Keeping Monetary Union on Track: Time for Another 'Kohl Shock'

Richard Medley

From Foreign Affairs, November/December 1996

Article preview: first 500 of 2,513 words total.

Summary:  Before Europe loses its nerve, Helmut Kohl and Jacques Chirac should disregard the Maastricht deficit targets and declare monetary union between their countries.

Richard Medley is Associate Director of Yale University's Center for International Finance and a political adviser to Soros Fund Management and other American investment firms.

Despite the aura of relaxed confidence pervading European capitals and financial markets as next year's deadline for meeting the convergence criteria for European monetary union approaches, the lines for a politically divisive battle are becoming clear. On one side stand German Chancellor Helmut Kohl, French President Jacques Chirac, the European Commission, and the vast majority of senior European politicians, who care far more about making European monetary union (EMU) happen on time than about how they get there. They worry that if monetary union is delayed once, it could be delayed more easily a second time, and a third, and so on until the great postwar drive for European union -- and the Franco-German alliance at its center -- fizzles out. On the other side stands the German "stability coalition," composed of the Bundesbank, the Federal Constitutional Court, such popular German tabloids as Bild Zeitung, and opposition-controlled power centers in the Bundesrat, or upper house of parliament, and L?nder governments. If Kohl and company worry that any delay would threaten European union, the stability coalition worries that rushing into EMU might cost Germany its sway over European economic policy, with control passing to a broad coalition of economically weaker southern European countries, led by a resurgent France.

German voters' opposition to giving up the deutsche mark buttresses the stability coalition, with most polls showing three-to-one majorities opposed to putting euros in their pockets.[1] Only a constitutional provision against referendums (to prevent a recurrence of the Weimar experience) and the tremendous confidence voters have in Kohl have allowed the chancellor to get this far with monetary union despite those odds. But Kohl faces a personal referendum on this issue in December 1998, when he must stand for reelection. That means he will be going to the polls only weeks before formally -- and irrevocably -- handing over the deutsche mark to a gaggle of Europeans on January 1, 1999. If he condones flagrant cheating by French budgeteers, or too obviously looks the other way if France misses the deficit targets of the Maastricht Treaty on European Union by a wide margin, he risks turning the election into a referendum on giving away the deutsche mark. With that as the central question of the campaign, even the spavined Social Democrats could not be counted out entirely.

The most important threat to Kohl and thus to the EMU process comes not from bending the deficit or accounting rules for France but from the attempts it would trigger from Spain, Portugal, and eventually even Italy -- sometimes referred to as the "Club Med" countries -- to use the same bent rules as a way of clambering into EMU in the first round. That is why German officials protested in September when France included in next year's revenues the windfall gain from taking over France Telecom's pension system. Depending on how far the accounting conventions are bent for France, Spain and Portugal could breeze into EMU with room to spare. In the ...

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