Options for Europe – Part 4

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014. The book will be about 180 pages long. Given the time constraints I plan to devote most of my blog time over the next 3 months to the production of the book. I will of-course break that pattern when there is a major data release and/or some influential person says something stupid or something sensible. I hope the daily additions will be of interest to you all. A lot has to be done! Because the drafting has to be tighter than the normal stream of consciousness that forms my usual blogs, the daily quotient is likely to be shorter.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

[PRIOR MATERIAL HERE FOR CHAPTER 1]

CONTINUING … [STARTING WITH A REWRITE OF PART OF PART 2’s TEXT] …

It was logical that the EU would also seek to harmonise certain economic parameters as a way of working together for the betterment of all. The result was that during the early Post-World War II period, the sense of deep antagonism towards the Germans was actively discouraged and Germany grew out of the wreckage that they had wrought on themselves and the rest of Europe to become a strong economy. A major impetus to the growth in Europe was the Marshall Plan, which provided a substantial fiscal injection into the European economies from the US. While the overall contribution of the Marshall Plan has been debated for decades, there is a broadly-held view that it helped provide a kick-start to the European economy that was floundering with with ravaged infrastructure, low rates of investment, major food and other shortages, and a general air of pessimism. The Marshall Plan was also an early part of the plan for European integration in that it removed trade barriers within Europe and established European-level institutional structures to facilitate the socio-economic recovery from the War.

It is interesting to note that if the current fiscal austerity mentality and obsession with fiscal rules had have prevailed in the immediate Post World War II period, the Marshall Plan would have been impossible and Europe would have wallowed in the stagnant growth, high unemployment and food shortages that marked the late 1940s.

The first major achievement of the newly formed European Economic Community was the Common Agricultural Policy (CAP), which was introduced in 1962 and a major step towards the goal of integration. The policy introduced a common price by removing tariffs on agricultural products, although this took some time to achieve given the parochial resistance of rural communities in the participating nations. At the heart of the policy design were the competing interests of France, who wanted to protect their farmers, and Germany, who wanted to expand its industrial export market. The CAP, more or less, provided for a German subsidy to French farmers which was the compromise required to allow each nation to achieve its domestic political needs.

While the CAP carried these political tensions it also relied on the fixed exchange rates provided through the Bretton Woods system for administrative ease given the multitude of agricultural prices that had to be supported across the Community. The uncertainty of the Bretton Woods system in the 1960s accelerated the idea that a common currency within the Community would be desirable.

In February 1969, the so-called Barre Report which reaffirmed the European preference for fixed exchange rates and a move to a common monetary policy. The Report stated (Barre, 1969: 3):

In the 1962 Memorandum, the Commission of the European Economic Community affirmed that the co-ordination of the Member States’ policies “would be incomplete, and therefore possibly ineffective, if no comparable action were taken in the field of monetary policy”. It recommended, among other things, the creation of a number of procedures for prior information and consultation, the establishment of a common position with regard to external monetary relations, and the negotiation of an agreement laying down “the extent of the obligations … with regard to mutual aid under the Treaty”.

However, the idea of an economic and monetary union (common currency) was seriously advanced for the first time at the December 2, 1969 European summit conference attended by the Heads of State or Government of the Six member states. If the intent of the December 1969 European summit conference in Den Haag had been carried through, there would have been a common European currency in the 1970s, and probably, the chaos that is now leaving millions of Europeans without work or hope would have come two decades earlier.

The Final Communiqué of the summit (EC, 1969) spoke of the Community arriving at “a turning point in history” and the “irreversible nature of the work” towards a “united Europe”. It talked about the “completion of the Communities” which as a “final stage” would “lay down a definitive financial arrangement for the common agricultural policy by the end of 1969. As an integral part of this financial arrangement, the Communiqué said that”

.. a plan in stages should be worked out during 1970 with a view to the creation of an economic and monetary union. The development of monetary co-operation should depend on the harmonisation of economic policies.

They agreed to arrange for the investigation of the possibility of setting up a European reserve fund in which a joint economic and monetary policy would have to result.

