Options for Europe – Part 29

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

[REWRITTEN FROM YESTERDAY]

In February 1998, Italian government Finance Minister Giuliano Amato responded supportively with his own memorandum accusing the Germans of stifling growth and operating with an undervalued currency. The Italians upped the ante by threatening “to invoke escape clauses in the process capital liberalization … as well as implement various protective domestic regulations” if the asymmetries were not eliminated (Moravcsik, 1998: 433). While the two memoranda were strident in their attacks on the system they failed to outline a process towards economic and monetary union. Piodi (2012: 51) said they were “vague when it came to the solutions for achieving monetary union”.

The Germans, were very sensitive to the growing anti-Germany sentiment. They saw the ‘European Project’ in terms of restoring the nation’s place in Europe, whereas the French saw it from the perspective of stopping Germany invading them again. In 1995, former German Chancellor, Helmut Schmidt reflected on the accusations of German bullying or intimidation in relation to the evolution of the economic and monetary union and the reactions of leading German policy makers to these accusations. He said that “the creation of the monetary union is in the first instance eminently a task for foreign policy” (“Die Schaffung der Währungsunion ist in erster Hinsicht eine eminent außenpolitische Aufgabe” Schmidt, 1995). He noted that over the last 125 years Germany had conducted three wars with France. He said that without a full economic and monetary union, the Deutsche Mark and the German financial institutions would dominate Europe, which would spark increased fear and envy against Germany and lead, for the third time in the C20th, to a coalition of almost all other European nations against Germany (“Diese Dominanz Deutschlands löste zwangsläufig bei allen Nachbarn Angst und Neid aus und bewöge sie zu einer gegen Deutschland gerichteten Gemeinsamkeit. Zum dritten Mal wäre eine Koalition fast aller anderen europäischen Staaten gegen Deutschland zu befürchten”).

In this context, the German Foreign Office took the diplomatic decision to push for the union to quell the on-going criticism of the ugly German, which threatened to derail the progress that the nation had made in restoring its image in the Post World War II period. So the French pushed for monetary union to undermine the dominance of the Bundesbank despite their historical distaste for ceding domestic policy discretion to supranational bodies, while the Germans signalled they would go along with the union as part of their vision of their place in a Europe where less than half a century before they had devastated with their extreme politics of anthropological supremacy. The German willingness to advance the common currency was highly conditional, however, and reflected the dominance of the Bundesbank. Neither motivation encouraged confidence in what would be created.

[NEW MATERIAL TODAY]

While the French and Italian memoranda were ‘vague’ on detail, it was left to the Germans to articulate in fine print how the economic and monetary union might emerge and operate. Two separate German memorandums were issued in early 1988. The author of the first, which was issued on February 26, 1988, was Helmut Kohl’s Minister of Foreign Affairs, Hans-Dietrich Genscher (Gensher, 1988). It was an exercise in German precision balanced, to be fair, by a concern to placate the concerns of the French so that a truly ‘federal’ solution could be achieved. The essence of Gensher’s input was to recommend the establishment of a single currency mediated by a European Central Bank. Gensher knew he had to walk the fine line between old ‘economist’ and ‘monetarist’ positions that had separated the French and the Germans for decades (Gensher, 1998). He also knew that the political balance within France had swung towards the ‘economist’ position under Chirac, which was much more closely aligned with the hard-line German position on inflation. Further, he had to bring the German ‘economists’ along and they were hostile to anything that would diminish the dominant position of the Bundesbank.

Gensher knew that a recommendation to increase the use of the ECU as an intervention currency, would find favour from the French who wanted to diminish the importance of the US dollar in currency markets. He also knew that if the proposal effectively rehearsed the charter contained in the Bundesbank Act – such that there should be no compromise against the fight against inflation irrespective of what the democratically elected polity might desire by way of domestic growth strategie – that he could reduce the opposition with Germany from the Bundesbank and economists in the Ministry of Finance. So instead of the deflationary strategy of the Bundesbank dominating European policy and bringing Germany into conflict with the other nations, Gensher proposed that a new European Central Bank would dominate policy even though the policy would remain the same. German concerns about inflation would thus be assuaged and they could shift the responsibility for the policy stance to a supranational body.

Gensher’s memo was followed soon after by a statement by German Finance Minister and Chairman of the Council of European Communities, Gerhard Stoltenberg’s to the Interim Committee of the IMF (Stoltenberg, 1988), which concentrated on increasing the freedom of capital flows and divorcing the issue from balance of payments problems. This was a direct challenge to the Italian position, which while favouring capital liberalisation, still suggested that capital controls could be used if the EMS asymmetries persisted. Stoltenberg and the Bundesbank President, Karl Otto Pöhl were not enamoured with the creation of a European Central Bank, but were persuaded by Gensher’s emphasis on the priority of the goal of price stability.

