems to be interested in this an indication of forthcoming reform of Maastricht criteria, or even a collapse of the monetary union? Just remember the end of exchange rate mechanisms in 1992. The triggering event was the reunion of Germany. Western Germany, which used to export most of its capital, redirected these cash flows to East Germany. Countries like the United Kingdom and Sweden spent large sums on maintaining the exchange rate of the German mark. Without success. The currencies of Finland, Sweden, Norway, Spain, i.e. all the marginal countries devaluated a lot. The countries in the centre stayed with the German mark. About a year later, I wrote an article for a French paper on the economic performance of countries that kept their exchange rate and those that devalued. And I found out that those that devalued managed to decrease their unemployment rates. I also found out that the inflation rate had not changed much. And the lesson I learned from what happened in 1992 was that for currencies that are under major pressure, it is more advantageous not to try and fight whatever the cost.

Q: But the USA gradually became a functioning monetary union. Why can't this work in Europe too?

A: For some time we used to have three currencies. But the union did not work well even after one currency had been introduced. Adequate labour force mobility was still missing. It worked in the west-east direction, but not from north to south. And this situation remained until World War II. The introduction of federal unemployment insurance in the thirties was one of the factors that contributed to the fact that the currency has been doing well over the last 70 years. Europe has very poor labour mobility. I used to work for the Ford car company. We wanted to increase the number of employees at the biggest British car plant in Dagenham, London. There was high unemployment in Coventry, a town only about an hour's drive away, but we could not persuade people to move just because of a well-paid job. And partially this was because they did not want to give up their cheap housing subsidized by the state which they had in Coventry. In Dagenham such housing opportunities were not available.

Extract from an interview published in the Slovakia`s leading economic weekly TREND.