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. The book will be about 180 pages long. Given the time constraints I plan to devote most of my blog time over the next 3 months to the production of the book. I will of-course break that pattern when there is a major data release and/or some influential person says something stupid or something sensible. I hope the daily additions will be of interest to you all. A lot has to be done! Because the drafting has to be tighter than the normal stream of consciousness that forms my usual blogs, the daily quotient is likely to be shorter.
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]
[THIS IS REWRITTEN TEXT FROM YESTERDAY]
The meeting, itself, has been described as a farce (see Tonioli, 2005: Capie, 2010). There was the “petty, mischief-making, and garrulous” chair overseeing the meeting who set up conflict between the central bankers and the finance ministers (Capie, 2005: 421). Bi-lateral animosities were the norm. The British claimed the Bank of International Settlements meeting had stipulated that Germany would have to revalue. Conflict ensued and the Germans provided “anti-British” briefings to the press corps (Capie, 2005: 421)). The British proposed blackmail as the way to prevent the pound from being forced to devalue further – it threatened retaliation in the form of unspecified withdrawal of support for NATO (Capie, 2005, 420).
In summary, Forest Capie (2010: 22) said:
The Bonn meeting of 1968 undoubtedly marked a low point in international monetary affairs in the post-war era. And there was little recovery in relationships over the next few years. The unilateral changes in parities in 1969 simply continued the poor feeling that pervaded the atmosphere.
After the meeting, the French and British governments increased taxes and introduced other policies aimed at reducing imports to avoid having to devalue.
[NEW TEXT TODAY STARTS HERE]
The Bank of International Settlements (BIS, 1970: 3) characterised the international atmosphere in 1969 by saying that:
… the focus of attention generally was not on output trends but on the feverish atmosphere that characterised the situation. The state of crisis which prevailed at times in the international monetary situation contributed to this atmosphere, though, happily, calm had been restored by the beginning of this year.
Curiously, the calm was due to the French and German government rejecting major currency realignments, which blighted any speculative fever. But it was to be a short-lived break in hostilities. France continued to run an external deficit, thus placing continued downward pressure on its exchange rate, while Germany’s external surplus remained large. Taken together, it was clear that the trade fundamentals expressed in the balance of payments were at odds with the fixed currency parities of both nations – the Franc was seen to significantly overvalued and the Deutsche Mark undervalued. Britain’s currency devaluation in November 1967 had also done little to correct their external deficit.
French political changes (De Gaulle resigning in April 1969) led to huge currency outflows from France to Germany as speculators bet that the Deutsche Mark would have to revalue, but the German government again denied the inevitable. The French were the first to recognise that the market predictions were realistic given the state of the French economy and on August 8, 1969, the French government finally devalued the franc against the price of gold by 11.1 per cent.
Across the border, Germany was getting set for Federal election and it was considered likely that the new government would not resist revaluation. The Bundesbank, facing massive pressures to keep the currency within the agreed limits was buying US dollars in the foreign exchange markets “on an accelerating scale” (BIS, 1970: 4) They even closed the Frankfurt currency market on the Friday before the election to avoid what was referred to as a “Black Friday”. Often currency realignments are performed over weekends to minimise the disruption that last minute speculation can cause to the economy and financial system. The foreign currency exchanges remained closed the day after the election in recognition of the massive instability that the fixed exchange rate system was generating.
The September election brought a pro-revaluation government of Chancellor Willy Brandt and to manage the transition, in the face of massive currency bets being made on revaluation, the Bundesbank suspended “its intervention in the foreign exchange market at the former uper and lower limits” (Deutsche Bundesbank, 1969: 5). This simply meant in the context that they stopped buying US dollar purchases once currency had reached the upper limit allowed for under the Bretton Woods agreement and effectively floated the Deutsche Mark, which immediately was revalued by around 5 per cent to DM3.84 per US dollar, on the first day they reopened the currency markets.
The Bank of International Settlements (BIS, 1970: 4) called this an “excellent tactical move” because it ensured the speculative inflow of funds to Germany would slow and that it could stop selling Deutsche Marks in the currency markets to defend the indefensible DM4 parity.
