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Options for Europe – Part 38

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).


With the IGC approaching, the European Commission presented its own position paper for the December IGC (Commission of the European Communities, 1991), on August 21, 1990 (sometimes known as the Christophersen Report), which basically rubber-stamped the Delors Plan and emphasised the need for a single currency. The primary macroeconomic function exercised at the Community level would be monetary policy and that (Commission of the European Communities, 1991: 19):

The Community’s monetary policy and the institution responsible for it need to be committed explicitly to the objective of price stability. Given this priority, they have to support the general economic policy objectives defined at Community level by the competent institutions. The stability commitment needs to be written into the basic legislative texts … [and] … the new Community monetary system also needs to enjoy a high degree of independence vis-à- vis national governments and other Community bodies.

Monetary policy would be determined by the Council of a new “European System of Central Banks (or, in brief, ‘Eurofed’)” under the stability agreement (Commission of the European Communities, 1991: 20). The central bank would “enjoy a high degree of independence vis-à- vis national governments and other Community bodies” (p.19). National state bodies would, by dint of new national legislation, be prevented from compromising “the fundamental stability objective” (pp.19-20).

Thus, in the long intellectual battle between the ‘monetarists’ (France, Belgium, Italy) and the ‘economists’ (Germany and the Netherlands), the latter had won out handsomely. The model of economic policy that was emerging was clearly ‘Modell Deutschland’ with the Bundesbank culture to be defined in the proposed legal framework of the new monetary union. Even the Italian submission to Monetary Committe of the Council reflected the dominance of the new Monetarist paradigm in macroeconomics. The Italians say that “As a matter of fact, there is universal agreement that price stability is an essential prerequisite for any sound economic policy and that central banks are the institutions best equipped to pursue it. Thus a prerequisite for th effective working of the ESCB is that other macroeconomic policies do not endanger price stability” (Monetary Committee of the European Community, 1990: 1-2). The Italiam submission appeals to “recent developments in economic theory” (that is, the new Monetarist literature) to eschew “activist macroeconomics policies” (p.3), which is reference to discretionary fiscal interventions by government. While supporting “budgetary discipline” through the imposition of “binding rules” (p.8) they also recognise that these rules should not “unduly constrain … growth, employment and external balance” (p.8). There is the devil and the Italians evade the reality by calling for “a careful design of the legal framework” for the proposed monetary union.


Their claim to ‘universality’ of viewpoint is a common tactic employed by mainstream economists who want to give the impression that there is no debate nor contested ideas in macroeconomics. Margaret Thatcher often used the phrase that she had derived from the C19th libertarian Herbert Spencer that ‘there is no alternative (TINA)’ to free markets as she sought to justify the harsh economic changes she wrought in Britain in the 1980s. The current European policy obsession with fiscal austerity has used the same rhetoric. As Europe was about to enter monetary union, it was similarly held out that economists all agreed on these basis ‘facts’ – an independent central bank with a passive and rule-constrained fiscal policy was the only way to ensure prosperity. The evidence since the union was created clearly negates that view, but, even at the time of inception, there was no such consensus. Price stability does not require the dominance of monetary policy (interest rate setting) and tightly constrained fiscal policy. We will return to that discussion in later chapters.

American economist Alan Blinder (1987) presented a compelling critique of this view and concludes that the political importance of inflation had been blown out of all proportion to its economic significance. After dismissing the arguments that inflation imposes high costs on the economy, Blinder (p. 33) noted:

The political revival of free-market ideology in the 1980s is, I presume, based on the market’s remarkable ability to root out inefficiency. But not all inefficiencies are created equal. In particular, high unemployment represents a waste of resources so colossal that no one truly interested in efficiency can be complacent about it. It is both ironic and tragic that, in searching out ways to improve economic efficiency, we seem to have ignored the biggest inefficiency of them all.

