European Union and Cohesion

The 1993 Union Treaty sets forth a process of deepening and widening of the European single market by creating institutions in which decisions are taken as dose as possible to the citizen" and by establishing the ECU as single currency before the end of the century. If it succeeds in inducing diverse nation-states into changing their economic regimes in the direction of price stability, the process may spread throughout the emerging European economy. Deepening implies cohesion, but, since the current divergence of national incomes per capita among union states matches the one observed among Swiss cantons, further convergence is likely to be gradual. As income redistribution among union states requires higher taxes, it impinges on national political processes and implies that appropriate medium-term convergence programs must be implemented, especially in the so-called cohesion states. Political stability and a social consensus about the regime change will in turn facilitate the fulfillment of the criteria for fiscal discipline set out in the Treaty. The regime change should have taken place during the first phase of economic and monetary union, which began on July 1, 1990, so that convergence may endure during the second phase, beginning January 1, 1994. But the medium term orientation of national budgetary consolidation is not credible until headline inflation is in single digits and the ability to stabilize a convertible currency has been tested in world financial markets. Membership in the European Monetary System does not suffice: discipline must be domestically generated, especially under the current wide fluctuation margins. In spite of several currency realignments in 1992 and in 1993, the reputation for financial stability acquired during the run-up to the single market was maintained in cohesion states. The regime changes in Ireland (1986), Spain (1989) and Portugal (1992) will become benchmarks even beyond the continent if the credibility of national policies is sustained until the third and final phase of economic and monetary union and incomes per capita continue to converge.N/