| Research guide to European Monetary Union The public sector deficit has been reduced from 7.5% of GDP in 1993 to 3.4% in 1996 and the budget in 1997 is aiming at a further reduction to 2.9%. The new convergence plan which was adopted last December paves the way for a 1.5% deficit by the end of the century. Public debt, though still at a very high level, has been declining at a satisfactory pace since 1993. Belgium was also among the first countries in Europe to lay down a detailed plan of how to organise in practice the transition to the third stage of Emu. Looking at the current debate on Emu it is striking that most of the attention is focused on how many and which countries will constitute the first wave of Emu members and on how the conversion rate will be fixed. Less energy seems to go into more fundamental debate on how monetary union will function after 1999. The introduction of a common currency does however in itself not mark a final point in the integration process. On the contrary it is more of a starting point. Despite the Stability Pact and the provisions of an ERM2, it could very well prove to be much more difficult to maintain a sufficient degree of macroeconomic policy coordination and to reinforce convergence than is now generally thought. A common currency implies specific demands on the adjustment process in the member countries and adds new constraints on the functioning of the economic system. Ways may have to be found to deal with the uncertainty and volatility which are inherent in any economic system, but which may work out differently according to the monetary regime. It is likely that in the future still more strain will be put on the goods and labour markets. The degree of flexibility and adaptability of the economy will, in the end, determine whether Emu membership turns out to be a success or not. Coordination problems will inevitably continue to exist within a monetary union since political autonomy and differences in economic structure will persist. A monetary union could however provide added value to Europe by establishing a stronger institutional setting in which to anchor market forces in a framework of a globalizing economy. Europe will undoubtedly benefit from a coherent policy mix with clearly formulated and well understood objectives with a proper set of rules and institutions in the economy. The fact that in many cases the costs of entering a monetary union are incurred before the benefits become evident probably explains why a large part of the European population has remained aloof thus far. Many of the economic problems Europe is currently wrestling with are perceived - rightly or wrongly - by many of Europe's citizens as the price Europe has to pay for the introduction of a common currency. The risk is that any further undermining of public support for Emu may endanger its chances of success in the longer run. The acid test for Emu is therefore not included in figures on public finances for 1997 and 1998, although these will continue to impact on short-term financial markets. In the longer term the ability of Europe to reconcile the demands of flexibility and adaptability that membership requires from economies and social security systems on the one hand, with the social aspirations of the population on the other hand, will undoubtedly prove to be a key factor in the quest for success. For more information please contact: Generale Bank |