Options for Europe – Part 16

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 BASEL ACCORD DIDN’T LAST LONG AND WHEN THE SMITHSONIAN AGREEMENT COLLAPSED THE SNAKE BECAME DISTINCTLY GERMANIC – THE NARRATIVE CONTINUES]

[NEW MATERIAL TODAY FOLLOWS]

The ‘snake’ though wobbly leaves the ‘tunnel’ as Bretton Woods is assigned to history

[CONTINUING THIS SECTION …]

The confidence in the US dollar didn’t last for long and by February 1974 a major reversal was underway. The BIS (1974: 30) assess that there was an initial overreaction by the foreign exchange markets as the OPEC price hikes and the embargo came into force. It was also clear that while the US was less dependent on oil imports than the European nations, the crude oil price rise impact on the US balance of payments would be very substantial. As a result, the US dollar lost ground in the currency markets. The European story was the opposite. Less energy was required in the mild winter of 1973-74 and the German trade locomotive continued to build even bigger trade surpluses (BIS, 1974).

The world was back to the sort of setup that drove the crisis less than a year earlier in mid-1973. A series of repeating balance of payments crises and disparate economic policy stances saw the ‘snake’ shrink to effectively become a German mark-zone. After abandoning the ‘snake’ in January 1974, the French Franc re-entered the arrangement on July 10, 1975 at the original parity agreed in the Basel Accord. The Swiss government negotiated an entry in September 1975 but by November, it decided not to become part of the ‘snake’ given on-going instability. Then on March 15, 1976, the French Franc exited the ‘snake’ never to return, and in October 1976, the Deutsche Mark was once again revalued by 2 per cent as it became difficult for the Bundesbank to keep the currency within the agreed limits.

Less than six months later (April 1977), most of the remaining members of the ‘snake’ devalued against the Deutsche Mark, further revealing the incommensurate nature of the arrangement. After Sweden pulled out on August 28, 1977, the Norwegian and Danish currencies devalued again. Early in 1978, Norway was forced to devalue by a further 8 per cent (February 13, 1978). A further realignment occurred in October 1978 as the Deutsche Mark was revalued against all the other ‘snake’ currencies. Ultimately, Norway could not stay in the arrangement such was the pressure on its currency and it exited on December 12, 1978.

The fact is that “the ‘snake’ was quickly reduced to a German mark-zone and policy coordination remained limited” (Maes, 2002: 15). The failure to create the first steps at economic and monetary union reflected the vastly different approaches to economic policy by the French and the Germans. The latter prioritised inflation control and elevated monetary policy to the centre stage, whereas the French were willing to engage in traditional Keynesian counter-stabilisation policy using both monetary and fiscal policy. As significant, was the hostility among the French to transferring fiscal policy sovereignty to the supranational European level. One might suggest that the current problems that plague the Eurozone have similar origins and might be considered intrinsic.

The European Monetary Cooperation Fund (EMCF) – April 1973 – Werner’s only legacy

While we have seen that 1973 was largely a year of chaos on international currency markets, there was one development that could be traced to the Werner proposals. On April 3, 1973 the European Monetary Cooperation Fund (EMCF) was established. The Council decision (European Community, 1973a) stated that “the progressive establishment of economic and monetary union in the Community provided for the establishment of a European Monetary Cooperation Fund to be integrated at a later stage into a Community organization of central banks”. The Fund was meant to progressively narrow “the margins of fluctuation of the Community currencies against each other” and encourage cooperation between central banks to ensure each had sufficient reserves to defend their own currencies within the scope of the fixed exchange rate bands (defined by the ‘snake’).

The press release from the European Community (1973b) stated that “a first step toward the European Community’s goal of economic and monetary union by 1980, became a reality today”. It noted that the Fund would “supervise the day’to-day operation of maintaining the nine member countriesr exchange rates, run the more than $1 billion credit for monetary support, arrange settlements of these credit operations, settling transactions in the EC’s ‘units of account'”. The Council decision defined, for the first time, a “European monetary unit of account of a value of 0.788867088 grammes of fine gold”, which was designed to replace the US gold convertibility that President Nixon abandoned in August 1971. Each participating currency would be defined in terms its parity against gold and the unit would be used to settle transactions within the group.

The deliberations leading to the establishment of the Fund were, as usual, vexed with both France and Germany adopting passive negative standpoints, albeit for quite different reasons. Danescu (2014c: 3) notes that French were reluctant to agree to any supranational authority and considered the “monetary decisions fell within the purview of the government”, a consistent position that had hampered progress towards the economic and monetary union since the inception of the idea. The Germans were reluctant because they didn’t want to become the paymaster, especially if funds were being given to governments who were not disciplined in their economic management. Again, a consistent approach, but, ultimately destructive approach in the context of advancing the union. The records show that the other Member States (and the three new candidates for membership, Denmark, Ireland and the Norway) were positive about the development, seeing the advantages in using the new unit of account to settle internal balance of payments imbalances (thus avoiding the use of the US dollar).

