Options for Europe – Part 24

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]

[NEW MATERIAL TODAY]

The EMS starts … after a delay

The EMS came into operation on March 13, 1979 despite it being agreed at the December Brussels Council Meeting that it would start on January 1, 1979 (European Council, 1978b). The delay was caused by the French disagreeing with the proposals in the December Council resolution on the system of Monetary Compensatory Amounts. The decision taken by the European Council on December 18, 1978 (European Communities Monetary Committee, 1979: 42) contained a clause 6.1(c) which covered the impact of the proposed EMS on the CAP. The resolution said that there should not be any change in the existing situation pertaining to “expression in national currencies of agricultural prices, monetary compensatory amounts” and other agricultural support amounts as a result of the “introduction of the EMS”. The Council clearly wanted the system of MCAs to be eliminated as it re-establishes “the unity of prices of the common agricultural policy”.

The French wanted the MCAs to be abandoned because their farmers were forced under the system to pay out given the adverse movement of the Franc against the previously determined ‘green rates’. In the official Statements by the Heads of State or Government at the Brussels Council Meeting in December 1978, Valéry Giscard d’Estaing emphasised that the need to “return to a system of uniform pricing on agricultural markets, since the divergences which existed at present were anomalous”, which was a reference to the French desire to abandon the monetary compensatory payments (European Council, 1978b: 13).

While the delay was only 3 months, the dispute, once again, brings into relief France’s motivation for economic and monetary union – to ensure the agricultural subsidies paid to their farmers would be paid at the European level, which meant disproportionately by Germany. The long path to the Euro began with the Treaty of Rome where the CAP and the customs union were locked in as sacrosanct European policies. It was a case of the ‘cart before the horse’ but it locked Europe into the pursuit of an economic and monetary union even though none of the pursuers were really willing to concede the national sovereignty and develop the supra-national institutional structures that were necessary to make that union work effectively.

The Bundesbank asserts itself early

The beginning of the EMS was marked by what the Bank of International Settlements (BIS, 1980: 3) said were two “stand out” facts – “an oil price rise which in real terms has been of the same order of magnitude as that of 1973-74, and an acceleration of inflation in all industrial countries”. Within this context, the uncertainty left by the failure to create a European-level central bank was soon resolved by the aggressive action of the Bundesbank.

While the Bundesbank’s primary focus was on price stability it also assumed responsibility under the EMS for exchange rate stability. The two foci are interrelated in the sense that it obligations under the EMS required it to intervene in foreign exchange markets, which under certain circumstances would have implications for its capacity to maintain its monetary target. For example, given that the Deutsche Mark was often pushed up in value by speculators in the currency markets, the Bundesbank was forced to buy Marks and sell other currencies (principally US dollars), which pushed more Marks into circulation. This was seen as placing a constraint on its capacity to achieve certain growth rates in the money supply and forced the Bank to engage in offsetting policy initiatives (which economists call ‘sterilisation’, which relates to the goal of insulating domestic monetary developments from those associated with the central bank’s defense of the exchange rate). For example, the Bundesbank could reduce the supply of loans it provides to banks in need of reserves to offset its sale of Deutsche Marks in the international currency markets.

The transition to the EMS and the earlier floating of the US dollar changed the role of the Bundesbank from defending the Deutsche Mark against a weakening US dollar to defending the currency against a weakening French Franc. To maintain its price stability charter, the Bundesbank introduced formal monetary targets in 1975 as a response to the growing influence of Monetarism in the academy and the rising inflation arising from the oil price shock in that year. Following the Monetarist logic, it believed that if it maintained control over the volume of money in the economy it would control inflation. The introduction of monetary targets were also a way the central bank could distance itself from real issues such as unemployment by signalling that “that monetary policy will not be available as an instrument of discretionary aggregate demand management” (von Hagen, 1989: 54). This policy shift was the beginning of the abandonment of the commitment by national governments to full employment (see Mitchell and Muysken, 2008). The central bank could simply say they were focused on price stability and the treasury could say that they couldn’t run policy that would compromise the central bank’s commitment and the result was stagnant growth and persistently high unemployment. This sort of logic also marked the beginning of the current era where the economy was elevated to some sort of independent deity status with which the people have to serve by way of penance and sacrifice. We will consider that construction and its consequences in Chapter X.

The way the targetting was made operational was that the Bundesbank would project what it considered real economic growth would be and then added an allowance for the inflation is desired to achieve. The sum would become the ‘midpoint’ of the target range for the permissible growth in the amount of money in the economy. For example, in 1975 its target for the growth of money was 8 per cent. By 1985 they had narrowed this to a 3-5 per cent range, which reflected its “growing intolerance of inflation” (Kahn and Jacobson, 1989: 21). Sometimes they would publish a single money supply growth target as the goal, while other times a range was provided.

When the EMS was finally put into operation on March 13, 1979, the Bundesbank announced a tougher approach to its quest for price stability. Between 1975 its monetary growth target was 8 per cent and in each of those four years the actual growth rate was well above their target. In 1979, they announced a new money growth range of 6 to 9 per cent per annum, which was designed to give them flexibility depending on “further domestic and external economic developments” (Deutsche Bundesbank, 1979a: 5). In other words, they wanted to be tougher or easier depending on economic growth rates. Pointedly, the Bundesbank noted that while they were having “difficulties” in “meeting such objectives” the announcement of the targets was, among other things, intended to “facilitate a certain coordination of monetary policies in the countries of the European Community” (Deutsche Bundesbank, 1979a: 5). In 1980, the range was reduced to 5 to 8 per cent and in 1981 from 4 to 7 per cent.

[TO BE CONTINUED]

[WE ARE MOVING THEN TOWARDS THE DELORS REPORT IN THE LATE 1980s AND THE TREATY OF MAASTRICHT – THINGS WILL FLOW MORE QUICKLY AFTER THAT – I HOPE!]

Additional references

This list will be progressively compiled.

Bank of International Settlements (1980) Annual Report 1980, Basel.

Deutsche Bundesbank (1979a) Monthly Report of the Deutsche Bundesbank, January 1979, Frankfurt am Main.
http://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report/1979/1979_01_monthly_report.pdf?__blob=publicationFile

Deutsche Bundesbank (1979b) Monthly Report of the Deutsche Bundesbank, April 1979, Frankfurt am Main. http://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report/1979/1979_04_monthly_report.pdf?__blob=publicationFile

European Communities Monetary Committee (1979) “Compendium of Community Monetary Texts”, EEC. http://ec.europa.eu/economy_finance/emu_history/documentation/compendia/a791231en1771979compendiumcm_a.pdf

Kahn, G.A. and Jacobson, K. (1989) ‘Lessons from West German Monetary Policy’, Economic Review, Federal Reserve Bank of Kansas City, April, 18-35.

von Hagen, J. (1989) ‘Monetary Targeting with Exchange Rate Constraints: The Bundesbank in the 1980s’, Federal Reserve Bank of St. Louis, September/October, 53-69.