Foreign Policy Briefing No. 28

European Monetary Reform: The Pitfalls of Central Planning

Executive Summary

The Maastricht Treaty of 1991 is a classic example of the fatal conceit of central planners who think that they can impose their will on peoples and markets regardless of economic rationality or even common sense. The treaty sets out a blueprint for significantly increasing the powers of the EC “government” in Brussels, establishing a European central bank (ECB), and replacing national currencies with a new common currency. The ratification process and the treaty itself are open to a number of serious objections.

The treaty was motivated by political factors.

The way the treaty was ratified in countries such as Britain and Denmark destroyed whatever legitimacy it might have had.

The treaty undermines the ECB’s “commitment” to price stability by failing to safeguard the ECB’s independence.

The treaty is vague and self-contradictory.

The European governments could not deceive the financial markets, which delivered a devastating verdict against the treaty by destroying the platform—the Exchange Rate Mechanism—on which European monetary union was to be built.

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Kevin Dowd is a professor of financial economics at the School of Financial Studies and Law at the Sheffield Hallam University in England and author of Laissez-Faire Banking.