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Getting the Core: A Neo‐institutionalist Approach to the EMU*

Published online by Cambridge University Press:  28 March 2014

Miriam L. Campanella
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THE NEW REGIONALISM, MANIFESTED IN EUROPE BY THE SINGLE European Act and the Maastricht Treaty (1992) and in North America by the signature of the North-American Free Trade Agreement (NAFTA 1993), is centred on strategic policies and new institutions, the aims of which are to achieve a more effective role in global competition. In Europe, the shift is marked by the impending process of monetary union and the creation of its related institutions. The new approach agreed in the Maastricht Treaty sets out four requirements for eligibility to membership of monetary union. Convergence criteria embodying the judgment of financial markets about future inflation, exchange rate and fiscal policy appeared to be the second best choice for governments seeking to institutionalize their commitment to inflation-avoiding policies. The whole mechanism is meant first to provide the region with a credible monetary institution able to win over the financial markets and secondly to set up bulwarks to the inflation-prone pressures of domestic sheltered interests. Thirdly, the aim is to commit member countries, through a so-called targeting exercise (in Keohane's words) to accomplishing the agreed objectives with monetary discipline and macroeconomic adjustment.

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Government and Opposition , Volume 30 , Issue 3 , 01 July 1995 , pp. 347 - 369
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Copyright © Government and Opposition Ltd 1995

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References

1 Keohane, Robert and Nye, Joseph, ‘The End of the Cold War in Europe’ in Keohane, R. O., Nye, J. S. and Hoffmann, S., After the Cold War. International Institutions and State Strategies in Europe 1898–1991, Cambridge, Mass., Harvard University Press, 1993.Google Scholar

2 Kindleberger’s hegemon is the notion that public goods would be underproduced (because of free riders) unless a leader agreed to bear a disproportionate share of their cost. Kindleberger came to the conclusion that the 1929 Depression was so wide, deep and long because no leading country was able and willing to discharge the role of a stabilizer, whose responsibility would be to provide an outlet for distress goods, to maintain the flow of capital to would-be borrowers and to serve as leader of last resort in a financial crisis. Charles Kindleberger, The World Depression, 1929–1939, University of California Press, 1973, Ch. 14. However, his notion is that of leadership rather than hegemon: C. Kindleberger, ‘Hierarchy versus Inertial Cooperation’, International Organization, Vol. 40, No. 4, Autumn 1986.

3 Regarding the attitude of the Bundesbank officials against Schmidt-Giscard entente on monetary policy see Tsoukalis, Loukas, ‘Money and the Process of Integration’, in Wallace, Wallace and Webb, Policy-Making in the European Community, John Wiley & Sons, 1983 Google Scholar and Kennedy, Ellen, The Bundesbank, London, Pinter Publishers, 1993.Google Scholar

4 The seminal contribution on ‘optimal currency area’ is by Mundell, R., ‘A Theory of Optimum Currency Areas’, in American Economic Review, No. 51, 1961.Google Scholar

5 ibid.

6 Ingram, James, ‘The Case for European Integration’, Princeton Essays in International Finance, No. 98, 04 1973,Google Scholar asserted that capital flows can substitute for labour migration. Eichegreen countered that argument demonstrating that ‘physical capital mobility eliminates the need for labor mobility only under restrictive assumptions’ in Bayoumi, T. and Eichengreen, Barry, ‘Shocking aspects of European monetary integration’, p. 196 Google Scholar in Torres, Francisco et al (eds), Adjustment and Growth in the European Monetary Union, Cambridge University Press, 1993.Google Scholar

7 Harrop, Jeffrey, The Political Economy of Integration in the European Community, 2nd ed., Newcastle-upon-Tyne, Edward Elgar, 1992, p. 176.Google Scholar

8 ibid.

9 Kenen, P. B., ‘The Theory of Optimal Currency Areas: An Eclectic View’ in Mundell, R. A. and Wodoba, A. K. (eds), Monetary Problems of the International Economy, Chicago University Press, 1969.Google Scholar

10 Harrop, op. cit., p. 177.

11 See Pearce, David W., The MIT Dictionary of Modern Economics, Cambridge, Mass., MIT Press, Fourth Edition, 1992.Google Scholar The Philips-curve, a cornerstone of macroeconomic analysis, is the statistically observed inverse correlation between the rate of change in wages and the unemployment rate. It allows governments to choose among several combinations of unemployment and inflation. For example, the policy of low inflation may be accepted at the expense of a high rate of unemployment. That policy is in evidence in France with the adoption of the franc fort and is also seen as a consequence of France’s commitment to the Exchange Rate Mechanism. In recent years the Philips-curve has lost some of its applicability: Dornbusch, R. and Fischer, S., Macroeconomics, New York, MacGraw Hill, 1990,Google Scholar Ch. 13.

