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From: EPE@fee.uva.nl

Organization: fee.uva.nl

Date: Fri, 11 Apr 1997 17:06:17 GMT-1

Subject: European economists appeal

To: progressive economists in the European Union

Amsterdam, April 1997

Dear Colleague,

We would like to propose a joint action of European economists against the Economic and Monetary Union (EMU) as it is currently being constructed. The main idea is to publish a short appeal signed by economist throughout Europe with a rejection and critique of the current european economic, monetary and social agenda. We believe that the EMU-project has to be criticized in many respects, first of all the lack of social, ecological and democatic content. One way or the other, the European integration has to be reprogrammed in favour of social and ecological sustainability, instead of - as is today the case - functioning as a vehicle for the neoliberal economic project. We feel that economists have the obligation to inform the public about the fact that economists - contrary to popular belief - disagree strongly about this project.

In the Netherlands we therefore tried to start a public debate about the EMUand to a certain extend we succeeded. On February, 13, `de Volkskrant' - one of the quality newspapers in Holland - printed an appeal against this EMU signed by 70 Dutch academic economists. Mainstream politicians quickly responded by denying the need forc debate and concern. Nevertheless a real debate about the EMU has started now in Holland, with until today a lot of debates, articles in the press and conferences. The fact that Holland is until July 1 the chairman of the European Union added to the effectiveness of our appeal. Below you'll find the English version.

Several European collegues have reacted positively to this initiative. Some of you have suggested that there should be a European-wide follow-up, proposing that Holland should take the initiative since `we' are European chairman and The Dutch Central Bank in Amsterdam will host the European Summit in June, where possibly the new `treaty of Amsterdam' will be finalised.

This letter is to find out whether you are willing to collaborate with us to organize such an appeal.

We propose the following procedure. If enough economists from all EU-countries are willing to work together in this initiative, we will propose a forst draft for the appeal, based on your first reactions, around April 28. After a week for amendments and suggestions for improvements we should be able to have a final text on May 10 to start the real work. We propose that we try to collect at least 20-25 signatures in each country, of which at least 5 are known to the general public. All in all this will mean that we could get an appeal signed by at least 300 to 400 European economists.

As a first step we would like you to reply as soon as possible, but not later then April 22, to the following questions, by e-mail or fax: 1) Do you want to help to organize the initiative in your country and act as one of the `national coordinators' (i.e. help to formulate the text and collect names)? If not: can you suggest (an)other person(s)? 2) Do you already have concrete suggestions for the text? 3) Do you have contacts in other countries who may be willing to help, especially in Luxemburg and Ireland, the two countries where until now we don't have contacts?

In a later stage we have to discuss and decide when exactly and how to publish the appeal (Saturday June 14 in national newspapers in all countries?). If we succeed in strengthening the progressive opposition to this EMU by publishing an appeal, maybe also further joint initiatives should be discussed, but that's for later.

We are looking forward to receive your reactions in due course. And please send us your exact address(es), phone number(s), fax number(s) and e-mail address(es).

With regards,

Geert Reuten, University of Amsterdam. Kees Vendrik, political staff Amsterdam political centre `De Balie'. Robert Went, International Institute for Research and Education and University of Amsterdam.

Please send all correspondence to:

EMU-appeal Dr. Geert Reuten FEE/UvA (AE) Roeterstraat 11 1018 WB Amsterdam

Phone: 31 20 525.4202 Fax: 31 20 525.4254 E-mail: epe@fee.uva.nl

----------------------------------------------- STATEMENT signed by 70 Dutch economists, published February 13, 1997 in De Volkskrant


The undersigned (all of us Dutch economists) are anticipating with increasing concern the moment at which Europe's Economic and Monetary Union (EMU)enters its third phase. The Maastricht Treaty, which took effect on 1 November 1993, is imperfect in many ways, particularly in the areas of democracy, employment, income distribution, environment, and poverty reduction inside and outside the Union. In addition, the Treaty was based on dubious economic assumptions.

Nothing has changed in the intervening years. On the contrary, implementation of this EMU is being accompanied by high costs, including growing unemployment and social tensions. The EMU is proving to be little more than a monetarist project.

