Options for Europe – Part 8

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 7]

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 the creation of a monetary union by appointing an expert group under the direction of the then Prime Minister of Luxembourg, Pierre Werner. The working party would flesh out the details of how an economic and monetary 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.

[BIT MORE HERE DOCUMENTING THE INITIAL NATIONAL REACTIONS TO THE WERNER REPORT – CONSIDERING THE BACKTRACKING BY POMPIDOU WHO WAS UNDER PRESSURE FROM HIS GAULLIST PARTY COLLEAGUES NOT TO AGREE TO ANY GROWTH IN THE SUPRANATIONAL INSTITUTIONAL CAPACITY. THE FRENCH WOULD NOT AGREE TO THE CONCRETE PHASE IN OUTLINED IN THE WERNER REPORT. THE GERMANS ALSO WOULD NOT SIGN UP TO AN UNSPECIFIED PLAN TO SHIFT POWERS FROM THE NATIONAL TO THE SUPRANATIONAL LEVEL – THEY WANTED A VERY SPECIFIC BINDING STRUCTURE – WHICH BECAME IMPORTANT IN THE MAASTRICHT DELIBERATIONS. I WILL DOCUMENT THIS STRUGGLE NEXT]

[THIS IS NEW MATERIAL]

The EEC Council and the representatives of the Governments of the Member States met on March 22, 1971 to consider the Werner Report and confirmed their political agreement to the ten-year phased plan to establish an economic and monetary union by January 1, 1981. The official resolution (European Community, 1971) articulated what the Community would look like at the end of the implementation period. It noted that there would be:

1. An irreversible single currency (“l’adoption d’une monnaie unique qui garantira l’irréversibilité de l’entreprise”).

2. No fluctuations in exchange parities between the member states which they said was indispensible for a monetary union (“l’élimination des marges de fluctuation des cours de change, la fixation irrévocable des rapports de parité, conditions indispensables à la création d’une monnaie unique”)

3. A Community-wide central banking system (“une organisation communautaire des banques centrales”).

4. Community-level decision-making with respect to economic policy decision with concomitant power vested at the Community level (“les décisions de politique économique requises sont prises au niveau communautaire et les pouvoirs nécessaires sont attribués aux institutions de la Communauté”).

A careful comparison of the recommendations in the Werner Report and the subsequent official Council resolution (European Community, 1971) reveal a major ommission in the latter. This was noted in the Vedel Report (1972).

There was an extremely powerful statement in the Werner Report (1970: 12-13) which echoes today:

The centre of decision for economic policy will exercise independently, in accordance with the Community interest, a decisive influence over the general economic policy of the Community. In view of the fact that the role of the Community budget as an economic instrument will be insufficient, the Community’s centre of decision must be in a position to influence the national budgets, especially as regards the level and the direction of the balances and the methods for financing the deficits or utilizing the surpluses.

On July 22, 1971, the European federalist Georges Vedel, a French constitutional academic lawyer, was appointed by the European Commission to chair an “ad hoc Working Party of independent experts to examine the whole corpus of problems connected with the enlargement of the powers of the European Parliament” (Vedel, 1972: 2). They tendered their report to the European Parliament on March 25, 1972.

As part of their enquiry they considered the political will of the Community to create a full economic and monetary union. The Report noted that the initiative for this proposal came from the “Governments themselves, which made the first move” (Vedel, 1972: 7) at the 1969 Hague summit. In other words, it could not be conceived as being a push by Brussels for more supranational power.

In relation to the discrepancy between the official resolution and the Werner Report, Vedel (1972: 8) noted:

The resolution does not, incidentally, refer to certain institutional proposals in the Report, one of which was that there should be set up a “centre of decision for economic policy” to “exercise independently, in accordance with the Community interest, a decisive influence over the general economic policy of the Community”. Concerning the European Parliament, the Werner Report added: “The centre of decision for economic policy will be politically responsible to a European Parliament. The latter will have to have a status corresponding to the extension of the Community’s tasks, not only from the point of view of the extent of its powers, but also having regard to the method of election of its members.”

The European Parliament’s own resolution (European Community, 1970) had expressed support for the outline presented in the Werner Report but emphasised that democratic control of the transfer of powers from member states to the federal level required strengthening the powers of the European Parliament (see also Vedel, 1972: 8).

[BIT MORE HERE DOCUMENTING THE GENERALITY OF THE MARCH 1971 COUNCIL RESOLUTION AND THE DEFERRAL OF MORE SPECIFIC DEADLINES TO LATER IN THE 1970s TO ASSAUGE THE FRENCH AND GERMAN CONCERNS ABOUT SUPRANATIONAL POWER IN GENERAL (THE FRENCH) AND UNSPECIFIED TRANSFER OF POWER (THE GERMANS)]

And then the Bretton Woods system collapsed and the OPEC oil crisis hit …. [MORE HERE LINKING THE DEVELOPMENTS TO WHAT HAPPENED NEXT – WHICH IS REALLY ABOUT UNDERSTANDING WHY THE EC FAILED TO ESTABLISH THE UNION AT THE END OF THE 1970s AND WHY THE NEXT MAJOR PLAN – SPECIFICIED IN THE DELORS REPORT WAS SO DIFFERENT AND ULTIMATELY DYSFUNCTIONAL]

One could argue that just like the way the European political leaders appear desperate to hang onto the Euro and have lost proportionality with respect to the costs incurred by the various ad hoc austerity and bailout interventions associated with that desire, the political leaders of the 1960s in Europe were desperate to hang on to the Bretton Woods system of fixed exchange rates and introduced a series of ad hoc initiatives to defer the inevitable collapse of the system.

