A real debate on implications of economic and monetary union getting under way

IT LOOKS as if a real debate is getting under way about economic and monetary union and its implications for Ireland and the European Union. It is not before time. Although official Ireland and the main political parties have made up their minds in favour of the project, much remains unexplored as to its impact on this State.

It will be much the most important development since Ireland joined the EC in 1972. The same applies to the EU as a whole. It is important that the discussion here takes full account of the wider one.

This week has seen a real flurry of activity and debate, about mechanisms, future membership and, more fundamentally, about the feasibility and sustainability of the EMU project because of the shortcomings in its design.

At the World Economic Forum in Davos it was announced that Germany and France have reached agreement on an informal "stability council" to co-ordinate policy among member-governments after the launch of a single European currency.

The German Finance Minister, Mr Theo Waigel, added that it would not have the power to interfere with the independent European Central Bank; it would therefore fall short of French ambitions for a form of economic governance to match the single currency.

Nevertheless, his acknowledgment of the need for a political mechanism represents considerable progress after the bitter exchanges between Germany and France before they reached agreement on another part of the agenda, the Stability and Growth Pact, at the Dublin Council in December.

It was at French insistence that growth was added to the title, in keeping with President Chirac's domestic and policy requirements on unemployment.

It is a growing preoccupation in Germany, too, as the figures climbed this week to 4.66 million, a dramatic rise of 450,000 in January alone. This is the largest increase since the war and will make Germany's own qualification for EMU, both politically and economically, more problematic. There is now much more talk that the Kohl era may be coming to a close.

The moral of the story is that the design of the EMU project is by no means completed. At his press conference in Dublin Castle to announce agreement on the pact the Minister for Finance, Mr Quinn, replied to a question concerning the addition of the growth element to the title by saying that everyone concerned is now convinced that clear budget discipline, sound public finances and low interest rates are essential for investment and employment.

This, he said, was the lesson of Ireland's experience in recent years. Clearly it has become part of social democratic as well as conservative orthodoxy.

A follow-up question referred to Jacques Delors's recent criticisms of the EMU project, in which he lamented the lack of a strong fiscal dimension in its design.

Mr Quinn said this is a separate but related issue. The Stability and Growth Pact, along with the employment policy adopted in Dublin, provide a firm foundation for future EU policy, "but they are not the end of all our problems. They are necessary but not sufficient." He said the issues will be taken further in debates between left and right-wing parties and governments within the EU.

It is a reminder that the EMU project now being implemented was a compromise between two competing models negotiated into the Maastricht Treaty in .1991. They might usefully be described as neo-liberal and social democratic.

Clearly the political compromise tilted strongly in the direction of the German neo-liberal model, with its stress on the nominal convergence criteria of budgetary balance, public indebtedness, interest rates and inflation rates that governments are now implementing.

There was little provision for real economic convergence by fiscal mechanisms, so that the shorthand currency union, rather than economic and monetary union, seems a more appropriate definition of what is at stake. There is no willingness among the net contributor states to provide the funding required.

The implications of this fact are only now being fully recognised. They are at the basis of German fears that the weaker Mediterranean economies will not be able to sustain membership without substantial transfers. The big row this week over deferred Italian membership has not been mitigated by the emollient noises coming from yesterday's meeting between Dr Kohl and the Italian leader, Mr Prodi.

There is increasing evidence, nevertheless, that stronger political and economic mechanisms will be necessary to maintain the cohesion and solidarity of a single currency. They will include political oversight and may well require substantial harmonisation of taxation policy. It is this growth of political integration that lies at the basis of fears in Britain that a political Behemoth is implicit in the Franco-German project.

But will it lead to a United States of Europe? Another range of criticism of EMU floated at the influential Davos meeting came from across the Atlantic. A new orthodoxy among commentators there asserts that EMU cannot work precisely because there is not the political will and commitment to replicate the US federal system. Thus mobility of labour, fiscal federalism and political solidarity are conspicuously missing from the European compared to the US polity, so the argument goes.

A lot of such criticism is misconceived. It takes quite insufficient account of the distinctive features of European history and politics. Fundamental is the qualitatively greater diversity of European political, economic and cultural structures compared to those of the US.

This means, for example, that the labour-mobility criterion has a different resonance in Europe because of the greater geographical diversity of industrial location here. As a result there is much more mobility within than between states compared to the US.

The points about fiscal federalism and political solidarity are stronger; they do not entail replication of the US experience, however, but rather the creation of a new type of political association that must entrench national identity as well as common citizenship.

This is meant to be the objective of the Inter-Governmental Conference under way to prepare the EU for the next enlargement and the common currency regime.

Unfortunately, there is as yet precious little evidence that this constitutional exercise can sufficiently engage the attention of, much less empower, EU citizens as to create the commitment that will be required to give political legitimacy to the EMU project. This agenda needs to be intensified over the next five months and the next five years if it is to succeed.