Options for Europe – Part 9

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]

[THE NEXT SECTION WILL SIT BETWEEN THE DISCUSSION OF THE EEC COUNCIL DECISION IN 1971 TO ENDORSE THE WERNER REPORT WHICH I COVERED YESTERDAY AND THE EARLIER DISCUSSION OF THE WERNER REPORT FINDINGS – WHICH I WILL REVISE A LITTLE GIVEN TODAY’S SECTION. I HOPE YOUR MEMORIES ARE GOOD SO YOU CAN MAINTAIN CONTINUITY. IT IS GETTING TRICKY – I AM ALSO GOING TO START USING SUB-HEADINGS FOR EASE OF EXPOSITION AND READING]

[THIS IS NEW MATERIAL TODAY]

The Monetarist-Economist (Franco-German) struggle on the road to union

The differing reactions from France and Germany to the Werner Report was conditioned by the stark differences between the national approaches to economic policy making, which, reflected the historical and cultural development of each nation and its role in Europe in early parts of the C20. Their respective responses to the Werner Report echoed the way each nation approached the Treaty of Rome deliberations in the late 1940s, which eventually saw the creation of the European Coal and Steel Community, the precursor to modern Europe. The “two contrasting ways of thinking” (Dandescu, 2013a: 2) remain today and the shortcomings of the EMU reflect the compromises that were required to accommodate the two rather opposing perspectives.

The clash of views has become popularly known as the “economists v. monetarists”, where the latter were led by France and joined by nations with typically weak currencies and external deficits, and the former were led by Germany (joined by nations with similar trading strength and currency strength) (Dandescu, 2013a; Howarth and Loedel, 2003). The dichotomised typology along national lines is a simplification because within, say France and Italy, there were political forces representing both ways of thinking, each with demonstrated influence on the overall shape of the monetary union that Europe is enduring today. But the dichotomy works as a simple framework to understand basic dynamics that have dominated the move to economic and monetary union in Europe. Maes (2002: 2) notes that the differences among policy-makers in Germany and France” reflected “fundamental characteristics of their history and society”.

The French attitude to the Werner Report recommendations and integration, in general, was conditioned by ‘la tradition républicaine’, which emerged after the French Revolution had disposed of the monarchy and created a strong secular state, which assumed a central role in economic affairs. From the formation of the state elite institutions (the ‘Grandes Ecoles’) which, in part, provided the private sector with cadres trained in the tradition that economic policy would be driven by politics rather than the market, to the formal planned control that the state Planning Office took in industrial policy (starting with “Le Plan” under Jean Monnet 1947-1953), ‘la tradition républicaine’ was a state-centred approach to economic management from education and training through to final production and sale.

The French embrace of the creation of European-level institutions was more about ensuring Germany would never again go to war with them than any grand desire for a supranational entity. In 1950, the French Government Planning Office, under the directorshop of Jean Monnet published the final draft of the propose to establish the European coal and steel community (French Planning Office, 1950). The draft outlined the motivation for the proposal saying that the “emerging nations of Europe require that conflict between France and Germany is eliminated” (“Le rassemblement des nations européennes exige que l’opposition séculaire de la France et de l’Allemagne soit éliminée”). The draft said that “the French government proposes immediate action on one limited but decisive point” (“le Gouvernement Français propose de porter immédiatement l’action sur un point limité mais décisif”). The reference to a limited step is significant. The proposal indicated that the “solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible” (“La solidarité de production qui sera ainsi nouée manifestera que toute guerre entre la France et l’Allemagne devient non seulement impensable, mais matériellement impossible”).

Maes (2002: 4), however, indicates that while Keynesians dominated the French Planning Office, and prioritised domestic objectives (such as full employment and a high wage economy), which meant they would allow the exchange rate to adjust (through devaluation) if international competitiveness became an issue, the “powerful Finance Ministry” was more pragmatic and supported policies that delivered “a strong French franc, wage moderation and sound public finances”. The tension between these two approaches has played out in the Post World War II period in several ways. In periods when ‘la tradition républicaine’ dominated French politics, there was hostiliy towards the relinquishment of power to the supranational level and willingness to establish intergovernmental institutions to advance a sense of Europe. The more pragmatic approach was pro-Europe and sympathetic to the creation of supranational institutions. Jacques Delors comes out of that tradition (Maes, 2002: 4). The fact that France participated in the ‘currency snake’ in 1972, then joined the European Monetary System (EMS) in 1979, and ended up supporting the Delors Plan to create the current form of the monetary union is evidence that the pragmatists ultimately held sway in France. But these decisions were not without compromises aimed at assuaging the tension between the two approaches to economic policy.

The French response to the Werner Report echoed this tension. The French (the ‘monetarists’) wanted a single currency and a European central bank established as the first step towards an economic and monetary union, and then a transition period established to achieve convergence in fiscal and industrial policy (Tsoukalis 1977; Howarth and Loedel, 2003). They were opposed to the loss of sovereignty that would follow if the recommendations of the Werner Committee were implemented in full.

The French media at the time were alarmed at the implications of the Werner Report. On October 18, 1970, ten days after the Werner Report was presented in Luxembourg, the conservative French daily, Le Figaro carried headlines such as “Les yeux ouverts” (“Eyes wide open”) and warned its readership that this “is a fundamental change of direction, which no one can decide apart from the President of the Republic … We insist on no decision being taken on this issue without a clear debate involving public opinion … Only with its eyes wide open may France decide what sacrifices it is prepared to take and what losses it must refuse” (summarised in Danescu, 2013b: 2). Somewhat at variance with that view, the centre-left daily, Le Monde claimed that the financial markets were already global and compromising national sovereignty. It said the real problem would be the risks of inflation arising from the creation of a European reserve currency along the same lines that the US dollar had encountered as the sole reserve currency under Bretton Woods (Danescu, 2013b).

