HOPES AND FEARS
27. Before the euro was launched, a number of expectations
had been voiced; our witnesses recalled some of them in their
28. The main hope was for an increased rate of growth,
greater incentives for fiscal responsibility, and stronger incentives
for structural reforms (in labour, goods, and financial markets).
Interest rates would be lower in the long term. It was hoped that
increased transparency in international cost and price comparisons
within the euro zone, reinforcing the completion of the Single
Market, would lead to enhanced competition between producers.
This would improve resource allocation (as well as leading to
lower prices for consumers). The euro would thus become a stable,
strong currency to rival the US dollar in world markets, being
used to price international transactions, both as an international
means of payment, and also as a reserve currency. Benefits were
foreseen from the greater liquidity of large markets in euro-denominated
financial instruments, from the removal of exchange rate risk
within the euro-zone, and from savings on transaction costs. It
was hoped that their greater competitiveness would strengthen
the international position of participating Member States, and
that the resulting increase in confidence would lead to higher
29. But there were fears too. There was a concern
that, without control over exchange rates and with a one-size-fits-all
interest rate, national governments would find that the adjustment
tools remaining to them were not strong enough, given the lack
of labour mobility, and inflexibility in wages and prices. This
could cause problems in reacting to shocks, and might lead to
divergence rather than convergence within the euro-zone (whether
between participating Member States or within individual Member
States). Post-EMU fiscal fatigue might set in, resulting in breaches
of the public borrowing limits set by the SGP, and consequential
instability. Some feared increasing pressure for co-ordination
or centralisation of fiscal policy in the euro zone, or for harmonisation
of social security provisions, and others thought that the single
currency might increase the pressure for closer political union.
30. Professor Patrick Minford (of Cardiff Business
School) described the euro as "a political project"
(Q 201). It was indeed apparent from the evidence which we received
that the governments of some participating Member States had strong
political motives for welcoming the single currency. The Belgian
government, for example, reported a broad social consensus in
Belgium "regarding the desirability of European economic
and monetary integration and the macroeconomic discipline it requires"
(p 114). The Italian government said that "in political terms"
Italy had been determined not to be left behind in Economic and
Monetary Union, which it welcomed as a step "towards an ever
closer European integration" (p 116). The Spanish government
referred to the "perception of belonging to an economic areathe
euro-zonewith a growing weight in the international economic
scene" (p 119). For the Dutch, "EMU marks the crown
on the European internal market" (p 104).
31. HE Mr P Salolainen, the Ambassador of Finland
(a former Deputy Prime Minister of Finland, who had been responsible
for negotiating his country's entry) told us that the decision
to join the European Unionand subsequently to join the
single currencyhad been for his country
"a political decision.
After the Soviet Union had collapsed the Finnish people really
wanted to join where they think they belong, to the family of
Western European nations
That is why, at the backbone of
the Finnish people, when they voted for membership of the European
Union, there was this willingness to be one of the family. We
did not have any referendum about the euro because it was
politically clear that Finland wanted to be in the mainstream
of European development".
Of course there would be economic advantages as well,
and losing the currency would not be a great psychological blow:
"our currency, the Finnish markka, has not had a glorious
past", because after the war there had been a series of "lousy"
economic policies and big devaluations (Q 127).
32. In the view of Mr Jim Power, Head of Economic
Research at the Bank of Ireland:
"First and foremost
EMU was a victory for politics over economics. It is a political
project. The economic realities are not always logical. I think
that is particularly the case for the Irish economy" (Q 199).
The Irish Ambassador, HE Mr Edward Barrington, accepted
that there had been political reasons for the decision to join,
saying that when time came for the decision on the single currency,
Ireland had already
"seen the advantages
which could accrue to a small country from being involved in the
decision making process on economic policies. We were going to
be subject to, and influenced by, the decisions of the EU whether
we were in or out. Far better to be inside affecting those decisions
and shaping those decisions in our interests
When it came
to the euro, it seemed to us that this experience of 20 years'
participation in Europe could be brought similarly into monetary
Those were the political reasons" (Q 232).
But the government could not have recommended joining
to the Irish people solely on that basis, nor would the public
have endorsed the euroor continued to support iton
the basis of the political advantage alone (Q 256j): "the
economic argument was also persuasive" (Q 232). The Irish
government told us that a study in 1996 by the Economic and Social
had concluded that "membership of EMU would, on balance,
be economically advantageous [to Ireland], even were the UK not
to participate in EMU".
By 1998, the risks attached to entry were judged to have decreased,
and those of delaying entry to have increased (p 74). Professor
Fitz Gerald of the Economic and Social Research Institute added
that the main benefit which that study foresaw was lower interest
rates in the long term, whereas over the previous 15 years Irish
interest rates had been on average two percentage points higher
than those in other Member States, resulting in lower investment
and growth (Q 234).
33. We noted the balance betweenand the complementary
nature ofthe hopes and fears of Member States, and examined
the extent to which they had so far been realised.