The dilemma recognised by the Italians – that binding rules of budgetary policy could “unduly constrain the potential contribution of fiscal policy” to maintaining growth in output and employment – was put to one side by the ruling ideology of the day, and as an article of faith, it was claimed that my running a tight monetary stance to maintain price discipline, economic growth would be maximised. The reality was that tight monetary policy and strong growth might only be expected if net exports were very strong – as in the German situation and then only if spending growth in the rest of the world was strong. Certainly, the other European partners to this folly were not in the same position as Germany to withstand the deflationary policy stance that the Bundesbank specialised in.

That lesson has been learned the hard way during the GFC but anyone who dared question the Monetarist surpremacy, at the time, and, instead, advocated Keynesian remedies to reduce the entrenched European unemployment were met with derision from the bulk of the profession who had embraced the new economic theory and its policy implications. While the TINA brigade dominated the fact was that rise in acceptance of monetarism and its new classical counterpart was not based on an empirical rejection of the Keynesian orthodoxy, but in Blinder’s (1988: 278) words “was instead a triumph of a priori theorising over empiricism, of intellectual aesthetics over observation and, in some measure, of conservative ideology over liberalism. It was not, in a word, a Kuhnian scientific revolution”. The ideological basis of the dominance of the Monetarist thinking in the emerging design of the economic and monetary union in Europe in the late 1980s and early 1990s was a ‘weak’ foundation because it was blind to reality on a number of fronts, which we will examine in subsequent chapters.


But, at the time, it was the only show in town, and the Christosophersen Report also constructed discretionary fiscal policy as a “threat to monetary stability” and as a result of the “potential threat of budget deficits and their financing … additional provisions” are required (Commission of the European Communities, 1991: 24). These include the familiar provisions that were discussed above and were written into the Maastricht Treaty change:

(a) no monetary financing of public deficits or market privileges for the public authorities concerning the placing of public debt;

(b) no bailing-out; in the case of imbalances, a Member State could not benefit from an unconditional guarantee concerning its public debt either from the Community or from another Member State.

Further “excessive deficits must be avoided” (p.24) although the amorphous nature of when a deficit becomes ‘excessive’ was not specified. Yet, in this vague world, the Report concludes that “some yardstick would seem necessary for the identification of excessive deficits” (p.24). As we will see, the yardstick that finally entered the picture was an arbitrary deficit to GDP ratio written on the “back of an envelope” one night by an advisor to François Mitterand, so that the French could be taken seriously in the whole process.

The path was now set to Rome where the IGC would be held in tandem with the IGC on politial union on December 15, 1990. The conjunction of conferences was not coincidental. A crucial part of the restoration of the Franco-German accord on economic and monetary union after the rift over German re-unification came in March 1990 after the East German elections, which brought victory for Kohl’s Christian Democrats. If anyone was ever in doubt about the intention and public acceptance in Germany for re-unification, then the March 18 poll dispelled that doubt. The French had no option but to accept their opposition to the boundary changes to the east of them had failed and so the strategy was how to make the best of that failure (Riding, 1990). The revised French position on the imperatives of economic and monetary union was emerged as early as March 20, 1990, when the French Foreign Minister, Roland Dumas gave a radio interview and urged the Germans to not only focus on reunifying its own borders but also maintain a firm commitment to economic and monetary union. Dumas was quoted as saying that the task ahead was “to advance further, faster and more deeply toward building Europe” in both political and economic terms (Riding, 1990). Baun (2001: 617) argues that the bringing together of the economic ambitions (the “key objective of France”) and the polical aspirations (“Germany sought a stronger European parliament and more cooperation in foriegn and defense policy”) gave Helmut Kohl “something in return for agreeing to surrender the D-mark and German monetary sovereignty” to appease domestic political concerns.