12 Grauwe, P. De, ‘The Political Economy of Monetary Union in Europe’, The World Economy, Vol. 16, No. 6, 11 1993.Google Scholar

13 Historically seignorage meant a tax on metals brought to a mint for coining, to cover the cost of minting and to provide a revenue to the ruler who claimed it as his prerogative. See David W. Pearce, The MIT Dictionary of Modern Economics, op. cit.

14 Dornbush, R., ‘The European Monetary System, the Dollar and the Yen’, in Giavazzi, F. et al, The European Monetary System, Cambridge University Press, 1988.CrossRefGoogle Scholar

15 Krugman, P., Geography and Trade, Cambridge, Mass., MIT Press, 1991; ‘Lessons of Massachusetts to EMU’, in Torres, F. and Giavazzi, F. (eds), Adjustment and Growth in the European Monetary Union, Centre for Economic Policy Research, Cambridge University Press, 1993.Google Scholar

16 For a positive and corroborating comment on Paul Krugman’s, thesis see Paul De Grauwe, Discussion in Torres, Francisco et al., Adjustment and Growth in the European Monetary Union, CEPR, Cambridge University Press, 1992, pp. 266–69.Google Scholar

17 The formation of cores and hinterlands is a self-organizing process that occurred, for example in the late nineteenth century in the United States. ‘Who gets the core’ is a policy that describes the present competition as something completely different from Hirschman’s ‘Dependence modeV. Krugman’s model embodies two features that may be defined crudely as spontaneous or artificial. Spontaneous or self-organizing processes are developed by specific economic factors such as relocation and specialization. Artificial or policy-led processes are those boosted by the initiative and entrepreneurial capabilities of visionary bureaucrats either as private or as political actors. The role of political actors, mainly at sub-national level, is dramatic in the creation of a favourable and richly-endowed environment. Krugman’s examples are from the success stories of new industries in the USA. The policy-making of local visionary bureaucrats and sub-national administrations play a more effective role than national or federal governments. Examples are the Silicon Valley and route 128 at MIT Cambridge, and the imitation of the two models in North Carolina’s Research Triangle, created through state support of a research park, in direct emulation of the first two. ‘Who gets the core’, is a policy which may include special packages of initial tax concessions, or modern and cheaper infrastructures.

18 op. cit.

19 P. De Grauwe, op. cit.

20 The table is in De Grauwe, ibid. Sources for Table 1: R. Dornbush, op. cit., and D. Gros, Seignorage and EMS Discipline’ in Grauwe, P. De and Papademos, L., The European Monetary System in the 1990s, London, Longman, 1990.Google Scholar

21 Tsoukalis, Loukas, The New European Economy, Oxford University Press, 1993.Google Scholar

22 This point lies outside the limits of this paper. Nevertheless, the topic is of crucial importance. For several economists supporting the thesis that growing monetary convergence may turn out to be incompatible with persistent fiscal divergence, see Dornbusch, R., ‘The European Monetary System, the Dollar and the Yen’, in Giavazzi, F. et al, The European Monetary System, Cambridge University Press, 1988.CrossRefGoogle Scholar P. Krugman, ‘Lessons of Massachusetts’, pp. 242–261, op. cit.

23 For a clear analysis of this point, The EMU Debate: a Common or a Single Currency, The Economist Intelligence Unit, 1990.

24 David Cameron, ‘Transnational Relations and the Development of European Economic and Monetary Union’, prepared as a chapter for Risse-Kappen, Thomas, (ed.), Bringing Transnational Relations Back In: Non-State Actors, Domestic Structures, and International Institutions, Cambridge University Press,CrossRefGoogle Scholar forthcoming.