The official statement at the time indicated the the German government was intending “to return to a fixed parity for the Deutsche Mark within a short time, even though this is unlikely to be the old parity, still legally in force, of one dollar to four Deutsche Marks” (Deutsche Bundesbank, 1969: 6). Of-course, this suspension of official Bundesbank intervention was contrary to the IMF Articles of Agreement but the Fund tolerated it because it was the only way to restore stability in the international monetary system. A new parity was established on October 27, 1969, some 9.3 per cent above the previous fixed parity and Germany resumed its place in the fixed parity system. But that would not last for much longer.
Interestingly, the revaluation gave the Federal government some headaches from the Bavarian farmers. Under the CAP, all agricultural prices were paid in US dollars and the revaluation meant that German farm output became more expensive to outsiders. The strength of the agricultural lobby and, particularly the political support that the Bavarian farmers gave to the Finance Minister in the conservative CDU/CSU alliance Franz Josef Strauss, had been a principle reason why the German government had refused to revalue prior to the election. The new government was also sensitive to the power of this lobby and sought a special deal with the EEC, whereby the previous domestic price level would be maintained for farm output despite the lower rates for foreign currencies. The EEC agreed, under German pressure, “to sanction the levying of a compensatory surcharge equivalent to the degree of appreciation of the Deutsche Mark on imports of agricultural products” that were part of the EEC common market (Deutsche Bundesbank, 1969: 6).
The tolerance of the IMF and the relaxation of the EEC rules for German farm output were all signs that the design of the monetary system in place was at odds with the reality of the situation. One could say the same thing about the way the authorities in Europe today act in relation to the Euro – the rules are continually being relaxed or amended to meet whatever financial emergency arises as a result of the rules being fundamentally unworkable. We will examine these issues in detail in subsequent chapters.
The February 1969 Barre Report was written within this environment of international currency uncertainty although it was published prior to the major realignments in late 1969. It noted that the creation of the customs union and the CAP was not a sufficient basis for a multinational Community to prosper. It also recognised that the ‘de facto’ currency revaluation by Germany and devaluation by France in November 1968 (via the tax changes) showed “clearly that there can be no lasting harmonization of indirect taxation unless economic policies are better co-ordinated to reduce imbalances” (Barre Report, 1969: 6). The Report emphasised that “the Community has a choice of vital importance to make, and it must lose no time in tackling the problem if it is to avail itself of opportunities remaining open before serious instability sets in and forces undesirable solutions on it” (Barre Report, 1969: 6).
The Barre Report also emphasised the need “to increase the co-ordination of current economic and financial policies to forestall short-term imbalances early enough”, which was a direct recognition of the tardiness the German and French response to the growing financial crisis in the late 1960s. However, there is not a sense that at this stage a full monetary union was considered. It was more about setting up a suprnational body that would vet individual nation fiscal positions for consistency with common goals of stability. The Barre Report, however, clearly reaffirmed the European preference for fixed exchange rates and a move to a common monetary policy. The Report stated (Barre, 1969: 3) that the Community needed to take action to coordinate “monetary policy” and establish “a common position with regard to external monetary relations”.
The November 1969 Den Haag summit held in the C13th Ridderzaal (Hall of Knights) was not a response to the currency turmoil but was influenced by it. The main agenda driving the summit was the vexed issue of Community enlargement, which was not able to be accomplished while De Gaulle was in charge in France. The in particular Britain’s inclusion. The Germans and the Dutch, in particular were pushing for
There were three main perspectives. First, that the inclusion of Britain would open markets for Dutch and German exports. Second, that the relative instability of the British pound would require progress to increased monetary cooperation if Britain joined the Community. Third, that a Community which included Britain would give Europe power in world financial markets and redress the growing concern that the US was too dominant. But, of-course, under the logic of the Bretton Woods system the US had to be at the top of the currency system and run continuous external deficits. Remember, the Triffen Paradox!
