The Politics and Economics of European Monetary Integration

Loukas Tsoukalis

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351743860
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The object of this work, first published in 1977, is to examine the history of the economic and monetary union (EMU) in the European Community, the policies of the parties involved and the conflicts of interest created in the political and economic environment within which all this has taken place. This title will be of interest to students of monetary economics and finance.

1 Introduction: A Post-Mortem?

In 1970, economic and monetary union (EMU) had become the central issue in the discussions about the future progress of the European Economic Community. By the end of 1973, interest in it had diminished considerably and nobody seriously believed in its feasibility within the foreseeable future. At that time, one would have been tempted to write a post-mortem on the subject and consider it as yet another episode in the history of European integration, like the issue of the European Defence Community in the early 1950s, which would soon be forgotten. But was it really a page which had been turned once and for all? Was EMU destined to become the big non-event of the early 1970s?

Less than two years after the long and rather absurd discussions which took place at the end of 1973 within the highest organs of the Community on the subject of the transition to the second stage of EMU, the Commission’s Report on European Union stressed again the need to move farther towards monetary integration. This applies even more to the Tindemans Report which came out a few months later.

Have the attitudes and policies of different countries towards EMU been determined by purely short-term tactical considerations? Or were there any real economic motives and long-term objectives behind it? If the latter is the case, then this issue will appear again and again in the future, despite the setbacks suffered so far. Moreover, its feasibility will increase once the political and economic environment becomes more favourable.

Almost every scholarly work on the subject has either concentrated on the theoretical aspects or has provided a blueprint for action without taking into consideration the different interests involved. Following the orthodox tradition of economic analysis, most economists have not attempted to explain the different policies followed or to analyse the conflicts of interest. As regards, the ‘neutrality’ or ‘objectivity’ of economic analysis, one simply has to participate in one or two conferences together with economists from other EEC countries to find out how often differences of views even among academics coincide with national differences, not to mention political ideologies.

I think that the apparent technicality of international monetary issues has discouraged political scientists from dealing with this subject. The complicated terminology which has developed in this field has created almost a closed shop for specialists. Equally, despite the wide political ramifications of EMU, a study of its history cannot be limited to the political sphere. The different policies followed cannot be explained without some understanding of the economic issues involved.

The object of this work is to examine the history of EMU in the European Community, the policies of the parties involved and the conflicts of interest created in the political and economic environment within which all this has taken place. The study of EMU is an open-ended story, or at least one may say that we are still spectators watching the second act of the play without really knowing whether this will have a ‘happy ending’. Obviously, the definition of ‘happy’ depends on where exactly you live, whether this is the Ruhr valley, Scotland or New York. Some lessons will be drawn from past experience and an attempt will be made to understand the present situation and to make some modest projections about the future.

In a sense, this is a limited exercise in international political economy. It is limited because it is not based on anything more than a rudimentary theoretical framework and because it does not go much below the national level in the analysis of politico-economic developments. This is partly a reflection of the poverty of theory which goes beyond the artificial enclaves of neo-classical economics and ‘pure political science’.

I have relied on the main political theories of European integration and on some basic economic works on monetary union for the theoretical background of this study. It is neither an objective in itself to have some theory in a clearly policy-oriented work nor is it because of an exaggerated sense of completeness. Part I has been written for two main purposes. One is to facilitate a better understanding of what has actually happened. For example, it would be difficult to explain the attitudes of some governments and the Commission with respect to EMU unless one had some clear idea of what were the main tenets of the neo-functionalist theory and strategy. The need for some economic analysis seems to me to be more straightforward. The other purpose is that the study of the history of EMU can also serve as a testing-ground for various theories. If this can show the inadequacies of some of our analytical tools, it may hopefully point to a certain direction for future research. Therefore, I would ask the reader whose main interest will probably lie in the actual politics and economics of EMU not to be discouraged by the short theoretical section which precedes it.

