When 56 per cent Swedes rejected the Swedish government’s proposal to join the eurozone in a referendum this September, the British, who are still out of the eurozone, said, “Sweden is Sweden and Britain is Britain and we have a very different economy......., (so) our national economic interests would be the determining factor” in the decision to join (or not) the eurozone. Just because a majority of the Swedes rejected the euro is no reason why Britain must reject it too, as said by the British themselves.
Similarly, just because Europe has a common currency is no reason why other regions must have it too unless their economic interests converge enough to necessitate a common currency as a means to the end of economic growth and development rather than as an end in itself that a common currency is made out to be since the launch of the euro. It is, therefore, important to take a brief overview of the situation that led up to euro and then compare and contrast it with the economic compulsions in the subcontinent that may require innovative home-grown solutions.
A period of monetary instability followed the demise of the gold standard in 1914. This was also the beginning of monetary nationalism when the US Fed chose to sterilize gold inflows in contrast with the era of the gold standard when domestic economies were adjusted instead to maintain external accounts’ equilibria. Consequently, competitive devaluations became common in the absence of exchange rates’ coordination in the interwar period.
After the end of the Second World War, the Bretton Woods System (BWS) was devised to restore monetary stability. As the BWS failed to restore exchange rate stability, the dollar was delinked from gold in August 1971 and was subsequently devalued. Japan and key Western European countries floated their currencies which marked the end of the Bretton Woods System of exchange rate management. Western Europe would now seek monetary stability on its own.
The efforts made by the European Community (EC) in this direction included the European “snake” of 1972 and the European Monetary System (EMS) of 1978. As the EMS succeeded in reducing exchange rate variability by 1989, the resolve towards currency stability through closer economic and monetary coordination and a common currency strengthened. Consequently Maastricht Treaty was agreed upon in December 1991 and took effect in November 1993 after ratification by member states. While common currency would help achieve stability, it would also be a means to the end of smooth operations of the European Common Market through the elimination of competitive devaluations and high transactions costs involved in the conversion of currencies. As Europe sought currency stability, it was also integrating economically at a pace rapid enough to necessitate a single European currency as a medium of easy exchange in a region where goods, services, money, and capital were all beginning to flow freely across national boundaries. By the time the Maastricht Treaty took effect, Western Europe had traversed a long distance since the formation of the European Coal and Steel Community, the European Atomic Energy Community, and the European Economic Community (EEC) in the 1950s. By early 1990s, Western Europe was poised to move surely towards the European Monetary Union (EMU) with a common central bank (ECB) and currency by the turn of the century.
Why did it take over half a decade for the Europeans to have a monetary union in place? Because, despite the agreement in 1991, the national economies had yet to converge before they could be influenced similarly by a common monetary policy. Britain still remains out of the eurozone as, inter alia, its economic cycle has yet to match that on the continent otherwise its economy would be affected differently by the interest rate movements steered by the ECB.
Within Britain, people and interest groups remain for and against euro depending upon the manner in which their economic interests would be affected by joining the eurozone. For economies to converge, strict eligibility convergence criteria were set for those countries who wished to join the eurozone. These criteria included targets for price stability, budget deficit, long-term interest rates, exchange-rate stability, and public debt. A stability and growth pact remains in place whose implications will be reviewed later as not everything is hunky dory for the eurozone countries either.
Nonetheless, the above overview clearly shows that Western Europe’s march towards a monetary union and a single currency was backed by a vision the European leaders had for their region. Regional economic integration and monetary stability were means or intermediate goals at best towards the broader end of their countries’ economic strength.
As for the subcontinent, economic integration remains a far cry as even the reasons behind economic integration remain unclear in a milieu characterized by extreme deprivation and poverty whose elimination should be the overarching goal for national governments.
Both Pakistan and India score poorly on poverty with each having around 85 per cent population living below $2 per day. Their human development indices also remain unimpressive meaning to say that each one of these two countries have yet to achieve intra-country integration of their societies characterized by stark dualism. This dualism was noticed even by former President Clinton when he visited India’s “Cyberabad” by road. He alerted the IT savvy population of India to take their country’s deprived along with them on their road to prosperity as no country can be called developed for as long as the bulk of their population remains immiserized which is the case with India as is also the case with Pakistan.
The two nuclear neighbours have to achieve national economic integration first and foremost without which they will continue to be viewed as less developed despite their advancements in nuclear technology and Indian notable progress in information technology as well. Are regional economic integration and intra-country economic integration mutually exclusive?
Regional economic integration can promote trade, growth, and human welfare if countries are at comparable levels of development which is not the case here as Indian industry is far more competitive cost-wise as well as quality-wise than Pakistan’s is. As integration will shift production to low-cost producers in the region, Pakistan’s industry will experience a greater challenge in the wake of an already liberalizing international trade regime. This is not to say that Pakistan’s industry should not learn to grow out of protection and become competitive internationally.
While a planned/guided approach is required for the purpose that is currently absent, promotion of trade would help only if redistributive mechanisms are in place that would allow the fruits of growth to be shared equitably in each member country. So, if Pakistan’s industry was developed and competitive enough, in the absence of redistributive mechanisms, trade and growth would help the industry and traders more than it would help the common people. This is why, even in Britain, it is the big business and big trade unions that are more pro-euro than their smaller counterparts are. And, the majority in Sweden voted against joining the eurozone primarily because they wished to guard their socio-economic well-being. So, is the well-being of the people in eurozone countries not guarded enough?
A stability and growth pact guides policy formulation in the eurozone. Its price stability and budget deficit requirements tend to impose a tight policy environment that inhibits growth and increases unemployment. Except for the Netherlands, Luxembourg, Ireland, and Portugal, the unemployment rates of eurozone countries remain way above that of the USA. So, even though the trade balance may remain favourable for most members, the unemployment situation remains precarious reflecting adversely on the human welfare aspects of the actively trading eurozone countries. Consequently, tension remains between the two major eurozone members, namely, France and Germany with the former remaining more concerned with employment and the latter remaining concerned with inflation and the strength of the euro.
Even though the eurozone countries do not experience dualism, they have yet to determine how to include all of their populations in regional trade promotion. While inclusion remains a challenge even for a developed Western Europe, this challenge is much more pronounced in the underdeveloped countries of Pakistan and India both of whom have attempted to develop through random measures with market reform being one of them. While deregulation, privatization, and liberalization were a donor-driven agenda in Pakistan; it was not backed by a vision even in India. The results in the form of poverty, deprivation, and human costs are known to all.
While the buzzword during the 1990s was market reform, the buzzword in the first decade of this century might well be a common currency without really investigating the implications or the reasons thereof. While common currency and the razing of the Berlin Wall might sound meaningless against the backdrop of the barrier being erected in Kashmir and the Baghliar dam being put up to block the flow of Chenab river into Pakistan, the people ought to ensure that slogans of the kind of common currency do not serve to divert policy attention away from the real issues of poverty and deprivation that necessitate national solutions first and foremost!