Options for Europe – Part 27

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 ‘second life’ marked by increasing Franco-German acrimony as they march together towards Maastricht

Once the French realised that instead of a European-level body compromising their policy sovereignty it was the Bundesbank that was in control, their attitude to fast-tracking a full European monetary union changed. The acrimony between France and Germany broke out into the open in 1987. Things were more manageable in the early years of the EMS because the US dollar was regaining strength and the nations maintained capital controls which attenuated the flow of funds into and out of their nations. Throughout this period, the IMF, true to form, were urging the nations to liberalise capital flows, which, of-course, once achieved would further tighten the Bundesbank policy straitjacket for the other nations in relation to defending their parities.

However, the US dollar started to depreciate again towards the end of 1986 and this put new pressure on the Deutsche Mark to revalue. In the fallout, the French Franc fell to the lower end of the agreed EMS parity range. The French government did not wish to devalue nor could they reasonably maintain the parity without worsening the unemployment that the fiscal austerity had wrought.

The French and Italians had worked out that the Bundesbank effectively set the interest rates for all EMS nations, irrespective of whether the rates that suited Germany were appropriate elsewhere. In turn, while the formal EMS understanding placed equal burden on the central banks to maintain currency stability, the reality was, that the nations facing downward pressure on their currencies had to do the adjustment because the Bundesbank increasingly refused to share the burden, given that the Deutsche Mark was stronger and intervention would mean the Germans would have to sell Deutsche Marks in currency markets, an operation they feared would ignite domestic inflation. Ungerer et al. (1990: 10) concluded that “the hegemonic role of German economic policy … narrowed the choice of economic strategies for its partner countries, impeded growth-oriented policies on their part, and thus perpetuated unemployment problems”. Ungerer et al. (1990: 10) also concluded the behaviour of the Bundesbank was “contrary to the community character of the EMS”, a problem that was extended into the Eurozone and remains one of the intractable issues facing Europe today.

The first attempt to bring the nullify the German dominance of the EMS, which had effectively become a Deutsche Mark zone, came in the mid-1980s, with the failed attempt by the former French Economics and Finance Minister, Jacques Delors, in his role as President of the European Commission, to promote the French demand that a European monetary authority be included within the wording of the European treaties. This manoeuvering was part of the debate associated with the introduction of the Single European Act (SEA). The SEA was signed in February 1986 and was the first major revision since the 1957 Treaty of Rome. The aim was to reform the ‘Common Market’ to ensure that free trade in theory meant free trade in practice. It also aimed at improving the speed of decision-making in the EEC (by implementing qualified majorities for certain Council decisions) and empowering the European Parliament. Notably, the unanimity rules and the veto powers were maintained for many matters relating to economic and monetary policy, although what issues were demarcated in this way were unclear and legally contestable (Good, 1988). As expected, the process was controversial with strident disagreement about how much power to give the European Parliament.

Apart from generalities in the preamble to the SEA that noted the “objective of the progressive realization of Economic and Monetary Union”, the “introduction of the European Monetary System (EMS)”, and that the “Community and the Central Banks of the Member States have taken a number of measures intended to implement monetary cooperation” (European Council, 1988), there was no explicit recognition of a European-level monetary institution. The French attempt failed. A new strategy was needed if they were to counter the German hold on economic policy within the EEC.

A number of separate developments after 1986 pushed Europe towards monetary union and promoted the French intentions. In 1986, the EMS veterans, Valéry Giscard d’Estaing and Helmut Schmidt re-entered the debate by setting up the ‘Committee for the Monetary Union of Europe’, which had its first meeting in Brussels in December of that year. In April 1987, the Committee released ‘A Programme for Action’ which included the creation of a European Central Bank, use of the ECU for private sector transactions, increased convergence of economic policies, and the liberalisation of capital controls (Committee for the Monetary Union of Europe, 1988). This Report was influential at the European Council meeting in Hannover on June 27-28, 1988. We will consider that meeting presently.

At the end of 1986 and into 1987, there were major speculative attacks on the European currencies, which were unrelated to tensions within Europe and reflected a weakening US dollar. Whatever the cause of the instability, the EEC Economic and Finance Ministers to agree to realign the currencies on January 12, 1987 because the central banks could not hold the existing parities in the face of the speculative capital flows. The was general concern that the German domination of the EMS was forcing unwanted realignments on the EMS and was stifling the growth prospects. There was neither stability nor growth!

This concern led the Ministers to call upon the Committee of Central Bank Governors to formulate a plan to improve the intervention mechanisms within the EMS. The result was a meeting of the Governors in Basel on September 8, 1987 which sent a plan for strengthening the EMS to the Economics and Finance Ministers (Committee of Central Bank Governors, 1987). The day before, the ‘Alternates’ to the EEC Monetary Committee met to review the document that would be considered by the Governors. At that meeting, the Bundesbank representative stressed that it “could not accept rules that weaken its stability oriented policies” and that it was up to the other EMS countries “to work further towards greater stability so as to have other strong currencies in the system which could acquire reserve status and thereby reduce the relative role of the Deutsche Mark” (Monetary Committee of the European Economic Communities, 1987: 1). A rather ‘Marie Antoinette’ sort of denial of what was happening to say the least.

The Council signed off on the proposal at a meeting in Nyborg on September 12, 1987 ….

[TO BE CONTINUED – IT IS GETTING MURKIER!]

[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.

Balladur, E. (1988) ‘Mémorandum sur la construction monétaire européenne’, ECU, No. 3 Brussels March 1988.

Committee of Central Bank Governors (1987) ‘Compte rendu de la rêunion du Comité des Gouverneurs du 8 septembre 1987 consacrée à la finalisation du rapport sur le renforcement du SHE’, 10.9.1987.
http://ec.europa.eu/economy_finance/emu_history/documentation/chapter12/19870910fr03summgovernorsmeet.pdf

Committee for the Monetary Union of Europe (1988) A Program for Action, Paris.

European Council (1986) Single European Act (1986), Official Journal of the European Communities, L 160, 29.6.87.
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:1987:169:FULL:EN:PDF

Good, K. (1988) ‘Institutional Reform Under The Single European Act’, American University International Law Review, 3(1), 299-322.

Lagayette, P. (1988) ‘Les perspectives monétaires à l’horizon 1992’, Politique étrangère, 2, 53rd year, 443-452.
http://www.persee.fr/articleAsPDF/polit_0032-342x_1988_num_53_2_3782/article_polit_0032-342x_1988_num_53_2_3782.pdf

Monetary Committee of the European Economic Communities (1987) ‘Report by the Chairman of the Alternates (1987), Annexe, September 7, 1987.
http://ec.europa.eu/economy_finance/emu_history/documentation/chapter12/19870907strenghteningoftheems.pdf

Monetary Committee of the European Economic Communities (1988) Twenty-Ninth Activity Report, Brussels, September 1988.
http://aei.pitt.edu/1316/1/29th_monetary.pdf

Ungerer, H., Hauvonen, J.J., Lopez-Claros, A. and Mayer, T. (1990) The European Monetary System: Developments and Perspectives, International Monetary Fund, Washington, D.C.