18 July 1998 • Aspects of European Economic and Monetary Union • Helmut Kramer

European economic and Monetary Union (EMU), due to start in 1999, is expected primarily to improve the effectiveness of the internal market because it should eliminate most of the uncertainties surrounding exchange rates and their costs. EMU will strengthen competition and put the risks of foreign trade and international investment on a more calculable basis. There are also grounds to assume that the single currency, being a viable alternative to the dollar, will provide more weight and influence for the European Union as a player in the global economy.

Eurosceptics, which count quite a few economists among their ranks, raise a number of objections to EMU: they doubt that the eleven countries are an "optimal currency area"; they fear that further budget consolidation, a necessary condition for stability, will not continue, that there is insufficient margin to compensate for asymmetric shocks, that there could be situations in which devaluation is the instrument of choice; they expect the strained labor market to exert heavy pressure on governments and the European Central Bank, and that national emotions will run high; and they feel that a central monetary policy would need to be accompanied by similar common institutions to co-ordinate other economic policies.

All these objections are true in principle and they certainly constitute risks for the working of EMU. Yet they overlook several provisions and mechanisms put in place to ensure that EMU will become and remain functional. Establishing Monetary Union will help states faced with massive budgetary problems because it reduces expenditure on interest and invigorates the economy. EMU will bring transparency to inconsistent wages and price policies, thereby fostering efforts to put them on a basis of productivity. Employment initiatives are not necessarily inconsistent with budgetary consolidation – indeed in many cases what is needed most is organizational improvements that have little impact on the budget. And the institutional provisions to co-ordinate economic policies and ensure independence of the European Central Bank are designed to perform efficiently and inspire confidence.

Ultimately, we need to consider that the European Union's political structure constitutes integration sui generis, which cannot be compared with any historical predecessors.

Many critics also tend to overlook that there is no alternative to EMU that does not include at least some level of risk. Loose co-operation within the European Exchange Rate Mechanism clearly demonstrated the limits and enormous risks involved in that structure. In the long run, the system has been putting a major strain on Europe's position in the global economy.

Austria in particular has sound reasons to participate in EMU: For many years now Austria has designed its economic policies in a way that anticipated EMU conditions by fixing the ATS/DM exchange rate. This unilateral link has made the Austrian economy stronger and more dynamic in general. Austria has very close ties to the Euro core zone, which can with some justification be seen as an "optimal currency area". If Austria were to stand apart, this would deprive its economy of the advantage of using a global currency as its own currency and would have it fall back on a schilling currency that is prone to marginalization and speculation.

Yet the creation of EMU also constitutes a new challenge to economic policies and corporate competitiveness. A major concern is ensuring that budget consolidation will continue in Austria in order to have an effective response in the event of a downturn or other crisis. The chief item on the government agenda will need to be stringent cuts in the costs and structure of the public sector. Austrian businesses will have to live with more competition, which will nevertheless bring new opportunities. The acceleration of merger activities in Europe will have to be countered by specialization in niches as much as by building partnerships on a European scale.