Germany represented the so-called ‘economists’. It had a federal tradition and was recoiling from centralisation (after their Nazi period). The most influential group in the Post World War II period in relation to economic policy making emerged out of the so-called Freiburg School (Hagemann, 2000). This group developed two strands of thought, which define modern German approaches to economic and monetary matters. On the one hand, they defined the German free-market tradition of Ordoliberalism, which in modern parlance is very much like conventional neo-liberalism and indeed most people simply refer to Ordoliberalism as ‘German neo-liberalism’. But, unlike the free market thinking that is commonly known as the Austrian-school, the Freiburg School supplemented Ordoliberalism with the concept of the Social Market Economy.

Ordoliberalism stresses the need for tight monetary policy to ensure price stability and tight fiscal positions. Government industry policy should be directed at enhancing competitiveness by freeing the market from any fetters. The ordoliberal tradition began in the C19th and fused with the events of the 1920s and 1930s in Germany to become a form of ‘German monetarism’. The Freiburg School further developed the concept during the Second World War years. The Germans were scarred by the hyperinflation of the 1920s and the nationalist socialist era that followed it. Even during the Post World War II period when other nations were pursuing “Keynesian full employment” economic policies, Germany ran tight budgets and maintained growth by keeping the value of their currency low to boost exports. The Bundesbank was at the

In the Post World War II period, the Ordoliberal views, where the state only provides a broad institutional environment that maximises the freedom and self-regulation of the private sector were refined. The Ordoliberals eschewed Keynesianism because they feared it would be inflationary and they wanted to avoid any hints of government intervention (the hangover from the disastrous Nazi period). They also aimed to build a strong private sector driven by investment in traded-goods industries. In general, free markets were held out as the optimal way to allocate resources.

The emphasis on market capitalism was, however, supplemented by the so-called ‘Soziale Marktwirtschaft’ or Social Market economy, which separates the German approach from laissez-faire (free market) capitalism. Indeed, the combination of the Social Market economy and Ordoliberalism reflects a repugance towards both unregulated laissez-faire and Marxian socialism. Under the Social Market, economic activity should be organised on the basis of free choice and competitiveness, and state intervention is approved as long as it maintains fair competition, ensures the private sector maintains decent working conditions and wages, and provides a social welfare net for those who cannot provide adequately for themselves. The ‘social welfare’ leanings were heavily influenced by the solidaristic Catholic notion of ‘All Souls’, which sets it apart from the broader social-democratic visions of the welfare state. That is, they were saturated with conservative morality rather than social freedom.

In this type of economy, the state is a rule setter and monitors compliance (Maes, 2002). The Germans did experiment with a more traditional Keynesian approach in the 1960s (for example, the Stability and Growth Law in 1967) but it was always tightly controlled by the all-powerful and independent central bank. The emphasis on price stability dominated German macroeconomic policy. While the Bundesbank always dictated the deficit limits, it was not until the OPEC oil price hikes in the early 1970s and the resulting stagflation, that the macroeconomic debate in Germany shifted back towards the Ordoliberal tradition.

In relation to the Werner Report, the ‘economists’ (Germany and the Netherlands) wanted the process to begin with the convergence in economic policies, including strict fiscal rules about deficits and public debt and then move onto setting up supranational institutions like a European central bank and a common currency. The currency would be the “finishing touch” (Danescu, 2013a: 2). The Germans trusted decentralised decision making as a result of the success of the independent Bundesbank, which had become, along with the stable Deutsche Market, an icon in the post World War II German resurgence (Howarth and Loedel, 2003). As long as their were strict rules and compliance procedures in place, the Germans were not opposed to “European integration and the transfer of sovereignty to supranational European institutions” (Maes, 2002: 8).

[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.

Danescu, E.R. (2013a) ‘Economists v. monetarists – agreement and clashes in the drafting of the Werner Report’, Centre Virtuel de la Connaissance sur l’Europe (CVCE). http://www.cvce.eu/obj/economists_v_monetarists_agreements_and_clashes_in_the_drafting_of_the_werner_report-en- 875a85f1-e099-4013-acbf-68b2c50a6879.html

Danescu, E.R. (2013b) ‘The Werner report in the international media of the time’, Centre Virtuel de la Connaissance sur l’Europe (CVCE). http://www.cvce.eu/obj/the_werner_report_in_the_international_media_of_the_time-en-e64b89bd-fb55-4c8b- bad8-8b67ca0eff2f.html

French Planning Office (1950) Neuvième projet pour le Plan Schuman (projet définitif) (6.5.1950), http://www.let.leidenuniv.nl/pdf/geschiedenis/eu-history/EU_05.doc

Hagemann, H. (2000) ‘The Post-1945 Development of Economics in Germany’, in Coats, A.W. (ed.), The Development of Economics in Western Europe since 1945, Routledge, London, 119-128.

Howarth, D. and Loedel, P. (2003) The European Central Bank: The New European Leviathan?, Palgrave Macmillan, Houndmills.

Maes, I. (2002) ‘On the Origins of the Franco-German EMU Controversies’, Working Paper No. 34, National Bank of Belgium, Working Paper-Research Series.

Noyer, C. (1992) ‘À propos du statut et de l’indépendance des Banques centrales’, Revue d’Économie Financière, 22(3), 13-18. http://www.persee.fr/web/revues/home/prescript/article/ecofi_0987-3368_1992_num_22_3_1861

Rosanvallan, P. (1992) ‘l’Etat au Tournant’, in Lenoir. R. and Lesourne, L. (eds.), Où va l’Etat?, Paris, Le Monde Editions, 62-73.