The Italian position was unique (European Community, 1973c). In the context of the currency crisis in early 1973, the Italian members of the EC Monetary Committee urged the Council to “give the European Fund real powers” and to strengthen the “Community’s credit potential” and progressively pool reserves (European Community, 1973c: 1). The Italian members said that “the pooling of reserves does not mean the transfer of ownership to a common pool” but rather “joint management” (European Community, 1973c: 2). The intent was to ensure the Fund would have adequate funds to maintain the agreed currency parities but “facilitate a joint float of the EEC currencies against the currencies of the rest of the world” (European Community, 1973c: 3). In effect, the Italians were proposing a European version of the pre-1971 International Monetary Fund.

The French and German resistance ensured that the pooling proposal didn’t see the light of day. The EMCF was poorly provisioned from the start and was “purely an accounting body” with “its transactions were conducted by the Bank for International Settlements” (Danescu, 2014c: 6). The Bank for International Settlements (BIS) is the so-called central banker’s bank and is located in Basel, Switzerland. Established in the Hague Agreements of 1930, its purpose was to promote coordination and collaboration among central banks but its immediate task was to ensure the German reparations under the Treaty of Versailles were coordinated effectively.

As an aside, the following resolution was passed at the Bretton Woods conference in July, 1944: “The United Nations Monetary and Financial Conference recommends: The liquidation of the Bank for International Settlements at the earliest possible moment” (Bretton Woods, 1944a: 330). The resolution was the result of a Norwegian entreaty based on revelations that the BIS had during World War II, cooperated with the German Reichsbank, to accept huge quantities of gold stolen by the Nazis from central banks in the occupied nations”. Engelen (2005: 51) noted that “Its despicable dealings with the Nazis in receiving and laundering the shipments of plunder explain why the 1944 Bretton Woods Agreement establishing the IMF and the World Bank also called for the abolition of the BIS.” The US supported the elimination but the British, led by John Maynard Keynes opposed the move.

The story of how the BIS survived (the resolution was overturned in 1948) and why the different nations took their respective positions is an international intrigue in itself, and beyond the scope of our discussion here. Suffice to say that it exemplifies while nations talk big about the need to cooperate, the reality is that every government is, ultimately in it for themselves. The upshot is that this sort of byplay regularly leads to dysfunctional structures of alleged cooperation. The Eurozone is just a more recent example of this sort of dysfunction international cooperation.

[TO BE CONTINUED]

[THEN MORE TO FOLLOW – WE ARE NEARING THE END OF THIS PHASE OF THE HISTORY – NEXT WE TURN TO THE DEBATES IN THE LATTER 1970s AND THE DELORS REPORT IN THE LATE 1980s]

Additional references

This list will be progressively compiled.

Danescu, E.R. (2014c) ‘The difficulties of the monetary snake and the EMCF’, Centre Virtuel de la Connaissance sur l’Europe, http://www.cvce.eu/obj/the_difficulties_of_the_monetary_snake_and_the_emcf-en-710d6313-9ef1-47fc-b69d- 81a4d7fecaec.html

Engelen, K.C. (2005) ‘BIS Birthday Blues’, The International Economy, Fall, 46-53.

European Community (1973a) Regulation (EEC) No 907/73 of the Council of 3 April 1973 establishing a European Monetary Cooperation Fund, Official Journal L089 , 05/04/1973 P. 0002- 0005, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31973R0907:EN:HTML

European Community (1973b) ‘EC Monetary Cooperations Fund Begins Operations’, European Community Information Service, April 6, 1973. http://aei.pitt.edu/43306/1/123.pdf

European Community (1973c) ‘European Monetary Cooperation Fund: Increase in Credit Potential and Joint Management of Reserves’, Memo by the Italian Members, EC Mometary Committee, March 2, 1973. http://ec.europa.eu/economy_finance/emu_history/documentation/chapter6/19730302en08euromonetcoopfund.pdf

Bretton Woods (1944a) Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1-22, 1944, Volume 1. http://fraser.stlouisfed.org/docs/publications/books/1948_state_bwood_v1.pdf

Bretton Woods (1944b) Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1-22, 1944, Volume 2. http://fraser.stlouisfed.org/docs/publications/books/1948_state_bwood_v2.pdf