25 In this way see Francis Snyder, ‘EMU-Metaphor for European Union? Institutions, Rules and Types of Regulations’, in Dehousse, Renaud (ed.), Europe After Maastricht, Munich, Law Books in Europe, 1994.Google Scholar ‘Whether judged favorably or not, EMU represents an attempt to put in place a major institutional innovation, and also an effort to envisage and shape the Europe of the future. It is a type of legal innovation which draws frequently on existing forms. It uses them in novel ways, however, and also combines them with new elements. It is also a conjunction of diverse strands. This is partly because of the inherent complexity of economic and monetary policy, and partly because EMU itself resulted from bargaining and compromise’, p. 63.

26 For a concise account of the EMU timetable see Sandholtz, W ‘Choosing Union, Monetary Politics and Maastricht’, International Organization, Volume 47, No. 1, Winter 1993.Google Scholar

27 ibid.

28 That is the case for spill-over and neo-functionalist theory. See Campanella, Miriam L ‘Proactive Policymaking: The New Role of the State as Actor’, Government and Opposition, Vol. 26, No. 4, Autumn 1991, pp. 480–500.Google Scholar

29 David R. Cameron, ‘Transnational Relations and the Development of European Economic and Monetary Union’, op. cit.

30 The notion of the epistemic community applied to central banks has been worked out by Kapstein, Ethan ‘Between Power and Purpose: Central Bankers and the Politics of Regulating Converged’, International Organization, Vol. 46, No. 1, Winter 1992.Google Scholar

31 There are differences between those economists who are not considered in this paper. As often happens political scientists take economists’ analyses as resources and not as problems. The author apologizes for the lack of esprit de finesse.

32 Giavazzi, F and Pagano, M ‘The Advantage of Tying One’s Hands: EMS Discipline and Central Bank Credibility’ in European Economic Review, No. 32, 1988, pp. 1055–1082;Google Scholar Giavazzi, F. and Giovannini, A., ‘Limiting Exchange Rate Flexibility’, The European Monetary System, Cambridge, Mass., MIT Press, 1988.Google Scholar

33 Collins, Susan M., ‘Inflation and the European Monetary System’, in Giavazzi, Micessi and Miller, The European Monetary System, Cambridge University Press, 1988.CrossRefGoogle Scholar

34 A certain number of studies agree that the EMS was very successful in promoting convergence of many economic indicators in the participating countries. As Busch observes ‘This occurred with respect to the stabilization of intra-EMS exchange rates and interest rates differentials (the volatility of which have gone down both in nomi-• nal and in real terms), but most clearly with respect to inflation which has been reduced both in level and variability in the EMS countries since 1979’. For the literature on this point see Busch, A., ‘The Crisis in the EMS’, Government and Opposition, Vol. 29, No. 4, Winter 1994, p. 83, fn. 7.Google Scholar

35 Cipolletta, Innocenzo, ‘Lira, salvezza con 1 Europa’ (Safety with Europe), Sole 24-Ore, 25 03 1995.Google Scholar The proposal made in the article is that parliament will authorize the government to adopt extraordinary measures of limitation of the public deficit by means of expenditure cuts or tax increases in the hope of passing unpopular fiscal and financial laws. It should consist in merely authorizing the government in an emergency to consider itself free from political uncertainty and give it the freedom necessary to restore the objective of the Maastricht Treaty. The expected result should be, according to Cipoletta, to adopt recovery measures in public finance not in a general government programme, but in relation to a European commitment. In the end, he comments, ‘[Italians] may lose a little national sovereignty, monetary sovereignty of course, as the other member countries, and a little budget sovereignty. A loss, however, which may be worth accepting as the price to be paid to have the right to participate in the sovereignty of a much wider nation, the European nation’ (p. 7). The article presents a comparison between the present Italian parameters and the Maastricht criteria.

36 Papadia, Francesco, ‘L’Unione Económica e Monetaria dopo Maastricht’, (Economie and Monetary Union After Maastricht), IlMulino, Spring issue, 1992.Google Scholar

37 Schioppa, T. Padoa, ‘The European Monetary System: A Long Term View’ in Giavazzi, Micossi and Miller, The European Monetary System, op. cit.Google Scholar

38 Perhaps this is a case of achievement versus ascription. Reservations were expressed by the Italian government’s representatives after the CDU (German Christian Democrats) presentation of a study envisaging the exclusion of founder members from the inner core of the monetary union. The reaction, however, is inconsistent with the Maastricht discipline, which Italy has agreed to. Nevertheless, the negative reaction of the Italian government is understandable and coherent with getting the core dynamic, as the commentator in II Sole-24 Ore, op. cit., argued.