Interestingly, the summit came at the end of a decade when the European Project had floundered. The tensions were clear and were exemplified by the French proposal for the Fouchet Plan, which would have replaced the emerging supranational European institutions with a system of intergovernmental bodies to run Europe and be dominated by France. The proposed ‘Union of States’ was also motivated by President de Gaulle’s increasing hostility towards US involvement in European affairs under the Atlantic alliance (NATO). The tensions increased as France twice rejected Britain’s applications to join the Community (because they feared Britain would undermine the CAP). The situation worsened in 1965 with the stand-off concerning funding for the CAP among other matters, which became known as the Empty Chair Crisis, where France effectively boycotted the Commission. This Crisis, in turn, led to the Luxembourg Compromise, which entrenched the torturous political processes that still beset speedy progress being made within the EC decision-making machinery. France clearly was positioning itself within the Community to become the most powerful nation and keep Germany and the US in check.

There is the famous private conversation between De Gaulle and the French government minister Alain Peyrefitte on August 22, 1962 about the proposed Fouchet Plan which Georges Soutou (1996: 131) reports De Gaulle saying:

What is the point of a Europe? he confided Alain Peyrefitte on August 22nd 1962. It should serve to prevent us from being dominated by America or Russia … France could be the strongest of the six members. We could control this lever of Archimedes. We could carry away the others. Europe represents the first opportunity France has to regain what she lost at Waterloo: world dominance.

[Note: I still have to check the translation in the original memoir of Alain Peyrefitte, C’était de Gaulle. My notes from when I translated it before were a little different and I am relying in the above quote from on a secondary translation of Soutou’s work rather than my own translation of Peyrefitte’s original recounting of the conversation.]

The 1969 summit in Den Haag was held at the end of this less than optimistic decade for European integration at the initiation of the Georges Pompidou, who replaced De Gaulle as French President in April 1969. While the Final Final Communiqué is silent, the supporting documents for this summit reveal that the push for the creation of an economic and monetary union, surprising to many, came from the newly-elected German Chancellor Willy Brandt, who in Pompidou had found a much more pragmatic French leader to deal with. The summit also agreed to admit Britain, which signalled a clear ambition for enlargement. But, important to our aim to understand why Europe is where it is now, was the fact that the operationalisation of enlargement would see the Community at the centre of the negotiations with intergovernmental arrangements largely eschewed. Brussels wanted to make it the institutional hub of the integrated Europe (see Ludlow, 2003)

The creation of an Economic and Monetary Union was the main topic for a meeting of the Council of Ministers of the Six Member States in Paris on March 6, 1970. This meeting formalised the Den Haag sentiments by appointing an expert group under the direction of the then Prime Minister of Luxembourg, Pierre Werner to head a working party, which would flesh out the details of how this union would be achieved.

The so-called Werner Plan was submitted to the Commission as an interim report on May 20, 1970 with the Final Report (Werner, 1970) presented on October 13, 1970. The Werner Report outlined a comprehensive timetable for the creation of a full economic and monetary union by the end of the decade. Willy Brandt told the Bundestag on November 6, 1970 that the Werner proposal to develop a European Economic and Monetary Union was the “great common task of the 1970s” (“Die große gemeinsame Aufgabe der 70er Jahre ist die Fortentwicklung der Gemeinschaft zur Wirtschafts- und Währungsunion) and that it represented a “new Magna Carta for the Community” (“Der von den Sechs zusammen mit der Kommission ausgearbeitete Stufenplan stellt in Wirklichkeit eine neue Magna Charta für die Gemineinschaft dar”) (Deutscher Bundestag, 1970: 4269)

[THERE ENDS THE REWRITTEN SECTION – NEW TEXT FOR TODAY STARTS HERE]

The three-stage implementation plan outlined in the Werner Report was formally endorsed by the European Council of Ministers on March 22, 1971.

The main features of the Werner Plan are worth dwelling on. Under the Heading “The Final Objective”, the Report (1970: 9) aims “to determine the elements that are indispensable to the existence of a complete economic and monetary union”. Their outline is the “minimum that must be done”. So what are these indispensable and minimum elements?