As an aside, Gerhard Stoltenberg made a statement to the IMF on April 14, 1988 which was very interesting and further elaborated the German position. He indicated that the challenge in maintaining exchange rate stability was to reduce major balance of payments discrepancies between surplus and deficit nations and that an “important element of this strategy is the maintenance of an adequate rate of growth in domestic demand” (Stoltenberg, 1988: 38). Modern Germany might take heed!

A recent reflective piece published by the Bundesbank (Lindenlaub, 2011) considered the different ideas about integration within Europe that had to be reconciled. Lindenlaub (2011: 1) said that “France was aiming only for a European reserve fund, the intended aim of which was to stabilise the exchange rates between the European currencies at an average value and to minimise exchange rate fluctuations against the US dollar. For a long time, price stability was of secondary importance”. By way of contrast, Germany was “prepared to go a comparatively long way in meeting French aims” but could only conceive of a union where there was a “matching institutional design”, a “prior orientation to stability” and “and a system of fixed exchange rates only if did not jeopardise price stability in Germany” (Lindenlaub, 2011: 1).

On the Gensher proposal, Lindenlaub reflected thus (2011: 2):

At the same time, the ERM intervention mechanism and the Bundesbank’s stability policy encouraged countries with weaker currencies in their desire to escape the de facto management of their monetary policies by the Bundesbank, say, by creating a joint management body. France, for example, was able to overcome the entrenched lack of confidence in its monetary policy – and hold the exchange rate of the franc against the D-Mark – only if French interest rates were well above those in Germany. The high interest rates, however, placed a strain on growth, economic activity and employment. Finally, in 1988, France pressed vehemently for economic and monetary policy objectives to be placed in the hands of all the countries involved and not to left to a single country, Germany. In the end, Germany presented a proposal, in consultation with the Bundesbank, which went far beyond what the French had in mind: a single currency and common central bank preceded by further advances in convergence in the reduction of inflation rates and budget deficits as well as in the liberalisation of capital flows, and progress towards a political union.

Gensher’s proposal was considered at the European Council meeting in Hannover in June 27-28, 1988, which established a working party headed by Jacques Delors, who was by then the President of the European Commission to develop a detailed implementation plan for the creation of an economic and monetary union. Delors was joined by the central bank governors and some other members.

[TO BE CONTINUED]

[TOMORROW THE DELORS REPORT AND THEN 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 Newsletter, No. 3 Brussels March 1988.

Bank of International Settlements (1988) 58th Annual Report, Basle.

Gensher, H.D. (1988) ‘Memorandum für die Schaffung eines Europäischen Währungsraumes und einer Europäischen Zentralbank’, press article, Deutsche Bundesbank, March 1, 1988.

Genscher, H.-D. (1998) Rebuilding a house divided: a memoir by the architect of Germany’s reunification, New York, Broadway (translated from the 1995 German Edition).

Gros, D. and Thygesen, N. (1992) European Monetary Integration, London, Longman.

Dieter Lindenlaub (2011) ‘Ten years: United towards stable money’, The Bundesbank in the history of European monetary integration, Frankfurt.
http://www.bundesbank.de/Redaktion/EN/Downloads/ten_years_united_towards_stable_money.pdf?__blob=publicationFile

Moravcsik, A. (1998) The Choice for Europe: Social Purpose and State Power from Messina to Maastricht, Ithaca, Cornell University Press.

Renard, F. (1987) ‘M. Balladur veut accélérer la construction de l’Europe monétaire’, Le Monde, January 8, 1987.

Richter, R. (1999) ‘European Monetary Union: Initial Situation, Alternatives, Prospects – in the light of Modern institutional Economics’, Economic Series No. 9908, University of Saarland, May.

Schmidt, H. (1995) ‘Deutsches Störfeuer gegen Europa’, Die Zeit, No 40, 29 September 1995.
http://www.zeit.de/1995/40/Deutsches_Stoerfeuer_gegen_Europa

Stoltenberg, G. (1988) ‘Statement by Mr Gerhard Stoltenberg to the Interim Committee of the IMF, Washington, April 14, 1988’, Twenty-ninth activity report of the Monetary Committee of the European Communities, 37-40.
http://aei.pitt.edu/1316/1/29th_monetary.pdf

Tsoukalis, L. (1989) ‘The Political Economy of the European Monetary System’, in Guerrieri, P. and Padoan, P. (eds.) The political economy of the European integration: states, markets and institutions, New York, Harvester Wheatsheaf, 58-84.

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.