Orchestrating Europe (Text Only). Keith Middlemas
countries (which included all the EEC states) kept the issue of regional monetary reform on the agenda. In 1964 the French finance minister Giscard d’Estaing proposed the creation of a new reserve unit to eliminate use of the dollar and to serve the needs of intra-European trade. This idea was killed by a combination of the point-blank refusal of the US to contemplate such arrangements, the reluctance of some EEC partners, and a policy conflict within the French government. Jacques Rueff, architect of the French reform programme of 1958, favoured instead an attack on the pre-eminence of the dollar, through using the ‘rules’ of the international system rather than through changing them. Since the dollar was convertible into gold, France decided in 1965 simply to do just that; a decision that provoked d’Estaing’s resignation. Although member states shared France’s underlying concern, they were uneasy about these tactics; and varied in their degree of susceptibility to American diplomatic pressure. On this last point, West Germany was particularly sensitive to US pressures, since the country depended upon the large American troop presence for its security.
A further impetus towards creating a Community attitude on monetary problems came from the decision in 1964 to adopt a common ‘unit of account’ for determining national prices. This implied that domestic prices would need to adjust proportionately to any future change in exchange rates. Although such adjustments were considered unlikely, the Commission wanted mechanisms to reduce the chances further still. At this point it faced opposition on the grounds that tying down one part of the monetary equation made no sense without tightening other components – a line of argument which had already been voiced by German delegations at various international gatherings for over a decade. They demanded economic policy coordination as a prerequisite for monetary union.
The essential underlying assumption that international parities were somehow immutable was punctured by the crises of 1967–8. When sterling devalued in November 1967, a two-tier gold market was introduced in March 1968. As speculation built up against the franc, France introduced exchange controls in spring 1968. Germany provided a safe haven for funds but the government denied that an overvalued DM had caused the problem. Instead, in autumn 1968, it imposed extra taxes on exports and took fiscal measures to encourage imports. The Bundesbank’s stubborn refusal to revalue, despite massive pressure, worried all concerned and pressure for a realignment of exchange rates could not be avoided. But it was a symptom of the depth of the conflict that when the decision was made, the action was not coordinated. France, unilaterally, devalued by 11.1% in September 1969. With German honour thus satisfied, the DM was allowed to float that same month and was formally revalued by 9.3% the following month.
These events produced a surge of interest in regional solutions. The Commission tabled two memoranda in the course of 1968, and in February 1969 the so-called ‘Barre Report’ was submitted. Although the reports differed in emphasis and tactics, they agreed on creating a new reserve unit, improving policy coordination and a establishing a mutual aid system. The Council of Ministers responded, since it also ‘recognized the need for fuller alignment of economic policies in the community and for an examination of the scope for intensifying monetary cooperation’. Even so, there was no immediate follow-up. Meanwhile, the need for some initiative was underlined by the situation created by the 1969 currency realignment. Since neither France nor Germany had wanted national farm prices to change in line with the new exchange rates, (rather than allow the CAP to collapse) the Commission had to produce a system of ‘green’ exchange rates to preserve the fiction of common price levels.
It was some relief when, prompted by the German chancellor, Willi Brandt, the Hague summit of December 1969 endorsed the aim of ‘Economic and Monetary Union’ (EMU) and set up the Werner Group. Although Brandt’s proposal seemed a major departure from the usual German line of insisting on the primacy of prior policy coordination, the Werner Group very soon found itself embroiled in old conflicts. Two schools of thought prevailed: the ‘monetarist’, which saw fixed exchange rates as a means of forcing policy coordination, and the ‘economist’ school, represented by Germany and the Netherlands, which saw the maintenance of fixed parities as impossible without convergent economic policies. The Werner Report, submitted in October 1970, adopted a compromise position. It called for the realization within ten years of complete and irreversible convertibility, closely aligned exchange rates, the full liberalization of capital movements and the creation of a common central banking system.
To achieve these ends it recommended a narrowing of the margins of fluctuation (from 1.5% either side of par) and a better organization of policy cooperation, especially in the area of foreign monetary policy. It took until March 1971 before the measures were approved. Although the French endorsed the monetarist approach, they wanted to avoid at all costs any discussion on the political and institutional aspects of EMU. But it was exactly a commitment on these aspects that Germany and the Netherlands saw as the price for their concessions. As a result, the resolution approving the goal of EMU left the questions of the transfer of power and institutional reform undecided.
Thus nothing was in place when the Bretton Woods system experienced its next, and ultimately terminal, crisis. In 1970 the USA, still experiencing mounting balance of payments deficits, had eased its monetary policy; consequently, speculative funds flowed back to Europe and, in particular, to Germany. The thinking of the German Bundesbank now moved quickly in the direction of a DM revaluation as a means of reducing the attraction for foreign funds, but there was still the question of how to reconcile this with maintaining parities within the EEC. In spring 1971, the German finance minister, K. Schiller, apparently against the feelings of the majority within the Bundesbank, proposed a joint flotation of all EEC currencies against the dollar. This was resisted by those countries that did not want their currencies dragged upwards in the slipstream of the DM. Instead something reminiscent of the 1966 Luxembourg ‘agreement to disagree’ was decided. The DM and the guilder floated, while other countries introduced capital controls. The decision by Nixon to suspend dollar convertibility in August 1971 only reinforced the divide. Italy now joined Germany and the Netherlands in advocating flexibility of exchange rates, while France, Belgium and Luxembourg preferred a system of exchange controls. Action was further delayed by a general agreement that the key to a global currency realignment lay in a dollar devaluation and not in a revaluation of other currencies. Thus another four months elapsed before the Smithsonian Agreement validated a change of most EEC rates against the dollar of between 7.5 and 16.9%.
The Smithsonian Agreement also allowed currencies to float by 2.25% on either side of the new central rates, which implied that EEC currencies could diverge by as much as 9% before triggering intervention to stabilize the exchange rate. This prospect produced a compromise whereby European currencies would maintain a tighter rein on their rates with each other, whilst moving jointly against the dollar: the so-called ‘snake in the tunnel’. The system was also briefly joined by the aspirant members. However, there was still no mechanism to produce convergent policies, nor were convergent policies adopted. Soon the new rates appeared as unrealistic as the old ones they had replaced. In June 1972, sterling left the snake and floated downwards. Ireland and Denmark, heavily reliant on the UK market, immediately followed suit, although Denmark rejoined after four months.
These mutations notwithstanding, the ‘success’ of the system prompted new moves, agreed in October 1972, to reinforce EMU but, significantly, no agreement was reached on the second step towards attaining the ultimate goal. Meanwhile divergent policies continued to exact their toll. Attempts to get the UK to rejoin the float in January 1973, when it joined the EEC, were rebuffed by a government that did not want to sacrifice recovery for exchange rate equilibrium. The following month, the Italian lira was forced out of the system. The fact that Sweden joined was little consolation. However, the final blow to the system (and to the chimera of economic and monetary union by 1980) was the fate of the French franc which in January 1974 was also left to float. As Tsoukalis comments, by this stage a group comprising Germany, Benelux and Scandinavia had to be understood as ‘little more than a DM Zone’.
The 1966 Luxembourg Compromise had allowed the Council, and thus the EEC, to resume its work by postponing the introduction of majority decision-making and allowing the right of national veto. For many observers who had looked for further progress towards supranationality and contributed to a body of neo-functionalist literature to rationalize their aspirations, the Community appeared interesting but no longer exciting. Moreover,