The "Stability Pact" agreed to in Dublin has confirmed this tendency, and even aggravated it: the maneuvering room for fiscal policy, particularly for social and ecological purposes, has become narrower than ever.

Rather than signalling the birth of a modern European welfare state, this EMU is creating the institutional framework for a further dismantling of national social and fiscal policy and of the European public sector. From a social, ecological and democratic point of view, this is undesirable. And the economic benefit is questionable.

In itself a common currency could have benefits, but with this project the European Union is taking the wrong road. It is time to reflect, reconsider, and begin a critical discussion of Europe's economic agenda.


According to the Maastricht Treaty the member states of the European Union (EU) must meet five so-called convergence criteria in order to join the EMU and take part in the euro, the common European currency. Along with requirements in the areas of long-term interest rates, inflation, and national debt, it was laid down in 1993 that a government's budget deficit may not exceed 3 percent of GNP.

Only during the Intergovernmental Conference (IGC) have policy-makers begun to think seriously about the way in which the EMU must actually function. The content of the EMU is clearer now that the heads of government of the fifteen member states have agreed to the Stability Pact, adopted in Dublin in december 1996.

What this essentially comes down to is that the member states will be held to the 3-percent requirement even after joining the EMU, and that their budget deficits must be cut back further to 1 percent of GNP. This, so the thinking goes, will guarantee a rock-hard euro. Attempts to fulfill this requirement have already led to deep cuts in social spending in the EU countries, which the most vulnerable members of society have suffered from the most. With the coming into effectof the EMU, that process of cutbacks will continue in the coming decades.

In the not inconceivable event that Europe has to contend again in the coming years with a recession, the rigid "Dublin requirements" will push us into a downwards spiral of cutbacks and rising unemployment. We cannot expect that the new European Central Bank (ECB) will respond by launching an economic stimulus package. The ECB is supposed to give absolute priority to price stability. There are in addition no automatic stabilising factors on a European level. Another consideration is that the European central bankers cannot be made to change course, because the ECB will operate in total independence.

It is claimed that while this may all be unfortunate from a social point of view, it is economically necessary and that a consensus on this necessity exists among economists. This is not the case. No scientifically responsible economic case for the EMU requirements has been made, and the new course and position of the ECB, as laid out by the Maastricht Treaty, is not uncontroversial among economists. To summarise briefly, the EMU's economic philosophy corresponds to monetarist doctrines, which are not endorsed by all economists. There is also a close relation between these doctrines and neo-liberal ideas that are increasingly being criticised.

According to the monetarist vision, reduction of the government's budget deficit leads to lower inflation, and lower inflation leads automatically to more growth and employment. A prudent monetary policy is supposed continuously to maintain this low inflation. Economic studies show that this assertion cannot be convincingly supported. Harvard Professor R. Barro, incidentally a supporter of anti- inflationary policies, concluded from research on over 100 countries during the period 1960-1990 that an increase in inflation of one percent led to an decrease in growth of at most 0.03 percent (Bank of England Quarterly Bulletin, 1995). In the Cambridge Journal of Economics (1993) the researcher W. Stanners, who examined trends between 1950 and 1987 in 12 leading countries, came to an even further-reaching conclusion: the assertion that low inflation leads to high growth cannot be proven. Research by economists Akerlof, Dickens and Perry, published in the Brookings Papers on Economic Activity (1996), shows moreover that in the United States a decline in inflation from 3 to 0 percent leads to a 2.6 percent increase in unemployment. Only when inflation reaches 8 percent or more are there measurable negative effects on growth, concluded IMF economist Sarel in 1996 on the basis of research on 87 countries during the period 1970-1990. The effects of an inflation rate between zero and 8 percent are nonexistent or even positive. On the basis of this and other comparable research, leading economists such as Krugman, Summers, Reich and Nobel Prize winner Vickrey have warned of the danger of rising unemployment as a result of anti-inflation policies.

