Options for Europe – Part 30

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]

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.

[NEW MATERIAL TODAY]

The Delors Committee Report – April 17, 1989

The makeup of the Delors Committee is interesting in itself, in that it excluded the Economics and Finance ministers. This was apparently at the suggestion of Delors himself, who wanted the Committee to “consist of the governors of the central banks, who were more independent than the governments” (Danescu, 2013x: 4)

In the ‘Collection of Papers’ that accompanied the Delors Report, Delors himself noted that (Delors Report, 1989: 63) that:

The creeping paralysis of the Community was the result of the Member States calling into question the Community method for the progressive and limited transfer of national powers to common institutions possessing a real power make decisions.

Delors knew that, given the Bundesbank would not budge at all on the independence of any European central bank (in its own image), it would be difficult to get agreement if the ECOFIN Ministers and their staff were involved. Howarth and Loedel (2003: 36) note that “National treasury officials from several countries balked at German demands on autonomy and focused a great deal more on the economic side of EMU”. Further, the central bankers had been excluded from the design of the EMS in 1979, which had, arguably, rendered the system prone to failure. Delors thus constituted his Committee to minimise any (legitimate) discussions of Member State sovereignty and to push through a homogenised Monetarist vision for the new united Europe. In reality, by excluding the diversity of opinion, Europe was setting itself up for monumental failure, which manifested in 2008, when the new monetary union was exposed to its first serious economic challenge.

Verdun (1999: 308) discusses how the “consensus on the creation of EMU in the Community could have been reached so easily” and introduces the concept of an ‘epistemic community’ to advance the explanation. Such a community is defined by Haas (1992: 3) as a “a network of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy-relevant knowledge within that domain or issue-area”. But this network also shares normative and causal beliefs and are engaged in a “common policy enterprise” (p.3) which means they agree on “common practices associated with a set of problems” (p.3).

In more simple terms, the exclusion of the ECOFIN Ministers meant that the Monetarist-orientated central bankers, who promoted the primacy of deflationary monetary policy and the subjugation of fiscal policy to that end, were highly likely to come up with a consensus fairly quickly. Then add a conservative mainstream economics professor (Niels Thygesen from Copenhagen), and some other bankers (Alexandre Lamfalussy, Bank of International Settlements; and Miguel Boyer, President Banco Exterior de España) and it became a matter of preaching to the converted! All members of the Committee were firmly wedded to the new era of neo-liberalism and the abandonment of Keynesian macroeconomic policies in favour of the hard-line pursuit of price stability.

The ‘Delors Plan’ is well-known and we do not need to dwell on the detail too much. Prior to its publication, the European Council had reasserted, at its December meeting in Rhodes, that its focus would be on the “progress made in establishing the single market” (European Council, 1988: 2) and the “the irreversible nature of the movement towards a Europe without internal frontiers” (p.2). The Delors Report (Delors, 1989a) reiterated that focus and noted the seminal nature of the 1970 Werner Report. Delors said, in a 1999 documentary produced by the European Commission (1999), that the “the overall philosophy behind what we proposed and even the structure of the Delors Report were very heavily influenced by the Werner Report” (“a philosophie d’ensemble de ce que nous avons proposé et même l’architecture du rapport Delors s’inspirent très fortement du rapport Werner”). The three-phase implementation plan was “taken over from the Werner Report” (“les trois phases, reprises du rapport Werner”).

Needless to say that circumstances had changed considerably in the time period between the Werner Report and the publication of the Delors Report. When the Werner Committee considered economic and monetary union, the European Community was made up of six member states. Delors was considering union of twelve states. Tietmeyer (2003: 13) notes that the twelve nations were economically more diverse than the earlier six and that the “political ideas about the goal of integration diverged distinctly more” with twelve than six. He also notes that there had been a “paradigm shift in economic policy” (p.13) in the 1980s with Monetarism (“more supply-side oriented economic policy”, p.3) dominating policy makers.

The fact is that the influence of the Werner Report was relatively superficial when one considers the actual content of the Delors Report. It accepted the Werner’s “three necessary conditions for a monetary union” which were:

– the assurance of total and irreversible convertibility of currencies;

– the complete liberalization of capital transactions and full integration of banking and other financial markets; and

– the elimination of margins of fluctuation and the irrevocable locking of exchange rate parities.

