By David Fairlamb
In December, 1991, representatives of 12 European countries met in the little Dutch town of Maastricht with the bureaucratic goal of better coordinating economic policy. What emerged was a radical plan to ditch national currencies for a common money managed by a European Central Bank.
The introduction of euro notes and coins on Jan. 1, 2002, is the last step in the process the Maastricht Treaty started. Its great triumph was to force European Union nations to curb deficits and tame inflation as a prelude to monetary union. Yet, from the depths of the worldwide recession, it is clear that the treaty has deep flaws. Unless they're fixed, Europe's hard-won economic stability is at risk.
Ten years ago, the forgers of monetary union most feared inflation and its evil corollaries, runaway spending and high interest rates. So the treaty not only made signatories clean up their fiscal acts, it also gave the ECB just one mission: maintaining price stability. The treaty only lets the ECB use rates to sustain growth once it hits its inflation targets.
STRAITJACKET. As Europe confronts the first major downturn since monetary union, Maastricht is a straitjacket. Europe faces a lack of jobs, confidence, and demand--not runaway prices. The largest economies--France, Germany, and Italy--have stalled. So it's time to do what was once unthinkable: renegotiate the treaty. Getting the EU members, which now number 15, to adopt new language would be a nightmare. But if the euro-zone economy is to weather future downturns better, the process must start. "The ECB needs more freedom," says former Bundesbank President Karl-Otto Poehl. "It should certainly have been able to cut rates earlier and further than it did."
European politicians are furious that the ECB has kept credit so tight. Lambasting controversial ECB President Wim Duisenberg has become a Continental sport. He deserves a few whacks for sticking for so long to his credulity-defying declarations that inflation remained a peril. In fact, it has been under control for five years in most euro-zone countries and is forecast to fall below 1% for the bloc by the end of 2002. But in fairness, Duisenberg is hog-tied by Maastricht. That's because inflation for the past year or so remained above 2%, the rate that the ECB's governing council says is consistent with price stability.
As a result, the ECB did little to stimulate the EU economy as the signs of distress mounted. Sure, it lopped 50 basis points off rates on Nov. 8, but only after Duisenberg finally agreed that inflation was waning. Since January, the ECB has trimmed rates just four times by a mere 150 basis points, to 3.25%. The U.S. Federal Reserve, in contrast, has cut 450 basis points off the federal funds target rate in 10 moves, a drastic but much praised response to dramatic circumstances.
European leaders privately urge a broader ECB mandate. That means rewriting the Maastricht Treaty. But finding acceptable new guidelines for interest-rate policy won't be easy. The faster-growing economies on Europe's periphery, such as Ireland and Greece, don't want to change Maastricht. The core European countries that pushed for Maastricht to be so strict now want an ECB that gives equal weight to growth. The ECB resolutely opposes change. "The best contribution we can make to economic growth is to ensure price stability," says a spokesman.
Although revisiting Maastricht is controversial, now is the time to start the arduous process of meetings, parliamentary votes, and referendums so at least the ECB will have the tools to fight the next recession. Another reason: By 2005, the EU expects to admit up to 10 new members from Central and Southern Europe. If all adopt the euro, their central banks each get a seat on the ECB's governing council. The ECB's ability to act quickly will vanish.
Europe's political leaders should stop criticizing the ECB for obeying Maastricht. Instead, they should give the bank the leeway it needs to get Europe's economy moving again.
Fairlamb covers European finance from Frankfurt.