One might think that bringing that budget deficit down to 3 percent and bringing the national debt down to no more than 60 percent of GNP are not in any case unreasonable demands. Ordinary citizens are expected to balance their accounts and limit their debts, aren't they? The interest burden on current debt can be a brake on the economy in the future. It is essential to see - as is acknowledged by advocates of the EMU - that no unambiguous norms can be established on scientific grounds: what "wise" policy consists in depends on economic circumstances. Many structural differences still exist between member states in the fields of social and fiscal legislation and other institutional arrangements. The EMU requirements are arbitrary, they take no account of these varying conditions, and they are no guarantee of real convergence.

A government's budget deficit is the difference between revenues and expenditures. A deficit can in principle be reduced by increasing revenues (taxes). Current policies, however, are fixated on the expenditures side: reducing collective spending. This entails extensive cutbacks, which result in considerable social and economic harm: not least because many member states have been caught in a web of cutbacks since 1982. The fat was cut away long ago. Due to the standards employed - a budget deficit of at most 3 percent and a national debt of at most 60 percent - these percentages rise or fall in practice with the rise and fall of national income. If economic growth slows, the budget deficit as a percentage of GNP automatically rises. In order to pass the EMU test collective spending then has to be cut even more sharply.

There are good arguments, particularly during conjunctural slowdowns, not to reduce spending and in some cases even to let government spending rise. A Keynesian-oriented policy of this kind disappeared from discussions because international interweaving of economies has left less maneuvering room for national policy-makers.

A common currency is just what could make counter-cyclical spending policies possible, even if this cannot be seen as a panacea. But just the oppositeis happening. The EMU criteria and Stability Pact regulations are in practice reinforcing pro-cyclical European policies. This endangers among other things the growth of employment. Moreover, deficits are judged by two different standards: government budget deficits are "bad", but companies' extensive shortfalls go unmentioned.

Countries that are about to join in the common currency will lose major macro-economic policy instruments. Inside the Union this applies of course to exchange rate adjustments, which will naturally disappear when the euro arrives. Because interest rates will soon be approximately the same everywhere, because the mobility of labour across national frontiers is (still) limited, and because there is no provision for compensatory financial transfers, the EMU countries will shortly have only one instrument left at their disposal in order to react to economic shocks: government spending.

Here the circle is closed, since this very instrument is blocked by the already-mentioned Stability Pact. Severe sanctions are prescribed for countries that exceed the maximum permitted budget deficit of 3 percent. Dutch Finance Minister Zalm, one of the pact's authors, has calculated for the Dutch parliament that a budget deficit of 4 percent, unless reduced in a timely fashion, could result for the Netherlands in a 2 billion guilder fine. This means that the factor labour will be handed the bill for any such economic shocks, in the form of unemployment, wage reductions and additional flexibilisation.

This effect is reinforced because the EMU is stimulating policy competition between EU states, over fiscal policy (witness the recent dispute over profits tax) as well as ecological and social policy. This policy competition will also block any ambitious national environmental policy, while a European environmental policy, including for example energy taxes, is hardly in prospect.

Finally, socio-economic policy will suffer seriously from the asymmetrical relational between the independent European Central Bank and the national states. The Bank will watch exclusively over the "hard" euro; as Europe's only significant policy-making body, it will encounter no meaningful countervailing force.

The national states, due to the unleashed policy competition, are contending with a restricted capacity for action. Trapped in a monetarist web, they are looking on as their problems of unemployment, social exclusion and environmental degradation grow. The (German) fear of a weak euro is unfounded. The contrary is more likely to be the case.

We conclude that the current EMU agenda is unsuited for the Europe of the future. We oppose the current situation in which the coming of euro-banknotes is seen in the Netherlands as a matter of course. The fact that the Union still offers no prospect of improvement for Europe's 20 million unemployed and 50 million poor is in itself sufficient grounds for our opposition.

The Maastricht criteria have already been taking their toll in the existing member states for a number of years. For most of the Eastern European countries, they will make EU membership unattainable for years to come. Former EC commissioner Ralf Dahrendorf (NRC Handelsblad, Dec. 1995) characterised the EMU agenda as flawed in light of Europe's current problems: "The price that must be paid for the EMU is high indeed." He risks being more than vindicated.

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