The study of the history of European monetary integration starts with an examination of the period between the signing of the Treaty of Rome and the Hague Summit in December 1969. This period can be seen as the pre-history of EMU. Its study shows how monetary co-operation evolved from the very restricted area which it was given in the Articles of the Treaty to the first Barre plan and the plethora of proposals for monetary union. It also helps to illustrate the evolution and the changes of attitudes of the principal actors.

The main focus of attention has concentrated on the period between the Hague Summit of 1969 and the end of the first stage of economic and monetary union in January 1974. The political and economic background of the Summit has been examined as well as the various plans which were later put forward by national governments for the creation of an EMU. Despite the apparent agreement as to the final objective, serious differences emerged between the various plans. These were only the prelude to the disagreements which later came out in the open and contributed to the early death of EMU. Particular attention has been paid to the plan submitted by the Werner group and the type of economic reasoning which lay behind it. The negotiations which followed it were marked by the reversal of French attitudes due to Gaullist opposition to any form of supranationalism. They also illustrated the political importance of EMU for all governments concerned.

The period between December 1969 and March 1971, when the decisions for the launching of the first stage of EMU were taken, served as the preparatory stage. The exchange crisis of May 1971 and the inability of EEC countries to reach a common stand turned the Council decisions into a tabula rasa. The monetary crisis also made clear the decisive role of the external environment on EEC affairs and the fact that monetary issues had become highly politicised. Despite the fact that the external challenge constituted one of the main factors behind the growing European interest in monetary integration, the EEC countries seemed to take the survival of the Bretton-Woods system for granted. The possibility of its complete breakdown and its implications for EMU were not taken seriously into account, at least during the preparatory stage.

The decision to re-launch EMU was made possible only when an international agreement on the monetary crisis had already been reached. Nevertheless, as was quickly shown by events, fixed exchange rates which were almost identified with EMU during the transition period could not be guaranteed by a simple act of legislation. The floating of the pound in June 1972 did not prove a strong enough warning sign for the nine heads of government who hastened to endorse an impressive list of intentions at the Paris Summit in October 1972. An attempt has been made to explain the political and economic factors which influenced the discussions at this Summit.

The experience from the first stage of EMU has been discussed under four main headings, namely, the ‘snake in the tunnel’, capital movements, co-ordination of economic policies and the Monetary Fund. The particular problems which arose in each field have been discussed as well as the factors which have led to divergent policies and incompatible objectives between the EEC countries. Similar difficulties are likely to reappear in the future if the project of EMU comes back on the table.

The discussions on the transition to the second stage, which took place in the late months of 1973, showed clearly the degree of disillusionment shared by all EEC governments with respect to EMU but also their unwillingness to accept it in public. The general malaise which prevailed in the Community at the time was also reflected in these discussions.

The more recent developments which have taken place during the so-called ‘a’ second stage have also been described. Here the attempt has been to highlight only the major developments and landmarks rather than to go into a detailed investigation of what happened during the last two years. I am only too aware of the limitations and dangers in describing and analysing recent events. The main objective has been to re-create the political and economic environment within which the latest proposals, ranging from the Marjolin to the Tindemans Report, have been made.

The attempts towards the creation of a regional monetary bloc in Western Europe coincide with the most turbulent years of the postwar international monetary system and its total collapse in 1971. At the same time, long and difficult discussions took place on the reform of the Bretton-Woods system. Developments on the two levels interacted although the influence seems to have been rather one-sided. It is developments on the international level which have affected the feasibility of European monetary integration rather than the other way round. In this work, recent international monetary history has been very briefly covered and only to the extent that international events have influenced the course of European monetary integration. Once the main objective is made clear from the beginning, I do not think there is any need for apologies for the Eurocentricity in the approach adopted. In any case, postwar international monetary relations have already been discussed elsewhere.[1]

With the end of the twelve-year transition period in December 1969, the European Community entered into the definitive stage of integration as envisaged by the Treaty of Rome. The chequered history of EMU, because of its crucial importance and the fact that it dominated discussions in the early 1970s, can also serve as a case-study of the EEC decision-making system as it has evolved during recent years. Has the European Community moved towards a more supranational or intergovernmental type of organisation? This is bound to have a serious effect on the future course of integration and on any new plan for an EMU.

