National interests and common currency

The title of this book may be misleading in the sense that the author presents how European economic and monetary union was shaped, and not reshaped as is stated, after its formal approval in the Treaty of Maastricht. The shaping of EMU was done during the 1990s and resulted from intergovernmental discussions among participants, with France and Germany leading the process.

The several interest groups within each country, and their respective preferences in terms of economic policy, are placed in the book as the determinants for the political positions assumed by governments during the negotiations.

Countries are either pro-stability, where low inflation should be the only target of a mainly restrictive monetary policy, or pro-growth, where low inflation is sacrificed for looser monetary policy to achieve the main objective of economic growth and wealth redistribution.

Although this duality is not totally correct, because the goal of stability is to create conditions for higher growth in the long run, domestic players are assumed to prefer one of these options and, through these preferences, to influence the basic foreign-policy priorities of each country.

Therefore, the interests of voters, businesses, workers, political parties and institutions are all considered and mixed up in the process of definition of each government's position.

Shawn Donnelly explains it well in the case of three countries: France and Germany, usually considered to be at the forefront of the European integration process, and Spain, a representative of the less-developed countries in the European Union at the time and a powerful negotiator in getting financial support from the richer countries to help soften the adjustment needed to comply with the EMU convergence criteria.

Donnelly does not consider the case of the UK or any other of the countries that opted to stay out of the euro. But this approach complements other works on the subject, where the analysis is focused almost exclusively on the case of Germany and ignores economic policy preferences within each country.

This is a superbly researched book, where the abundant details sometimes border on the excessive. This happens mainly in the country-specific chapters, where some tables summarising the information provided would have been very helpful.

But the flavour of the detail sometimes compensates for the excess. There are delicious stories on the negotiations, such as the domestic political calculations of President Jacques Chirac when attempting to impose a French president for the European Central Bank on the remaining countries and Wim Duisenberg, the already-nominated Dutchman. The book also provides the reader with an excellent explanation of the role played by the Bundesbank in the negotiations and how, using its huge influence, it was able to impose itself as the model for the ECB.

Unfortunately, the book spans only 1992-99. After that a lot happened, so there is a feeling of something missing. Changes to the stability pact are not included, and that is a pity because it seems that the reshaping of the EMU implied by the title is now about to occur.

The German attempt, through the stability pact, to limit the ability of countries to provoke higher inflation in the euro area by running large budget deficits and a high public debt seems to be dead. Paradoxically, one reason for this is Germany's difficulty in complying with a limit of 3 per cent of gross domestic product for its budget deficit.

After all, it seems that the Bundesbank no longer has popular support and a huge influence on economic policy in Germany and in the EU.

Ricardo Pinheiro-Alves is lecturer in economics, Universidade da Beira Interior, Portugal.