Options for Europe – Part 7

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.

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]

[THIS IS REWRITTEN TEXT FROM PART 6]

On December 2, 1969, the Heads of State or Government of the Six member states convened in The Hague at the C13th Ridderzaal (Hall of Knights) for a summit. The gathering was not a response to the currency turmoil but was influenced by it. The main agenda driving the summit was the vexed issue of Community enlargement, in particular, Britain’s inclusion, which could not be accomplished while De Gaulle remained President of France. The Dutch and German members were keen for enlargement. There were three main perspectives surrounding their preference, which bear on our discussion of the development of the common currency. First, the inclusion of Britain would open markets for Dutch and German exports. Second, the relative instability of the British pound would require progress to increased monetary cooperation once Britain joined the Community. Third, that a Community which included Britain would give Europe increased power in world financial markets and redress the growing concern that the US was too dominant. But, this latter view was almost in denial of the requirement that the US had to be at the top of the Bretton Woods currency system and run continuous external deficits as a consequence. Remember, the Triffen Paradox! We will see that European sensitivity about the position of the US dollar in the international monetary position and a belief that the Euro should become a rival currency has also influenced the way the European Central Bank (ECB) has behaved since 2000 with detrimental consequences for the welfare of European citizens. We will consider that issue in subsequent chapters.

Politics and the CAP have always been at the core of the enlargement debate. The Dutch Prime Minister Piet de Jong summarised the tension in Europe during a Cabinet meeting on Friday, October 27, 1967. In relation to the inclusion of Britain, the minutes read (MR, 1967: 10-11):

Hij acht het niet verantwoord Nederland te leiden in de richting van een Europese satellietstaat onder Franse, en na de dood van president De Gaulle, onder Duitse hegemonie. De geschiedenis leert dat de democratische principes bij een hegemonie van Frankrijk of Duitsland niet in veilige handen zijn. De toetreding van Groot-Brittannië en de Scandinavische landen is met name voor het behoud van de democratie in Europa van het grootste gewicht.

Which translates to the Prime Minister saying that he did not think it “justified in leading the Netherlands towards a European satellite state under the French, and after the death of President De Gaulle, under German hegemony. History teaches us that democratic principles under either French or German hegemony are not in safe hands. The accession of the Great Britain and the Scandinavian countries, especially for the preservation of democracy in Europe, is of the greatest importance” (see also Harryvan and van der Harst, 2003, for more discussion of the Dutch attitude leading up to the 1969 summit).

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 The Hague 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.

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On June 6, 1969 when the new French President Georges Pompidou enunciated his plans at Mülhausen for “continuite et overture” during the French presidential campaign. In trying to distance himself from De Gaulle’s European hostility, Pompidou stated that he wanted the EEC political leaders to develop a Common Market with financial integration, more closely cooperate on economic matters and enlarge the membership to include Britain, Ireland, Denmark and Norway. What he really wanted to ensure was that the very favourable system of cross subsidy under the CAP would continue. It is moot that he wanted Britain and the other nations to complicate French designs for supremacy in Europe. The CAP was a source of tension for Germany, which predominantly funded “the Community’s surplus production” of agricultural output (Hiepel, 2003: 65; see also EU Commission, 1973 for a breakdown of the contributions and reimbursements under the European Agricultural Guidance and Guarantee Fund to see the advantages France gained under the policy).

Pompidou’s Statement to the Hague summit prioritised the issues of “price disturbances caused by parity changes jeopardizing the future of the common market in agriculture” and “the growing burden of farm surpluses” (Bulletin of the European Communities, 1970: 33). He later said that in terms of enlargement “(n)ow is the time … to discuss it without preconceived ideas but without giving anything away” (Bulletin of the European Communities, 1970: 34). By way of contrast, Brandt’s Statement noted that the central issue was the “enlargement of the Community”.

While there were complex, and at times, conflicting political agendas underpinning each nation’s motivations for participating at the summit, Pompidou’s willingness to abandon the long-standing French veto on the issue of enlargement, was matched by the new German Chancellor Willy Brandt’s signals that Germany would allow the concept of a joint monetary policy to be put on the agenda. Germany had long opposed the idea of monetary integration unless the other countries being constrained to follow the policy set by the the German Bundesbank, which prioritised a low and stable inflation rate. We should, however, not overstate the willingness of Pompidou to accept enlargement. A more realistic account is that he was “persuaded” by Brandt’s “skilful mixture of demands and concessions” (Hiepel, 2003: 63) to accept enlargement as a necessary evil to further his agricultural policy designs.

Marie-Thérèse Bitsche (2007: 165) called the Hague summit the “nouveau Messine” referring to the 1955 Messina Conference in Italy, which saw the members of the European Coal and Steel Community (ECSC) commit to creating the European Economic Community (EEC). After a series of studies and reports, which informed the Treaty of Rome in 1958, the EEC was formed in 1959. The concept of integration was centre stage at Messina and manifested in the agreement to create a customs union. Bitsche also considered the Hague summit was the “beginning of the revival of the integration process” (“le début d’une relance du processus d’intégration”). While the final outcome of the summit could support that, the story is more complex.

It is clear that the summit did not introduce the idea of European integration. That had been part of the European Project since recovery after World War II began. In 1968, key long-term decisions were taken about the funding of the CAP and the operations of the customs union (see Moravcsik, 1998; van der Harst, 2003). But the idea of an economic and monetary union (common currency) was seriously advanced for the first time at The Hague summit conference. While the 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 (Allers, 2013).

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. The tensions at The Hague summit between the bureaucrats in Commission and the agendas and machinations of the national interests is well documented (for example, Ludlow, 2003). The very fact that Germany and France had realigned their exchange rates without consulting Brussels was an illustration of who was running the agenda. The Commission clearly wanted to make itself the institutional hub of the integrated Europe (see Ludlow, 2003).

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.

It is not the task of this narrative to review the extensive debate concerning the success or otherwise of The Hague summit. There are diverse interpretations of what happened at the summit and the aftermath. The significant development that emerged from the meeting was that

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The followup meeting of the Council of Ministers of the Six Member States in Paris on March 6, 1970 placed the creation of an Economic and Monetary Union at the centre of their agenda. This meeting formalised the rather vague statements in the Final Communiqué of the summit about union 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)

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 COMING]

Additional references

This list will be progressively compiled.

Bitsch, M-T (2007) La construction européenne: enjeux politiques et choix institutionnels, Paul Lang, Bruxelles.

Bulletin of the European Communities (1970) “The Summit Conference” at the Hague, Statements made by the Heads of State or Government on 2 December 1969, Reproduced from the Bulletin of the European Communities, 12.

EU Commission (1973) First financial report relating to EAGGF – 1971. Information Memo P-14/73, April 1973, http://aei.pitt.edu/30163/1/P_14_73.pdf

Harryvan, A. and van der Harst, J. (2003) ‘Swan Song or Cock Crow? The Netherlands and the Hague Conference of December 1969’, Journal of European Integration History, 9(2), 27-40.

Hiepel, C. (2003) ‘In Search of the Greatest Common Denominator. Germany and the Hague Summit Conference 1969’, Journal of European Integration History, 9(2), 63-82.

Moravcsik, A. (1998) The Choice for Europe. Social Purpose and State Power from Messina to Maastricht, UCL Press, London.

van der Harst, J. (2003) ‘The 1969 Hague Summit: a New Start for Europe?’ Journal of European Integration History, 9(2), 5-10.