Politics was always at the core of the enlargement debate. The Dutch Prime Minister Piet de Jong summarised the tension in Europe during a Cabinet meeting on Friday, October 27, 1967. In relation to the inclusion of Britain, the minutes read (MR, 1967: 10-11):
Hij acht het niet verantwoord Nederland te leiden in de richting van een Europese satellietstaat onder Franse, en na de dood van president De Gaulle, onder Duitse hegemonie. De geschiedenis leert dat de democratische principes bij een hegemonie van Frankrijk of Duitsland niet in veilige handen zijn. De toetreding van Groot-Brittannië en de Scandinavische landen is met name voor het behoud van de democratie in Europa van het grootste gewicht.
Which translates to the Prime Minister saying that he does not think it “justified in leading the Netherlands towards a European satellite state under the French, and after the death of President De Gaulle, under German hegemonie. History teaches us that democratic principles under either French or German hegemony are not in safe hands. The accession of the Great Britain and the Scandinavian countries, especially for the preservation of democracy in Europe, is of the greatest importance”.
[TO BE CONTINUED - A SMALL SECTION LINKING THE LAST AND THE NEXT BY WAY OF SETTING THE INTRIGUES FOR THE DEN HAAG SUMMIT WHICH WERE TO SOME EXTENT AMBUSHED BY THE CURRENCY INSTABILITY AND THE IMPENDING DEMISE OF BRETTON WOODS]
[I WILL REWRITE THE 1969 DEN HAAG SUMMIT SECTION NEXT - WHICH THEN LEADS US INTO WHY THE WERNER REPORT WAS NOT IMPLEMENTED AND HOW BY THE TIME THE DELORS REPORT CAME OUT IN 1989 THE DISCUSSIONS WERE DOMINATED STILL BY THESE NATIONAL POLITICAL INTRIGUES BUT ALSO INCREASINGLY INFESTED BY NEO-LIBERALISM.
MY MOTIVATION FOR EMBEDDING THE LATER SPECIFIC DISCUSSION ABOUT MODERN DAY EUROPE IS TO PROVIDE A BROADER CONTEXT TO WHAT HAPPENED IN MAASTRICHT, TO BETTER UNDERSTAND HOW THE DELORS REPORT DIFFERED FROM THE WERNER REPORT, AND TO WEAVE IN THE RAW NATIONAL POLITICAL DIMENSIONS WITH THE IDEOLOGICAL INFESTATION. THE EARLIER MONETARY UNION DISCUSSIONS ETC WERE NOT ABOUT NEO-LIBERALISM. BUT NEO-LIBERALISM ENTERS THE PICTURE IN THE 1990s AND THAT IS WHERE THINGS STARTED TO GO REALLY ASTRAY].
[THERE ENDS THE NEW TEXT TODAY - OLD TEXT YOU HAVE ALREADY READ FOLLOWS TO THE END BUT WILL BE REWRITTEN ON MONDAY IN LIGHT OF CURRENT RESEARCH]
However, the idea of an economic and monetary union (common currency) was seriously advanced for the first time at the December 2, 1969 European summit conference attended by the Heads of State or Government of the Six member states. If the intent of the December 1969 European summit conference in Den Haag had been carried through, there would have been a common European currency in the 1970s, and probably, the chaos that is now leaving millions of Europeans without work or hope would have come two decades earlier.
The Final Communiqué of the summit (EC, 1969) spoke of the Community arriving at “a turning point in history” and the “irreversible nature of the work” towards a “united Europe”. It talked about the “completion of the Communities” which as a “final stage” would “lay down a definitive financial arrangement for the common agricultural policy by the end of 1969. As an integral part of this financial arrangement, the Communiqué said that”
.. a plan in stages should be worked out during 1970 with a view to the creation of an economic and monetary union. The development of monetary co-operation should depend on the harmonisation of economic policies.
They agreed to arrange for the investigation of the possibility of setting up a European reserve fund in which a joint economic and monetary policy would have to result.
