Options for Europe – Part 11

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 FOLLOWS ON THE DISCUSSION ABOUT THE BASIC DIFFERENCES OF OPINION BY THE FRENCH AND GERMAN ABOUT HOW THE ECONOMIC AND MONETARY UNION MIGHT BE INTRODUCED. IT COMES UNDER THE HEADING – “The Monetarist-Economist (Franco-German) struggle on the road to union”]

[THIS IS NEW MATERIAL TODAY]

The failed Snake in the Tunnel – an early warning ignored

The Werner proposals were clearly more in line with what the Germans desired and the French knew it. The rivalry within French politics between the republicans who eshewed handing over national sovereignty to European-level decision-making units and other leading officials (Barre, Marjolin, d’Estaing, and later Delors) who were sympathetic to the German position was played out within the French government. Pompidou faced major opposition within his Gaullist party to the Werner Report intent of establishing supranational institutions. He had to effectively renegotiate the French position before it went to the Commission for ratification (see account in Tsoukalis, 1998: 108-10). The French, particularly the Finance Minister Giscard d’Estaing wanted the process to produce more exchange rate cooperation to reduce fluctuations against the US dollar, rather than closely coordinated economic policy. The Germans desired to break out of the currency instability by floating the Deutsche Mark. At the time it was facing massive capital inflows, largely from the US as a result of the currency uncertainty, and this was straining its capacity to both maintain economic growth and defend the fixed parity.

Against that background, the French and German leaders (Pompidou and Brandt) met in January 1971 to work out a compromise agreement that could go to the European Council the following month. Gone was any concrete plans to transfer power to any supranational institutions. The French gained some traction by getting Brandt to agree to the creation of the European-level reserve fund to reduce exchange rate fluctuations.

On March 22, 1971, the Member States passed a political resolution to accept the proposals that the European Commission had distilled from the Werner Report (Journal officiel de Communautés européennes, 1970), which would establish an economic and monetary union (Journal officiel de Communautés européennes, 1971).

The Resolution recognised that the union could be achieved over the decade “provided it has the permanent political support from the governments” (“à condition de bénéficier d’un appui politique permanent des gouvernements”) and would mean that the “major economic policy decisions will be taken at the Community level and therefore the necessary powers will be transferred from the national to the Community level” (“les principales décisions de politique économique seront prises au niveau communautaire et donc que les pouvoirs nécessaires seront transférés du plan national au plan de la Communauté”). They were somewhat conditional, however, saying that the final outcome “may be the adoption of a single currency” which would ensure the exercise would be irreversible (“Son aboutissement pourra être l’adoption d’une monnaie unique qui garantira l’irréversibilité de l’entreprise”) (Journal officiel de Communautés européennes, 1971: 1). The Resolution noted that an economic and monetary union would require among other things that fiscal policy would be determined at the Community level (Journal officiel de Communautés européennes, 1971: 2).

While the Werner Report had been somewhat diffident about the establishment of a European-level fund to be used to militate against currency instability between the Member nations, the Resolution invited the Monetary Committee of the Community and the Commitee of Central Bank Governors to work towards establishing a European Monetary Cooperation Fund (EMCF), “possibly” in the first three years of the plan (“d’établir éventuellement ce Fonds durant la première étape”) (Journal officiel de Communautés européennes, 1971: 4). As it turned out, the Fund would be the only real development that came out of the compromised Werner process.

The rather weak outcome from the Werner process was in France’s favour and satisfied their growing dislike for the idea of a common currency. What emerged from this compromise was an agreement to allow the currency fluctuations to snake within a defined band (the ‘tunnel’). With growing fears about the stability of the US dollar value and the sustainability of its convertibility into gold, the European leaders were keen to take some initiative to provide more certainty to European trade.

On March 6, 1971, the Committee of Governors of the Central Banks of the Member States met as these currency pressures continued to mount in the face of huge capital inflows into Europe and out of the US, which forced the central banks, particularly the Bundesbank to sell large volumes of their currency to defend the fixed parity. The meeting sought to devise a way to reduce the fluctuations in the European currencies and to establish a “Community-wide level of the US dollar” (“‘niveau communautaire’ du dollar”) *Committee of Governors, 1971: 8).

BIT MORE HERE

THEN THE EUROPEAN CURRENCY CRISIS IN MAY 1971 JUST PRIOR TO THE US SUSPENSION OF THE GOLD WINDOW IN AUGUST 1971

THIS IS LEADING TO THE CREATION OF THE EMCF, THE FAILURE OF THE SNAKE, AND STAND-OFFS GALORE!

[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.

Bank of International Settlements (1971) Forty-First Annual Report, Basel.

Committee of Governors (1971) Minutes of the 47th Meeting, 06/03/71 (Proces-Verbal),
http://www.ecb.europa.eu/ecb/history/archive/pdf/agendas/CoG_47th_meeting_06_03_1971_FR.pdf?e25f55637ede52b010ae60dfba207d7e

Journal officiel des Communautés européennes (1970) ‘Communication et propositions de la commission au Conseil relatives à l’institution par étapes de l’union économique et monétaire’, C140, November 26, 1970. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1970:140:FULL:FR:PDF

Journal officiel des Communautés européennes (1971) ‘Résolution du Conseil et des représentants des gouvernements des États membres, du 22 mars 1971, concernant la réalisation par étapes de l’union économique et monétaire dans la Communauté’, C28, March 27, 1971. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:1971:028:FULL:FR:PDF