They include (Werner, 1970: 10)

… the total and irreversible convertibility of currencies, the elimination of margins of fluctuation in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital. It may be accompanied by the maintenance of national monetary symbols or the establishment of a sole Community currency.

Significantly, it said (Werner, 1970: 10) that “the global balance of payments of the Community vis-à-vis the outside world is of any importance. Equilibrium within the Cömmunity would be realized at this stage in the same way as within a nation’s frontiers, thanks to the mobility of the factors of production and financial transfers by the public and private sectors.” The conceptualisation of the newly created economic and monetary union as a new ‘nation’ where the member-countries effectively become states of a federation was clearly thought elemental. As we know, that is not the conceptualisation that emerged around two decades later after the Treaty of Maastricht.

The Werner Report considered short-term economic policy would have to be “decided in its broad outlines at a Community level” and that it was essential that the “principal decisions of monetary policy should be centralized” (1970: 10). However, and that the for “influencing the general development of the economy budget policy assumes great importance” (1970: 10). The Report was in keeping with the times where fiscal policy (referred to as budget policy in the Werner Report), involving government decisions regarding spending and taxation were to be given a higher priority than monetary policy operations involving interest rate setting. Any divergences of structure within the Community would be addressed by appropriate levels of “financial … compensation” coordinated at the central level. National budgets would not be responsible for addressing asymmetric development (Werner Report, 1970: 11).

Importantly, the Report concluded that an effective economic and monetary union would require, among other elements (1970: 12):

– the creation of liquidity throughout the area and monetary and credit policy will be centralized;
…
– monetary policy in relation to the outside world will be within the jurisdiction of the Community;

– the policies of the Member States” as regards the capital market will be unified;

– the essential features of the whole of the public budgets, and in particular ‘variations in their volume, the size of balances and the methods of financing or utilîzing them, will be decided at the Community level;

Of further importance, the Werner Report (1970: 13) emphasised that while the “transfer to the Community level of the powers exercised hitherto by national authorities will go hand-in-hand with the transfer of a corresponding Parliamentary responsibility from the national plane to that of the Community. The centre of decision of economic policy will be politically responsible to a European Parliament”, which would be elected on the basis of universal suffrage. The recognition that economic policy should be democratically determined and those responsible for the policy should be held accountable to the will of the people was fundamental to the way the Europeans were conceptualising economic and monetary union in 1970. There was no hint that this level of intervention would be the domain of officials centred in Brussels who would do deals with unaccountable bodies such as the International Monetary Fund (IMF) that would result in millions of Europeans being made unemployed, which is the norm in Europe in 2014.

To take our discussion further, we can conclude that that the intent of the Werner Report was that:

1. There should be a Community-wide central bank which acts as the lender of last resort and is responsible for regulation and oversight.

2. That monetary policy will be centralised.

3. That there should be centralised capital market access.

4. That the ‘federal’ fiscal operations – size of deficits, debt-issuance etc will dominate national and regional budgets, which will be retained to ensure localised initiatives are effective.

In other words, the type of structure that exists in a number of functioning federations such as Australia, Canada, the United States of America.

[TO BE CONTINUED]

THIS DISCUSSION IS LEADING US TO THE WAY IN WHICH EUROPE REACTED TO THE COLLAPSE OF THE BRETTON WOODS SYSTEM AND PARTICULARLY THE WAY IN WHICH GERMANY AND FRANCE REACTED IN THE EARLY 1970s WHERE GERMANY WANTED A JOINT FLOAT BUT FRANCE (AND THE EC) WANTED TO MAINTAIN FIXED PARITIES WITH CAPITAL CONTROLS.

[MORE HERE ON THE 1970s DEBATES, DELORS REPORT etc NEXT TIME]

Additional references

This list will be progressively compiled.

Ludlow, N.P. (2003) ‘An opportunity or a threat? : the European Commission and the Hague Council of December 1969’, Journal of European integration history, 9(2), 11-26.