EUROPEAN ECONOMIC & MONETARY INTEGRATION

Summary

S.L.N. Simha, former Principal Adviser to the Reserve Bank of India, reviews the fifty-year arc of European economic and monetary integration in a Forum of Free Enterprise booklet that reprints his January–March 1999 paper from the Indian Economic Journal. He frames the European achievement as a deliberate reproach to India: nations that fought repeated wars now bind themselves through mutual trust, a single market and a common currency, while Indian states cannot agree on river-water sharing, district boundaries or tehsil limits, producing only committees, walk-outs, bandhs, morchas and rasta roko. The opening pages position the study less as economic reportage than as an exhortation to Indian economists and policymakers to learn from Europe at a moment of accelerating globalisation.

The narrative tracks integration from the Marshall Plan and the European Payments Union, through the European Coal and Steel Community of the early 1950s, the Treaty of Rome (1957) that created the EEC, the Single European Act (1987), and on to the Maastricht Treaty (1992), the renaming of the Community as the European Union (1993) and the launch of the Euro on 1 January 1999. Simha lays out the four elements of the European Monetary System established in 1979 — the ECU, the Exchange Rate Mechanism, the European Monetary Cooperation Fund and the Very Short-term Financing Facility — and walks readers through the evolution of the European Monetary Unit of Account, the EUA and the ECU as a closed basket of currencies.

At the heart of the booklet is the Delors Committee report of April 1989 and the institutional architecture it produced: a European Central Bank insulated from political control, a European System of Central Banks, and convergence criteria capping public-sector deficits at 3 per cent of GDP and outstanding public debt at 60 per cent of GDP. Simha treats the fiscal Stability and Growth Pact (1997), the Article 104 prohibition on overdraft financing of governments, and Articles 107–108 on central-bank independence as the operative provisions that make monetary union credible. He notes the irrevocable conversion rates fixed in late 1998 for the eleven Euro entrants and the four hold-outs (the U.K., Sweden, Denmark and Greece).

Within the rendered pages Simha repeatedly returns to price stability as the guiding principle of the new European order, with the ESCB tasked under Article 105 to support an open-market economy with free competition. He is candid that whether the ECB’s independence will hold against governmental pressure ‘remains to be seen’, and he gestures — without endorsing — at the danger that developing-country central banks suffer inflation precisely because they finance their governments. The chunk closes inside the Treaty’s articles on central-bank independence; remaining pages of the booklet are not yet in the rendered set.

Key points

• Frames European integration as a direct contrast to Indian inability to settle inter-State disputes, urging Indian economists to study the EU experience.

• Traces a 50-year evolution from the Marshall Plan and European Payments Union through the ECSC, Treaty of Rome (1957), Single European Act (1987) and Maastricht Treaty (1992).

• Explains the four elements of the 1979 European Monetary System — ECU, ERM, EMCF and VSTF — and the closed-basket nature of the ECU from November 1993.

• Centres the Delors Committee Report (April 1989) as the document that prescribed a single currency, a European Central Bank and the three-stage path to union.

• Lays out the convergence criteria: public-sector budget deficit not to exceed 3 per cent of GDP and outstanding public debt not to exceed 60 per cent of GDP.

• Describes the Stability and Growth Pact of 1997, driven by Germany, and the irrevocable conversion rates for the eleven Euro entrants fixed in late 1998.

• Quotes Maastricht Articles 2, 104, 105, 107 and 108 to show how central-bank independence and price stability are written into the Treaty architecture.

• Notes implicitly that developing-country central banks finance governments and are thereby principal contributors to inflation — a pointed aside aimed at Indian readers.