39 A subject not yet considered in the literature and which may reveal more surprising facts about the collapse of the Italian consociative political regime.

40 An interesting contribution on a similar topic has been made by Reuck, Anthony de, ‘International Relations: A Theoretical Synthesis’, in International Interactions, Vol. 14, No. 4, pp. 321–41.Google Scholar The author distinguishes between the centre described as the tenant of’dominant roles of economic creditor, political suzerain and cultural patron over the Peripherals’ subordinate roles of debtor, dependency and client (...).’ By using the literature of unequal development, de Reuck describes in terms of economic division of labour, the centre as characterized by tertiary (service) activities, the Core by secondary output (capital intensive manufacturing), and the Periphery by primary production (labour intensive agriculture and mining). The limit of such a description rests in its intrinsically static nature, which contrasts with the paradigm adopted in this article ‘getting the core’ which maintains that the process of institution-building is meant to develop along a dynamic pattern.

41 Butler, Sir Michael, ‘Europe’s Currency Tangle. The Way Ahead’, The Economist, 30 01 1993.Google Scholar

42 For an up-to-date analysis of multilateralism versus minilateralism see the excellent paper written by Kahler, Miles, ‘Multilateralism with Small and Large Numbers’, International Organization, No. 46, Summer 1992, pp. 681–707.Google Scholar

43 For a historical account of the monetary projects in the Community see: Papadia, Francesco and Saccomanni, Fabrizio, ‘From the Werner Plan to the Maastricht Treaty: Europe’s Stubborn Quest for Monetary Union’, in Steinherr, A. (ed.), 30 Years of European Monetary Integration: From the Werner Plan to EMU, London, Longman 1994.Google Scholar

44 It was very important for Germany to ensure that unification did not jeopardize the Franco-German relationship and that France adopted a supportive position. The improvement in relations was underlined in a speech by Chancellor Kohl in Paris on 17 January 1991, in which among other reassuring statements he emphasized the importance of close cooperation between Bonn and Paris in their effort to deepen Europe. The Franco-German entente was clearly stated in Kohl’s and Mitterrand’s joint address to EC member states on 14 April 1991, proposing a faster timetable for economic and monetary union.

45 Deepening is not such a new phenomenon. Even in the 1970s, the decade of Euroschlerosis, there were important policies oriented to deepen the relations among European members. Examples are the European Political Cooperation and the creation of the European Monetary System (EMS). On the institutional front it took shape in the European Council and the decision to introduce direct elections for the European Parliament. Nevertheless, deepening was most strongly pursued in the mid-1980s under the Delors presidency of the Commission and assumed a dramatic dimension with the reunification of Germany.

46 In the mid-to-late 1980s the prevailing view in the debate and discussion was that there was an irreconcilable dichotomy between deepening and widening. Since the 1990s, opinion has changed and it is accepted that the two processes are not irreconcilable. See Nugent, Neil, ‘The Deepening and Widening of the European Community: Recent Evolution, Maastricht, and Beyond’, of Common Market Studies, Vol. XXX, No. 3, 09 1992.Google Scholar

47 Nugent, N., ‘The Deepening and Widening of the European Community. Recent Evolution, Maastricht and Beyond’, Journal of Common Market Studies, Vol. XXX, No. 3, 1992, p. 327.Google Scholar

48 A further consequence of mutual recognition is that it extends credibility to decentralized decision-makers at a sub-national level as well to non-governmental actors which have grown impressively in several crucial areas (environment, pollution, safety etc.)-

49 The Economist: ‘The Mast of Post-Maastricht Europe’, 16 October 1993; ‘From the Arctic to the Mediterranean’, 5 March 1994; The European Union Survey, 22 October 1994.

50 The quotation is from CDU/CSU-Fraktion des Deutschen Bundestages, Bonn, 1 September 1994, ‘Reflections on European Policy’, Section 1, FurtherDeveloping the EU’s Institutions. The section concentrates on agenda-setting for the Inter-Governmental Conference in 1996.

51 N. Nugent, op. cit., p. 327.