Options for Europe – Part 36

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).

[NEW MATERIAL TODAY]

The decision to reunite Germany also had significant economic ramifications. First, the available labour supply to the strong West German economy was immediately boosted by the well-educated, German-speaking Ostlanders. This resulted in an increased domestic demand for housing and consumer durables and put pressure on the German price level. Further, in early 1990, Helmut Kohl announced that the Deutsch Mark would exchange one-for-one with the Ostmark (with exceptions for large debts and loans) and become the single currency for the united Germany. At the time, the Ostmark traded in Berlin at about 5 to 1 Deutsch Mark. The inflated one-for-one peg was, in fact, a massive subsidy from the West to the East to facilitate the German monetary union but it had the effect of shrinking the supply-side of the East as the former East German firms were no longer be competitive given the relative productivity and wage levels. It also provided an immediate boost to the real purchasing power of East German consumers in terms of West German goods. Whereas before they would have needed 5 Ostmarks to buy one Deutsch Mark worth of West German goods (had they been able to), now they were on equal footing with West German consumers.

The Bundesbank wanted to increase interest rates to quell any inflationary surge, which would have pushed the value of the Deutsch Mark up against the other European currencies. Karl Otto Pöhl told the Banking Federation in Bonn on October 6, 1989 that the Bundesbank wanted to revalue the Deutsch Mark but that he recognised that Germany’s “most important partners” (aka France) would oppose such a move (Pöhl, 1989). The Ecofin ministers were adamant that after the 1987 Basle-Nyborg agreement that currency stability would be managed without significant realignments. In the Autumn of 1989, French Prime Minister Rocard called Helmut Kohl and demanded he oppose any realignment, which would be tantamount to a devaluation of the French Franc. Bonn, then, told the Bundesbank President that realignments were off the agenda, a decision that demonstrated that despite the vaunted ‘independence’ of the German central bank, the politicians typically ruled (Henning, 1994: 215).

The upshot was that the German inflation rate rose more quickly than its European partners, which led the Bundesbank in 1990 to increase interest rates. With a stable, but undervalued Deutsch Mark and the Bundesbank driving down the German inflation rate, Germany’s trading partners had a problem. To remain competitive against Germany they had to drive their inflation rate down well below Germany’s. This required harsh cutbacks in domestic spending, which would certainly invoke a recession. European political nuances were both opposing currency movements that would provide competitive adjustments for each nation and facing the domestic costs of recession.

In other words, even before the delegates turned up in the lovely Limburg city of Maastricht, the European nations were rehearsing the problems that come with a fixed exchange rate system, where one nation is economically dominant and the other members of the system struggle to maintain international competitiveness. In 1990, they had a vision of what would come in 2008, but the leaders and their advisors were so besotted with neo-liberal ideology that they couldn’t indentify the vulnerability of the monetary system they were set on creating. They certainly had no perception of the enormous costs their citizens would incur when that vulnerability was breached.

Onward to Maastricht – the march of the ideologues

While the Economic Council meeting in Madrid on June 16 and 27, 1989 accepted the Delors Plan and resolved to begin the first stage on July 1, 1990, it was not until the meeting in Dublin on June 25 and 26, 1990, that the ‘Intergovernmental Conference’ (IGC) to consider the changes to the Treaty of Rome that would be required to implement stages two and three was agreed and set down for December 14, 1990. This would become the Maastricht meeting. It was intended to coincide with another meeting between governments on advancing political union. In between the meetings in Madrid and Dublin, a working party formed by Ecofin Committee considered how the Delors Report could be rendered acceptable to the Member States, bearing in mind that the Delors Committee had deliberately excluded the Finance ministers, the ‘politicians’ from the process to that point. The vehement opposition from the British brought homethe need to render something that would be acceptable at the political level.

French politician Élisabeth Guigou was charged with leading this ‘high-level’ EMU group. An early briefing document for Jacques Delors and Henning Christophersen, President and Vice-President of the Commission, respectively, records a preliminary agenda-setting meeting between European Council members and Ms Guigou held in Paris on September 15, 1989 noted that (European Commission, 1989a). The minutes show that the Commission would be asked “to be ready to explain and advocate the need for binding rules in the budgetary field (in October’s meetings for the Group).

On September 27, 1980 this group produced a series of issues . On the “role of the Community Budget”, they separated out the structural and macroeconomic issues, and asked (European Commission, 1989b: 6):

Peut-on imaginer une Union économique et monétaire sans que le budget communautaire (le budget de l’Union) atteigne une signification macro-économique? Si non, faut-il se préoccuper de ses effets et comment?

Faut-il prévoir la possibilité de modifications discrétionnaires des ressources communautaires de façon à se servir du budget communautaire pour contribuer, en complément des politiques nationales, aux objectifs macro-économiques convenus en commun?

That is they wanted the IGC to consider whether the a federal fiscal capacity in the proposed Economic and Monetary Union could be of macroeconomic significance? They further wanted consideration of the possibility that federal fiscal policy might could be used for discretionary changes in spending to help complement Member State policies, in pursuit of commonly agreed macroeconomic objectives. The best interpretation of this discussion is that they were considering whether the EMU should allow fiscal transfers in times of asymmetric spending changes which might cause prolonged recession and entrenched unemployment.

The European Council meeting in Strasbourg on December 8-9, 1989 considered the report produced by this working party and ratified the July 1, 1990 starting date agreed to in Madrid.

[TO BE CONTINUED]

[TOMORROW WE MOVE ONTO TREATY OF MAASTRICHT]

Additional references

This list will be progressively compiled.

European Commission (1989a) ‘Preparatory document for the “Guigou” high-level group on EMU’, September 15, 1989. http://ec.europa.eu/economy_finance/emu_history/documentation/chapter13/19890915enfr25preparatorydocum.pdf

European Commission, 1989b) ‘Compte rendu de la réunion du groupe ad hoc UEM (Guigou)’, September 25, 1989.
http://ec.europa.eu/economy_finance/emu_history/documentation/chapter13/19890927fr10compterendureunion.pdf

European Commission (1990a) ‘Note to the EMU Group’, February 3, 1990. http://ec.europa.eu/economy_finance/emu_history/documentation/chapter13/19900203en04emugroupmeeting.pdf

European Commission (1990a) ‘EMU Group meeting’, February 27, 1990.
http://ec.europa.eu/economy_finance/emu_history/documentation/chapter13/19900228en03emugroupmeet270290.pdf

Henning, C.R. (1994) Currencies and Politics in the United States, Germany, and Japan, Peterson Institute.

Pöhl, K.P (1989) ‘Aktuelle Fragen der Währungspolitik’, Speech to the Banking Federation in Bonn, October 6, 1989.

Riding, A. (1989) ‘Mitterrand Backs Europe Integration’, New York Times, December 8, 1989. http://www.nytimes.com/1989/12/08/business/mitterrand-backs-europe-integration.html

That is enough for today!

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