Euro Was Nearly Aborted Nineteen Years Ago Tomorrow

September 19, 2011

The Maastricht Treaty of December 1991 that laid out a process for a common European currency as early as 1997 and no later than 1999 required that all members of the European Community (EC) ratify the document within a year for it to be valid.  The goal of European economic and monetary union (EMU) was supported more heavily by the career politicians of the day than the general population, which was suspicious about watering down national sovereignty in ways that were not well understood.  Governments were permitted discretion over how the treaty was to be ratified, and most chose to have their vote done by national legislatures.  Only two small candidates, Denmark and Ireland, and one large one, France, permitted the question to be decided directly by their citizens.

The Danish and Irish referendums were both held in June 1992, with mixed results.  Danish voters on June 2 rejected the treaty by a margin of 50.7% to 49.3%, but the Irish on June 18 gave it a “yes” verdict by a comfortable margin of around two to one.  When French voters went to the polls on September 20, 1992, passage of the Maastricht Treaty and the hopes of a single currency in Europe were riding on the outcome.  The vote as in Denmark was razor thin.  With a turnout of 69.7% of eligible voters, 51.05% said aye to 48.95%, who gave the proposal a thumbs down.  Denmark on May 18, 1993 held a second treaty referendum that accepted much of the Treaty but gave Denmark the right to opt out of the common currency element, and that passed convincingly by 56.7% to 43.3%. 

Despite the gravity of the issue and the heartache that its ramifications are now causing to global financial markets and the European and world economies, approval in these referendums only required a simple majority of support.  Ultimately, closer economic union, that is fiscal standardization, was going to work only in an environment of very widespread popular endorsement and credibility, and that has now crumbled.  It would have been better to have set tougher standards for national approval analogous to the stringent requirements that must be met to amend the U.S. Constitution.  

If only 269,388 out of nearly 25.8 million total French votes had felt differently, history would have been vastly different.  Countries now known as the peripherals would have had higher interest rates and slower growth in the early noughties, but the boom-bust cycle of the last dozen years would have been less pronounced.  It’s hard to imagine Europe being as fractious politically and economically had the road not taken been followed.  Inflation may have been stronger in some places, but so too would probably have been real economic growth.  Interest rate differentials, for example between Germany and Greece, could hardly have been wider now than they are.  In Britain, which like Denmark opted against common currency membership, ten-year yields are over 18.5 percentage points below the Greek counterpart, despite poor British public finances, relative high U.K. inflation and a chronic current account deficit in that country.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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