Options for Europe – Part 17

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]

Why the Werner Plan failed

While the plan for economic and monetary union outlined, albeit vaguely, in the 1970 Werner Report optimistically talked about “a monetary union” using a “total and irreversible” currency and eliminating the “margins of fluctuation in exchange rates” by “the irrevocable fixing of parity rates and the complete liberation of movements of capital”. Recall that the Werner Report (1970: 10) also emphasised that “to ensure the cohesion of economic and monetary union, transfers of responsibility from the national to the Community plane will be essential” and that “the centre of decision of economic policy will be politically responsible to a European Parliament” (page 13), a sentiment that was affirmed by the resolution in the European Parliament supporting the proposed economic and monetary union.

The plan never materialised and was finally abandoned in 1977. The only artifact of the many meetings and interchanges between national leaders, high-level ministers, central bankers and others, was the European Monetary Cooperation Fund, which as we have seen became nothing much more than an accounting organisation. The main mechanism implemented as a first step in reducing currency fluctuations within Europe – the ‘snake’ – shrank to become a Deutsche Mark-zone and the economic and philosophical differences between the aspirant nations showed no signs of diminishing.

The popularised assessment is that it was the 1971 ‘Nixon Shock’ and the resulting turbulence in international currency markets, followed by the OPEC oil price hikes, that brought the proposed transition to economic and monetary union unstuck. While there is truth in that narrative and it is certainly a more soothing rendition of the failure, the basic reason it failed is because the underlying motivation for the ‘European Project’ – the French fear and disdain for German (military) dominance in Europe and their fierce notion of sovereignty that militated against delegation of power to supranational institutions – remained as did the German obsession about inflation.

Recognising the impact of both the breakdown of the international fixed-exchange rate monetary system and the inherent national disparities, McAllister (2009: 63) concluded that the Werner Committee had to “pick its way through the minefield of ‘monetarists’ … and the ‘economists'” and the resulting conception was “built on shifting sand in being based on the very Bretton Woods’ mechanisms that were fast foundering … all the knitting unravelled”. On January 23 1972, the Financial Times carried an article written by the then Governor of the Danish Central Bank, Frede Sunesen. He wrote: “I will begin to believe in European economic and monetary union when someone explains how you control nine horses that are all running at different speeds within the same harness” (cited in McAllister, 2009: 58). These reflections resonate strongly with the views expressed at the time of the Maastricht deliberations by those who warned that the design being implemented for the Eurozone was flawed and would expose the system to failure. But there is still some machinations to consider before we get to Maastricht.

Next stop – “L’Europe se fera par la monnaie ou ne se fera pas” – the European Monetary System (EMS)

In 1950, Jacques Rueff, who was a trusted economic advisor to Charles De Gaulle and French central banker wrote that “L’Europe se fera par la monnaie ou ne se fera pas” (“Europe will be made by money or it won’t be made”), which provided the mantra for those who believed that the ‘European Project’ ultimately would require a single currency (Rueff, 1950).

As the ‘snake’ was falling apart, the President of the Commission of European Communities, Roy Jenkins delivered the first Jean Monnet lecture in Florence on October 27, 1977. Jenkins (1977: 3) described the demise of the Werner plan as a “retreat rather than an advance”. In making the case for a renewed push to monetary union he said (1977: 5) that there would be advantages in “creating a major new international currency baçked by the economic spread and strength of the Community, which would be comparable to that of the United States, were it not for our monetary divisions and differences”. He claimed that eliminating the currency fluctuations within Europe would improve economic welfare. Rueff’s agenda was very much back on track.

On December 5, 1978, the European Council met in Brussels and agreed to set up the European Monetary System (EMS), which was to absorb what remained of the ‘snake’ and establish a European Currency Unit (ECU) (European Council, 1978). The EMS emerged out of a proposal put to the European Council meeting in Copenhagen in April 1978 by the French President Valery Giscard d’Estang and the German Chancellor Helmut Schmidt.

It won’t surprise the reader to learn that the system eventually found itself in crisis and instead of abandoning the almost impossible idea of tying these disparate European economies together into a functioning fixed-exchange rate currency zone, the European political leaders began the rocky road to Maastricht with a compromised EMS and the creation of the Delors Committee. But first, we have to tell the story.

[TO BE CONTINUED]

[TOMORROW I WILL FINISH THE DEBATES IN THE LATTER 1970s AND THEN TURN TO THE DELORS REPORT IN THE LATE 1980s. IT WAS SLOW GOING TODAY GIVEN THE DOCUMENT RETRIEVAL AND READING IN FRENCH, MOSTLY]

Additional references

This list will be progressively compiled.
European Council (1978) ‘European Council Resolution of 5 December 1978 on the establishment of the European Monetary System (EMS) and related matters’, Bulletin des Communautés Européennes, 12-1978.
http://bookshop.europa.eu/en/bulletin-des-communaut-s-europ-ennes.-n-12-1978-11-ann-e-pbCBAA78012/downloads/CB-AA-78-012-FR-C/CBAA78012FRC_001.pdf;pgid=y8dIS7GUWMdSR0EAlMEUUsWb0000L6goZtuV;sid=Cchai37cH6laiSw0sfjELBz5qwsm23kPDxs=?FileName=CBAA78012FRC_001.pdf&SKU=CBAA78012FRC_PDF&CatalogueNumber=CB-AA-78-012-FR-C

Grieco, J.M. (1995) ‘The Maastricht Treaty, Economic and Monetary Union and the neo-realist research programme’, Review of International Studies, 21, 21-40.

Jenkins, R. (1977) ‘Europe’s Present Challenge and Future Opportunity’, Jean Monnet Lecture, Florence, October 27, http://ec.europa.eu/economy_finance/emu_history/documentation/chapter9/19771027en17casemonetaryunion.pdf

McAllister, R. (2009) European Union: An Historical and Political Survey, Taylor & Francis, New York.

Rueff, J. (1950) ‘L’Europe se fera par la monnaie ou ne se fera pas’, Revue Synthèses, 45, 386-388.

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