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Deeper European integration is on hold indefinitely

Many Europhiles believed, shortly after the UK voted last June to leave the EU, that getting rid of Britain, that eternal troublemaker, would pave the way to deeper integration of the remaining states. One year on, even after the ascent of Emmanuel Macron as a pro-European French president, it is time for a more sober view.

The EU has made progress in areas such as European banking supervision. Yet no major member state is willing to give up decision-making power over vital issues of taxation and spending. Further development of the economic and monetary union is on hold. All the ideas, including those from Paris, about accelerating EU integration are no more than a pipe dream.

Britannia’s ghost will haunt the EU long after the UK has left. The EU member states outside the economic and monetary union are in no rush to join the euro. Some are behaving conspicuously like the British. Their antipathy seems not to bother those running the monetary union. They have enough problems with current members.

It’s hard to imagine a landmark event that would reverse this reluctance for greater economic integration. Immediately after Mr Macron’s victory, many German politicians were quick to offer him support, provided he forgot any idea of the EMU becoming a system for transferring funds from creditor to debtor countries.

Some question whether the UK will survive Brexit. I would put the issue differently. Britain offers Europe valuable lessons about what is needed for deeper integration, a long process requiring many checks and balances. Over more than three centuries, after Scotland and England unified in 1707, the British created a successful monetary union. Yet England, Scotland, Wales and Northern Ireland retain separate national football teams to this day. Beyond the UK, it will be a long time before European states are willing to give up their places at the G7 or the International Monetary Fund.

The British were sceptical about the single currency from the beginning. For years this was seen as another sign of Britain’s European backwardness. However, in the past couple of years, more EU countries outside the euro have started to share British doubts, showing unmistakable fondness for preserving domestic currencies. Many policymakers in these countries behave as if they were under the influence of Sir Alan Walters, Margaret Thatcher’s notoriously Eurosceptic economic adviser when she was prime minister.

The British, with the 1991 opt-out clause, were the first to secure the right to stay outside the single currency. In 1993 the Danes followed suit. Sweden is acting similarly despite not having an opt-out. Central and eastern European states that joined the EU in the 2000s initially saw euro membership as a badge of honour. Then the sovereign debt crisis destroyed any belief that the euro area is a New Jerusalem. And most new members wrote the single currency out of the monetary script.

The treaty obligation to join EMU was invented to prevent competitive devaluations of the sort seen after the break-up of fixed exchange rates. Yet double-digit inflation — and the threat of competitive devaluations — belong to the history books. Exchange rates may be volatile but they are relatively stable. In Poland, the złoty has hovered around current levels since the start of the century. In the Czech Republic, the koruna has appreciated.

Mild currency fluctuations are a small price to pay for preserving autonomous monetary policy. For relatively small economies, such policies are efficient. Sweden has used the exchange rate as a major tool to combat deflation. The same is true for the Czech National Bank, which intervened in the exchange markets to prevent the currency from rising, although it has since adjusted the policy.

The Polish authorities quickly realised how EMU imbalances were the key reason behind the euro sovereign debt crisis. Warsaw has signalled that in the next 10 years it has no interest in joining. The country needs time to bring Polish living standards more in line with the rest of the continent.

Some purists say remaining outside EMU without an opt-out breaches the European treaty. However, neither the Swedes nor the new members were part of the then-European Community when the opt-out clause was introduced. And the EU leadership must know it would be foolish to force a country to meet treaty obligations against the will of its own people.

Overcoming the challenges of monetary unification appears an insuperable hurdle for the European establishment, even after Mr Macron’s victory. The Treaty of Rome is 60 years old, far too short a period to allow the European nations to forget the benefits of national policies.

EU citizens still behave the way Mrs Thatcher once described. Conquering Mount Everest, they plant not the EU emblem but their national flag. We’ll need a long time before a unified EU football team takes the field in the union colours.

The writer is president of Narodowy Bank Polski, Poland’s central bank