Interestingly, the summit came at the end of a decade when the European Project had floundered. The tensions were clear and were exemplified by the French proposal for the Fouchet Plan, which would have replaced the emerging supranational European institutions with a system of intergovernmental bodies to run Europe and be dominated by France. The proposed ‘Union of States’ was also motivated by President de Gaulle’s increasing hostility towards US involvement in European affairs under the Atlantic alliance (NATO). The tensions increased as France twice rejected Britain’s applications to join the Community (because they feared Britain would undermine the CAP). The situation worsened in 1965 with the stand-off concerning funding for the CAP among other matters, which became known as the Empty Chair Crisis, where France effectively boycotted the Commission. This Crisis, in turn, led to the Luxembourg Compromise, which entrenched the torturous political processes that still beset speedy progress being made within the EC decision-making machinery. France clearly was positioning itself within the Community to become the most powerful nation and keep Germany and the US in check.
There is the famous private conversation between De Gaulle and the French government minister Alain Peyrefitte on August 22, 1962 about the proposed Fouchet Plan which Georges Soutou (1996: 131) reports De Gaulle saying:
What is the point of a Europe? he confided Alain Peyrefitte on August 22nd 1962. It should serve to prevent us from being dominated by America or Russia … France could be the strongest of the six members. We could control this lever of Archimedes. We could carry away the others. Europe represents the first opportunity France has to regain what she lost at Waterloo: world dominance.
[Note: I still have to check the translation in the original memoir of Alain Peyrefitte, C’était de Gaulle. My notes from when I translated it before were a little different and I am relying in the above quote from on a secondary translation of Soutou's work rather than my own translation of Peyrefitte's original recounting of the conversation.]
The 1969 summit in Den Haag was held at the end of this less than optimistic decade for European integration at the initiation of the Georges Pompidou, who replaced De Gaulle as French President in April 1969. While the Final Final Communiqué is silent, the supporting documents for this summit reveal that the push for the creation of an economic and monetary union, surprising to many, came from the newly-elected German Chancellor Willy Brandt, who in Pompidou had found a much more pragmatic French leader to deal with. The summit also agreed to admit Britain, which signalled a clear ambition for enlargement. But, important to our aim to understand why Europe is where it is now, was the fact that the operationalisation of enlargement would see the Community at the centre of the negotiations with intergovernmental arrangements largely eschewed. Brussels wanted to make it the institutional hub of the integrated Europe (see Ludlow, 2003)
The creation of an Economic and Monetary Union was the main topic for a meeting of the Council of Ministers of the Six Member States in Paris on March 6, 1970. This meeting formalised the Den Haag sentiments by appointing an expert group under the direction of the then Prime Minister of Luxembourg, Pierre Werner to head a working party, which would flesh out the details of how this union would be achieved.
The so-called Werner Plan was submitted to the Commission as an interim report on May 20, 1970 with the Final Report (Werner, 1970) presented on October 13, 1970. The Werner Report outlined a comprehensive timetable for the creation of a full economic and monetary union by the end of the decade. Willy Brandt told the Bundestag on November 6, 1970 that the Werner proposal to develop a European Economic and Monetary Union was the “great common task of the 1970s” (“Die große gemeinsame Aufgabe der 70er Jahre ist die Fortentwicklung der Gemeinschaft zur Wirtschafts- und Währungsunion) and that it represented a “new Magna Carta for the Community” (“Der von den Sechs zusammen mit der Kommission ausgearbeitete Stufenplan stellt in Wirklichkeit eine neue Magna Charta für die Gemineinschaft dar”) (Deutscher Bundestag, 1970: 4269)
The three-stage implementation plan outlined in the Werner Report was formally endorsed by the European Council of Ministers on March 22, 1971.
The main features of the Werner Plan are worth dwelling on. Under the Heading “The Final Objective”, the Report (1970: 9) aims “to determine the elements that are indispensable to the existence of a complete economic and monetary union”. Their outline is the “minimum that must be done”. So what are these indispensable and minimum elements?
They include (Werner, 1970: 10)
… the total and irreversible convertibility of currencies, the elimination of margins of fluctuation in exchange rates, the irrevocable fixing of parity rates and the complete liberation of movements of capital. It may be accompanied by the maintenance of national monetary symbols or the establishment of a sole Community currency.
