the birth of the euro--10/8/24

08 Oct 2024

the birth of the euro--10/8/24

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Today's selection-- from Europe Recast by Desmond Dinan. The radical idea of a common European currency as it emerged in the 1980s through a bewildering array of ideas and institutions including the European Monetary System, the European Community (the executive branch of the European Union), and the European Monetary Union:

“Apart from the single market program, the existence of the European Monetary System helped bring EMU back onto the EC's agenda in 1987 and 1988. Participation in the exchange rate mechanism of the EMS promoted a degree of economic convergence and facilitated exchange rate stability. The experience of working together in the exchange rate mechanism also reconciled many politicians and officials to the prospect of EMU. Ten years earlier, Leo Tindemans had reported regretfully that there was not enough trust between national governments to transfer responsibility for EMU to a central European authority. By the late 1980s, the EMS had spawned a network of officials in the Commission and national capitals who were committed to close monetary policy cooperation.

“Operational problems with the EMS led to calls for its reform and possible replacement by EMU. The German mark was the system's de facto anchor currency, and other central banks followed the monetary policy lead of the Bundesbank. Germany's partners disliked at the ‘asymmetry’ of a system that was so obviously dominated by the mark and by German policy preferences. Pressure on the French franc triggered a revaluation of the stronger currencies in January 1987 and sharpened French criticism of the system. France pressed for better coordination of monetary policies and greater flexibility in exchange rate intervention. That resulted in the so-called Basle-Nyborg agreement of September 1987, negotiated by the Committee of Central Bank.

“Governors, a key monetary policy body that met in Basie, and endorsed by the economic and finance ministers in Nyborg) to strengthen the EMS, notably by monitoring monetary developments and coordinating interest rate policies more closely, and by relaxing the rules on intervention. The agreement helped the EMS to respond better to fluctuations in international currency markets, such as the upheaval after the Wall Street crash in October 1987, but did not address the underlying problem of asymmetry.

“Chafing at the ascendancy of the Bundesbank while acknowledging the benefits of German-inspired monetary policy preferences, notably price stability, French officials warmed to the idea of a monetary union in which France would be on a par with Germany. At the same time, the single market program, which included proposals for the liberalization of capital movements, provided an increasing impetus toward EMU. The maintenance of exchange rates within the EC seemed inconsistent with and contradictory to the objectives of the single market. Already enthusiastic about the single market, business leaders began to take an interest in monetary union. Valery Giscard d'Estaing and Helmut Schmidt, authors of the EMS, formed a high-level committee to lobby for it.

The flag and emblem of the European Union (EU).

“The relationship between the single market and the EMS provided an additional argument in favor of EMU. Tommaso Padoa-Schioppa developed the point in an influential report in early 1987 on the implications of the single market for the EC's economic system. ‘In a quite fundamental way,’ Padoa-Schioppa pointed out, ‘capital mobility and exchange rate fixity (in the exchange rate mechanism) together leave no room for independent [national] monetary policies.’ Because a unified market with a free flow of capital could put the EMS under great strain, Padoa-Schioppa recommended the establishment of a monetary union.

“The momentum of market integration, continuing asymmetry in the EMS, and the possible impact of free capital movements on the exchange rate mechanism prompted Edouard Balladur, France's finance minister, to draft a memorandum for the Economic and Financial Affairs Council in January 1988 titled ‘Europe's Monetary Construction.’ After reviewing the history of the EMS and the trajectory of the single market, Balladur concluded that the EC should adopt ‘a single currency ... [and a] common central bank.’ The Balladur memorandum signaled France's dissatisfaction with the status quo and willingness to embrace EMU.

“A similar memorandum the following month by Hans-Dietrich Genscher, Germany's foreign minister, was even more significant, not least because Germany was then in the Council presidency. While writing in a personal capacity, Genscher endorsed the idea of a common currency and a European central bank, modeled of course on the Bundesbank. Genscher's initiative indicated Germany's growing openness to EMU, although the Bundesbank remained opposed to the idea.

“Genscher's trial balloon emboldened Delors to advocate EMU more openly. Not wanting to detract attention from the single market program and stir up sentiment against EMU, Delors had so far moderated his public statements on the subject. With the single market well on track and the post-Single European Act budget package out of the way, Delors turned his attention squarely to EMU. As it was, Delors had responsibility within the Commission for economic and monetary affairs. Accordingly, he attended the monthly meetings of the Committee of Central Bank Governors at the headquarters of the Bank for International Settlements. Delors sought to ingratiate himself with the central bankers, a notoriously cliquish group. In particular, he cultivated relations with Karl-Otto Pohl, president of the Bundesbank, one of the most influential members of the committee and a presumed opponent of EMU.

“Having responsibility in the Commission for monetary policy, Delors also attended meetings of Ecofin, which played an important role in the evolution of EMU. The General Affairs Council (of foreign ministers) was also influential and vied with Ecofin for supremacy in monetary policy matters. But the European Council was the most powerful body, not only because of the political sensitivity of EMU but also because, as stipulated in the Single European Act, any effort to establish EMU would require the convening of an intergovernmental conference, in which the European Council would negotiate the final deal.

“Delors had the great advantage of being a member of the European Council, although officially, as Commission president, he carried less weight than the national leaders. Within the European Council, and on the question of EMU generally, Mitterrand and Kohl were the key players. Mitterrand, since his economic about-face in 1983, had openly espoused greater European integration and made ‘the construction of Europe’ the leitmotif of his presidency. He favored EMU and, in the mid-1980s, nudged Kohl to take a stronger stand on the issue. Mitterrand, during a visit to Aachen in October 1987, where he was seduced by the charm of the historic town hall and the spirit of Charlemagne, glowingly of a common Franco-German destiny. As the motor of European integration, France and Germany should spearhead closer cooperation in a range of areas, including monetary policy.

“Kohl, another lifetime advocate of European integration, was susceptible to arguments in favor of EMU. Yet Kohl faced strong resistance from the Bundesbank, which did not trust the political instincts and policy preferences of the French and Italian monetary authorities and did not want to lose its dominant position in the EMS. Germans deeply respected the Bundesbank, an independent body with an impeccable record of monetary policy management. As a cautious and astute politician, Kohl would not confront the Bundesbank on the question of EMU until and unless circumstances changed and German public opinion became more open to the idea.

“Circumstances began to change in the late 1980s not only within the EC, where implementation of the single market program generated interest in EMU, but also in the Soviet Union, where Mikhail Gorbachev's policies of economic and political reform began to have an impact abroad. Developments in the Soviet Union raised the specter of the German question, which had haunted the early years of European integration. A visit to Moscow in July 1986 convinced Mitterrand of the importance of tying Germany more tightly into Europe should Gorbachev's reforms result in significant geopolitical change. Kohl, equally aware of what was happening in the Soviet Union and sensitive to French concerns, was happy to commit Germany unequivocally to deeper European integration. EMU would be a sure sign of Germany's intentions.

“Mitterrand and Kohl had ample opportunity to discuss EMU together. The close relationship between Roland Dumas and Genscher, the French and German foreign ministers, was equally important for the evolution of Franco-German thinking on the subject. Dumas was Mitterrand's most trusted interlocutor. He and Genscher spoke regularly on the telephone and met frequently in the Council and other forums. Genscher, the leader of the junior party in Kohl's coalition government, was not close to Kohl, but his position as foreign minister and coalition partner gave him considerable influence in Bonn.”