Will EMU lead to political union?

In the recent history of Europe, from Jean Monnet's plan for a European Coal and Steel Community in1950 to today's European Union, one pattern seems clear: where economic integration leads, political integration will eventually follow.

EMU, it is argued, will continue this trend-except on a far bigger scale. The euro will be more visible and have a more direct public impact than any previous EU economic policy. The constraints that EMU imposes on national economic policy are also unparalleled. A common monetary policy, coupled with strict limits to government borrowing, seems to strike at the heart of national economic sovereignty. Furthermore, the euro will generate an unprecedented sense of winners and losers: an interest rate suitable for Belgium could be punitive for Portugal, whilst differences in the standard of living between the two countries will be all the more transparent.

These, argue EMU's critics, are the ingredients of political union: just as national currencies need state institutions to maintain them, so by extension, will EMU require an EU state system. Politically sensitive decisions on interest rates will demand a system of representative government akin to that of the European nation state. Co-ordination of budgetary positions within the euro zone will require an authoritative, democratic mandate for the EU. And the politics of brokerage between EMU's winners and losers will require financial transfers far in excess of the EU's current budget. Thus the sheer scale of economic integration by EMU will require an equally radical political union of Europe.

This argument is fallacious. A single currency neither makes, nor requires a single state. Neither does EMU require an EU system of budgetary transfers. The countries of western Europe have very similar economic profiles and highly integrated economies. National economies in the euro zone will therefore respond to external shocks in much the same way. Differences in Europe's economic performance will remain most pronounced at the local and regional levels -where production is specialised. Such imbalances can continue to be dealt with through fiscal transfers within member states.

But even if budgetary transfers did increase under EMU, would this constitute closer political union? Last year, Britain paid more transfers to former Soviet bloc countries through Phare, Tacis and the Know-How Fund, than it paid, on balance, to the EU-yet no one claims that Britain is more politically integrated with Eastern Europe than with Western Europe. Political integration is defined by the nature of the political system in which the transfers are made and the strength of the political interests underpinning them-not by the transfer itself.

In other words, policies do not make polities. A polity-the range of political institutions and allegiances defining a political community-is the product of collective identities and aspirations. The European polity, such as it is, has arisen from the common experience of war, from an ill-defined European culture and from shared objectives of peace and prosperity. EU policies, no matter how important, have little direct impact at this level.

Policies reflect the political systems from which they originate. Therefore monetary union reflects the features of the EU political system that designed it. EMU draws much of its anti-inflation credibility from a political system which, compared with any national government, is more insulated from day-to-day political pressures; less coloured by party ideology; and spared the instability of falling governments. Nor is the euro burdened by the legacy of past policy errors, as is sterling. The credibility of the European Central Bank stems from the EU's capacity for independent economic regulation, as reflected in the performance of the European Court of Justice and the Commission.

But EMU's design acknowledges the limitations of the EU political system. The monetary union will operate in a framework that lacks the legitimacy to set up systems of direct taxation; whose budget remains minuscule compared with national governments'; and which is ill-suited to the politics of budgetary redistribution. So EMU will always rely on the superior capacity and legitimacy of the nation state.

A principal advantage of a European monetary policy stems from the distinctiveness of the EU's political system. A stable monetary policy needs authorities with the confidence of global financial markets, who can establish a reputation for consistent, prudent financial management. Given the nature of its political system, and its relative distance from day-to-day political pressures, the EU is in many ways better suited for this task than national governments.

In the short term, however, EMU will subject the EU to new political pressures. Some member states are unaccustomed to treating monetary policy as a matter of independent, technical regulation. Temptations to "politicise" interest rate policy will therefore persist, whilst perceptions of winners and losers from EU monetary policy will generate additional conflicts.

The question, then, is not whether EMU will lead to political union, but whether EMU can survive these pressures in a political system designed for a low-level, regulatory style of politics. This depends not on changing the EU political system, but on our ability to re-approach monetary policy in an apolitical manner. After decades of central bank independence, this is not an issue for countries like Germany or the Netherlands. The same cannot, as yet, be said for Britain.