The Italians couldn’t wait – Rome, October 1990

With German federal elections scheduled for December 1990, which might create uncertainty about the German position on economic and monetary union, the Italian Presidency of the European Council (Italian Prime Minister Giulio Andreotti) decided to call a unscheduled European Council summit in Rome on October 27-28 to advance the monetary union agenda. The summit didn’t wait for the IGCs, scheduled for December (after the German elections) and “decided to take a further step towards European unity” although the British delegation preferred “not to pre-empt the debate in the Intergovernmental Conference” (European Council, 1990: 2). The further step was to announce that the “second phase” of the Delors Plan would “start on 1 January 1994”, after “the Treaty has been ratified” which would “ensure the independence of the new members of the new monetary institution … [and] … monetary powers have been transferred” and “the monetary financing of budget deficits has been prohibited” and no bailouts allowed (European Council, 1990: 6). The third phase was foreshadowed to begin within a reasonable time after the European Commission and the Council had reflected on the “functioning of the second phase” (p.6).

At this stage there was no mention of the European Parliament despite the Christophersen Report having made it clear that if the responsibility for monetary policy was to be handed over to an unelected group who would not be answerable to the governments of the Member States then there had to be some ‘democratic oversight’. This, apparently, would be accomplished by the national governments ratifying its creation and the “method of appointment of its president and the board members” (Commission of the European Communities, 1991: 20). Further, the central bank would have to report to the European Parliament.

The European Parliament had been mostly compliant since the release of the Delors Report. Its April 14, 1989 resolution on economic and monetary union (2 days after the release of the Delors Plan) contained no major divergences from the ‘Monetarist party line’. The Parliament wanted to speed up the process of monetary integration by broadening membership of the EMS and requiring all Member States pursuing a common economic policy, despite the significant structural variations across these economies. They proposed a starting date of January 1, 1995, a much more truncated phase-in than the European Council had considered possible.

It promoted the Monetarist mantra about central bank independence and the need for “fixing money supply targets” (European Parliament, 1989: 334) despite the fact that central banks cannot fix such targets, which was soon revealed and exposed the poverty of the entire Monetarist theory. But the European Parliament was just part of the cheer squad and supported the central bank being legislated to adopt as its sole charter an inflation-first policy with no repsonsibility for economic growth and full employment and no capacity of elected governments to influence that policy. In particular, the Resolution claimed the “European Central Bank would be federal in nature” and “based on on what are long-established national central bank structures” (p. 335) but failed to note that in these long-established federal structures, the central banks and the treasuries cooperated closely to ensure on monetary matters, which ensured that federal fiscal policy could maintain prosperity across the federated states. In the Parliament’s vision, Europe didn’t need a federal treasury. How wrong they were.


Additional references

This list will be progressively compiled.

Blinder, A. (1987) Hard Heads, Soft Hearts, Reading, MA: Addison-Wesley.

Blinder, A. (1988) ‘The fall and rise of Keynesian economics’, Economic Record, 64(187), 278–94.

Commission of the European Communities (1991) ‘Intergovernmental Conferences: Contributions by the Commission’, Bulletin of the European Communities, Supplement 2/91.
also contains ‘Economic and Monetary Union, SEC (90) 1659, 21 August 1990′

European Council (1990) ‘Conclusions of the Presidency, European Council’, Rome, 27-28 October, 1990.

Monetary Committee of the European Community (1990) ‘Monetary and Fiscal Policy in the EMU: Contribution of the Italian Treasury to the debate in the Monetary Committee’, March 1, 1990.

Riding, A. (1990) ‘France Urges West Germany to Speed Unification’, New York Times, March 21, 1990.

Spencer, H. (1851) Social Statics: or The Conditions essential to Happiness specified, and the First of them Developed, London, John Chapman.

Teltschik, H. (1991) 329 Tage: Innenansichten der Einigung, Berlin, Siedler, Berlin.

That is enough for today!

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

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    This Post Has One Comment
    1. Isn’t this the wrong way around?

      Thus, in the long intellectual battle between the ‘monetarists’ (France, Belgium, Italy) and the ‘economists’ (Germany and the Netherlands), the latter had won out handsomely.

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