There were various attempts by the US to economise on gold (for example, the US Federal Reserve Bank eliminated the need for private banks to hold a proportion of their reserves at the Federal Reserve in the form of gold). Various other strategies were introduced in the second-half of the 1960s.

In 1969, the US tightened monetary policy (that is, increased interest rates) to reign in the strong growth and rising inflation as a result of the massive public spending associated with the prosecution of the Vietnam War. The tighter policy reduced the US dollars available to the international monetary system and this placed strains on the international trade and finance. The International Monetary Fund (IMF) responded to this by introducing a new type of foreign exchange reserve asset, which they called the Special Drawing Rights (SDRs). It was intended to be a vehicle to broaden the available international reserve assets and save the Bretton Woods system from the Triffin paradox. The dilemma facing the Bretton Woods system was that if world trade and finance was to grow, the US had to run increasing external deficits (to supply the US dollars as the reserve currency). The increasing balance of payments deficits undermine the confidence in the US dollar value, which was at the heart of the international monetary system, and increased the demand for gold convertibility. The growing shortage of US gold stocks as a result of the 1960s balance of payments deficits had thus endangered the viability of the overall system. The tightening US monetary policy at the end of the decade only exacerbated this problem.

The creation of the SDRs was meant “to supplement dollars in official reserve holdings” (Boughton, 2001: 926) by giving nations an alternative asset to use in international transactions. They were initially issued at par to the US dollar (1 SDR = 1 USD) and allocated by the IMF to member nations in proportion to the member’s total contribution to the Fund. They were meant to allow nations “to settle a financial obligation or to acquire another good or asset” (Boughton, 2001: 925). They represented a “potential claim on the freely usable currencies of IMF members” (IMF, 2013: 1). SDRs could be voluntarily exchanged between IMF member nations for currency or the IMF could tell “members with strong external positions to purchase SDRs from members with weak external positions” (IMF, 2013: 1).

Upon their introduction, the SDRs were immediately referred to as ‘paper gold’ (Boughton, 2001: 924) because it was intended they would allow the US to economise on the gold transfers. Once the Bretton Woods system collapsed a few years after the SDRs were introduced, they SDRs were revalued in terms of a basket of currencies rather than just the US dollar. This prompted one IMF official in 1989 to say that the IMFs “‘basket currency’ had become a ‘basket case'” (Boughton, 2001: 924). Like many of the IMF innovations and interventions, the SDRs failed to achieve their purpose, not the least reason being, they were poorly conceived and were band aids to an international system in terminal decline as a result of its basic design failure. One could reflect on the current interventions into the Eurozone crisis in the same way. As we will argue in later chapters, the design of the Economic and Monetary Union (EMU) is flawed at the most elemental level yet the likes of the IMF think that tinkering around the edges will be sufficient. The extra millions of unemployed that have resulted from this tinkering is testimony that the system needs basic surgery rather than band aids.

The European nations, which were holding significant stocks of US dollars, also thought the SDRs would overcome their own fears and this led to a slowdown in the loss of US gold stock (which actually increased in 1970). With the rapidly declining US gold stocks, the European governments feared that the US government would either devalue the US dollar against gold or would abandon convertibility altogether. But they also knew that if they attempted to cash out their US dollar holdings into gold, the end of the system was guaranteed.

Soon after they were introduced, the US relaxed monetary policy (that is, cut interest rates) to revive a recessed economy, which turned the international tap of US dollars back on and the SDRs were effectively rendered redundant. The introduction of the SDRs could not reduce the centrality of the US dollar to the international monetary system. As the US was reducing interest rates, the German Bundesbank was increasing them in order to slow its economy, and capital flows out of the US, which were exploiting the interest rate gap exacerbated the US shortage of reserves. The Deutsche Mark also came under renewed pressure to revalue.

By early 1971 …

[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.

Boughton, J.M. (2001) Silent Revolution, The International Monetary Fund 1979-1989, International Monetary Fund, Washington.

IMF (2013) Factsheet: Special Drawing Rights, http://www.imf.org/external/np/exr/facts/pdf/sdr.pdf

European Community (1970) Journal officiel C151, 29 December 1970, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1970:151:FULL:FR:PDF

European Community (1971) Journal officiel C28/4, 27 March 1971, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1971:028:FULL:FR:PDF

Vedel, G. (1972) Report of the Working Party examining the problem of the enlargement of the powers of the European Parliament, Bulletin of the European Economic Community. April 1972, n° 4. Luxembourg: Office for Official Publications of the European Communities. http://www.cvce.eu/obj/vedel_report_25_march_1972-en-a4f5b134-99b9-41b3-9715-41769dfea12a.html