(Delors Report, 1989a: 14-15)

The Committee also said the “replacement of national currencies by a single currency should therefore take place as soon as possible after the locking of parities”.

The Delors Report’s treatment of fiscal policy was relatively brief and reflected the dominance of the Monetarist macroeconomics, which eschewed the discretionary use of government spending and taxation powers in favour of strict rules. The Report recommended that:

… binding rules are required that would … impose upper limits on budget deficits of individual member countries of the Community … exclude access to direct central bank credit and other forms of monetary financing … limit recourse to external borrowing in non-Community currencies … [which] should enable the Community to conduct a coherent mix of fiscal and monetary policies.

(Delors Report, 1989a: 20-21)

In other words, the ‘Delors Plan’ was effectively, dealing fiscal policy out of the game and constructing what economists call counter-stabilisation policy purely in terms of monetary interventions (interest rates adjustments) to stabilise the price level. In the Werner era, counter-stabilisation policy was about governments adjusting their discretionary spending and tax parameters to try to keep output gaps to a minimum and thus sustain high levels of employment. It was recognised that at times, government deficits would have to rise significantly as economic activity fell because not only would tax revenue decline but also governments would have to inject stimulus spending to reverse the downward cycle. The Delors Plan was in contradistinction to that Keynesian orthodoxy of the 1960s.

The reality is that the final recommendations of the Delors Committee mirrored both the plan laid out by Hans-Dietrich Gensher in his February 1999 memo and the statement released by the Bundesbank President, Karl Otto Pöhl which was published in the ‘Collection of Papers’ accompanying the main Report (Delors Report, 1989b: 131-155). The latter, of-course, was just an elaboration of the former. Pöhl rejected the idea that a plan for a monetary union could just pick up the “ideas contained in the Werner Report” (p.132). He wanted a “new start” and that no progress could be made until there is “agreement … that stability of the value of money is the indispensable prerequisite for the achievement of other goals” (p.132). The threads from the Werner Report were cut by the shift from the Keynesian macroeconomic policy dominance with the emphasis on full employment that pervaded in the late 1960s, to the Monetarist dogma, which effectively abandoned full employment as a legitimate policy goal in favour of price stability.

What emerged was clearly the Bundesbank model – an independent central focused on maintaining low inflation. The indepedence would provide the bank with the capacity to ignore political demands to compromise its monetary policy stance in recognition of rising unemployment, for example.

[TO BE CONTINUED]

[TOMORROW THE DELORS REPORT CONTINUED AND THEN THE TREATY OF MAASTRICHT – THINGS WILL FLOW MORE QUICKLY AFTER THAT – I HOPE!]

Additional references

This list will be progressively compiled.

Committee for the Study of Economic and Monetary Union (Delors Report) (1989a) Report on economic and monetary union in the European Community, April 17, 1989.

Committee for the Study of Economic and Monetary Union (Delors Report) (1989b) Collection of papers submitted to the Committee for the Study of Economic and Monetary Union, April 17, 1989.
http://aei.pitt.edu/1008/

Danescu, E.R. (2013x) The Werner Report and the Delors Report, Centre Virtuel de la Connaissance sur l’Europe.
http://www.cvce.eu/obj/the_werner_report_and_the_delors_report-en-72dae01a-6f2f-4b00-8caa- ba66db14dcac.html

European Commission (1999) ‘Pierre Werner – testimonies at the threshold of the 21st century’, Documentary film referred to in Danescu (2013x).

European Council (1988) ‘Conclusions of the Presidency European Council, Rhodes, 2 and 3 December 1999’.
http://www.europarl.europa.eu/summits/rhodes/rh1_en.pdf

Haas, P.M. (1992) ‘Introduction: Epistemic Communities and International Policy Coordination’, International Organization, 46(1), 1-35.

Verdun, A. (1999) ‘The Role of the Delors Committee in the Creation of EMU: An Epistemic Community?’, Journal of European Public Policy, 6(2), 308-28.

That is enough for today!

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