Significantly, it said (Werner, 1970: 10) that “the global balance of payments of the Community vis-à-vis the outside world is of any importance. Equilibrium within the Cömmunity would be realized at this stage in the same way as within a nation’s frontiers, thanks to the mobility of the factors of production and financial transfers by the public and private sectors.” The conceptualisation of the newly created economic and monetary union as a new ‘nation’ where the member-countries effectively become states of a federation was clearly thought elemental. As we know, that is not the conceptualisation that emerged around two decades later after the Treaty of Maastricht.
The Werner Report considered short-term economic policy would have to be “decided in its broad outlines at a Community level” and that it was essential that the “principal decisions of monetary policy should be centralized” (1970: 10). However, and that the for “influencing the general development of the economy budget policy assumes great importance” (1970: 10). The Report was in keeping with the times where fiscal policy (referred to as budget policy in the Werner Report), involving government decisions regarding spending and taxation were to be given a higher priority than monetary policy operations involving interest rate setting. Any divergences of structure within the Community would be addressed by appropriate levels of “financial … compensation” coordinated at the central level. National budgets would not be responsible for addressing asymmetric development (Werner Report, 1970: 11).
Importantly, the Report concluded that an effective economic and monetary union would require, among other elements (1970: 12):
- the creation of liquidity throughout the area and monetary and credit policy will be centralized;
- monetary policy in relation to the outside world will be within the jurisdiction of the Community;
- the policies of the Member States” as regards the capital market will be unified;
- the essential features of the whole of the public budgets, and in particular ‘variations in their volume, the size of balances and the methods of financing or utilîzing them, will be decided at the Community level;
Of further importance, the Werner Report (1970: 13) emphasised that while the “transfer to the Community level of the powers exercised hitherto by national authorities will go hand-in-hand with the transfer of a corresponding Parliamentary responsibility from the national plane to that of the Community. The centre of decision of economic policy will be politically responsible to a European Parliament”, which would be elected on the basis of universal suffrage. The recognition that economic policy should be democratically determined and those responsible for the policy should be held accountable to the will of the people was fundamental to the way the Europeans were conceptualising economic and monetary union in 1970. There was no hint that this level of intervention would be the domain of officials centred in Brussels who would do deals with unaccountable bodies such as the International Monetary Fund (IMF) that would result in millions of Europeans being made unemployed, which is the norm in Europe in 2014.
To take our discussion further, we can conclude that that the intent of the Werner Report was that:
1. There should be a Community-wide central bank which acts as the lender of last resort and is responsible for regulation and oversight.
2. That monetary policy will be centralised.
3. That there should be centralised capital market access.
4. That the ‘federal’ fiscal operations – size of deficits, debt-issuance etc will dominate national and regional budgets, which will be retained to ensure localised initiatives are effective.
In other words, the type of structure that exists in a number of functioning federations such as Australia, Canada, the United States of America.
[TO BE CONTINUED]
THIS DISCUSSION IS LEADING US TO THE WAY IN WHICH EUROPE REACTED TO THE COLLAPSE OF THE BRETTON WOODS SYSTEM AND PARTICULARLY THE WAY IN WHICH GERMANY AND FRANCE REACTED IN THE EARLY 1970s WHERE GERMANY WANTED A JOINT FLOAT BUT FRANCE (AND THE EC) WANTED TO MAINTAIN FIXED PARITIES WITH CAPITAL CONTROLS.
[MORE HERE ON THE 1970s DEBATES, DELORS REPORT etc NEXT TIME]
This list will be progressively compiled.
Bank of International Settlements (1970) Fortieth Annual Report, Basel, June 8, 1969. http://www.bis.org/publ/arpdf/archive/ar1970_en.pdf
Deutsche Bundesbank (1969) Monthly Report October 1969, http://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report/1969/1969_10_monthly_report.pdf?__blob=publicationFile
Deutsche Bundesbank (1969) Monthly Report November 1969,
Notulen Ministerraad (MR), 27 October 1967 – www.historici.nl/pdf/europa/C00103.pdf