Although it is unlikely that EMU will be seen again as the driving force towards political union, a number of economic motives still exist for the creation of a regional monetary bloc. Writing only one year ago, I would have been tempted to argue that whenever a new attempt were to be made, the approach would be substantially different from the one adopted in the early 1970s. Official reactions and a few academic works in this field pointed towards this direction. More recent events, like French reactions towards the ‘snake’ and the proposals included in the Tindemans Report on European Union made me more cautious and rather doubtful as to whether enough has been learnt from past experience.

PART I

2 European Integration: Theories and Strategies

Political and Economic Determinism

Co-operation between sovereign states is not a new phenomenon. Nevertheless, the number of attempts made in the postwar period to establish various forms of co-operation among nations—with a wide range of variation in terms of degree or kind—is unprecedented in international history.

The case of Western Europe, and particularly the six states, France, the Federal Republic of Germany, Italy, Belgium, the Netherlands and Luxembourg, which created the European Coal and Steel Community (ECSC) in 1950 and later signed the Treaty of Rome establishing the European Economic Community (EEC) and the Atomic Energy Community (Euratom), has been singled out for two main reasons. One is that the six states went farther, in terms both of institutions and economic co-operation, than any other group of sovereign states in the postwar period. The other reason is that political union has been set as the final objective, at least by some of the protagonists of the European scene.

With the main emphasis laid on the three above-mentioned European organisations and with a parallel examination of attempts to create a common market in parts of Africa and Latin America, political scientists have tried to provide an ex post interpretation of such events. Different schools of thought have been created, which have contributed a growing literature ranging from modest attempts to provide political explanations to more sophisticated theories using the modern tools of political science.

To a large extent, different interpretations made by academics have reflected different attitudes and thinking of influential elites and political leaders in Western Europe. In most cases, a theory has only been an explicit presentation of a strategy followed by some policy makers and the dividing line between the two has been rather blurred.

The object of the present study is to examine the attempts made towards monetary co-operation in the EEC, leading to ambitious plans for the creation of an EMU, and the turbulent path followed by the latter. At the end of the 1960s, EMU was seen by many people as the next logical step after the creation of a customs union. Apart from economic motives, EMU was also considered as a means of approaching political union. Such expectations were closely related to an implicit strategy and a set of assumptions made with respect to the whole course of European integration.

Since the present study concerns a policy issue, an examination of the main theories and strategies on European integration will be useful only to the extent that it contributes to a better understanding of the different policies followed with respect to EMU. This is where the main emphasis will lie.

Before proceeding to examine in some detail the main elements which characterise each school of thought, it would be useful to drawn one important distinction, namely, between political and economic determinism. The difference between those who believe that economic relations determine the political superstructure and those who see in political relations the determining factor, both within the national framework and the international system as a whole, is a classical one. Marxists[1] belong to the first category while the traditional school of international relations is a typical representative of the latter. Even before the establishment of the ECSC and up to the present moment, the difference has underlain the whole process of European integration. Would the direct transfer of powers from the nation-state to the Community level and the creation of new institutions lead more quickly to the purported goal of political union? Or would it be easier to start by integrating sectors of the economy, which would gradually bring about the need for political integration? The path actually chosen lay closer to the second approach.

The above may seem to suggest that there was some general agreement about the final political goal. Although this might be close to reality at the time of the signing of the Paris Treaty in 1950, the failure of the European Defence Community and the negotiations which preceded the establishment of the EEC and the Euratom in 1958 showed that such an agreement no longer existed. Therefore, it may be pointed out that the fact that the second approach was adopted was not a result of choice but of necessity, the reason being that a frontal attack on the nation-state by a direct transfer of power in the political sphere would not be accepted. But yet, the implications of the approach actually chosen were not seen in an identical way. There were those who believed in the cumulative logic of economic integration which would ultimately lead to political union. This was a typical c...