Abstract
Post-World War II events provided the motivation for European integration: America offered hope and support while the Soviet Union exerted pressure and generated fear. In the end, hope conquered fear.
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Notes
The J-curve effect describes the time lag involved in a real currency depreciation improving the current account balance. If export and import demand adjust gradually to real exchange-rate changes, the current account may follow a J-curve pattern after a real currency depreciation, first worsening and then improving. If such a J-curve exists, currency depreciation may have a contractionary initial effect on output.
The OEEC was expanded and renamed the Organization for Economic Cooperation and Development (OECD) in 1960.
The EPU agreement was signed on September 19, 1950 and implemented retroactively as of July 1, 1950.
The Bank of International Settlements (BIS) — 21st Annual Report, Basle: BIS, June 11, 1951, p.226.
The sterling bloc extended beyond the British Empire and encompassed Scandinavia, Egypt, Argentina and a number of Middle Eastern countries such as Persia (Iran) and Iraq.
After the 1950–51 crisis, Germany, except for 1979–81, had an almost uninterrupted series of current account surpluses until 1990.
Over a period of eight years, the EPU’s net aggregate balances amounted to approximately US$15.5 billion.
The six member nations had signed the Treaty of Paris, establishing the ECSC in April 1951 (ratified in 1952). The Treaties of Rome were signed by Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands. It not only established the EEC but also created the EIB and the European Atomic Energy Community (EURATOM).
Paragraphs 103 and 107 of the EEC Treaty of Rome, 1957.
As part of the 1974 drive toward better coordination, the Committees for Conjuncturel Policy, Medium-term Economic Policy and Budgetary Policy were consolidated into the Economic Policy Committee.
Although the Committee of Central Bankers gained influence in the 1970s, it was not until the 1980s that it began to play a major role in policy formulation.
The calm 1960s were disturbed by the 1967 pound sterling crisis which had resulted in an approximately 15 percent devaluation of that currency. In 1969, the French franc was devalued by 11.1 percent and the Deutsche mark was revalued.
The CAP was influenced by exchange rate adjustments through the pegging of agricultural product prices to the common monetary unit called the European Currency Account (ECA), and later through the system of Monetary Compensatory Accounts (MCAs). The ECA was linked to the U.S. dollar as well as to gold and later was transformed into the European currency unit (Ecu).
By the late 1960s the EEC together with the other two communities was informally renamed the European Community (EC). The new name was officially adopted by the Maastricht Treaty signed in 1992.
Federal Republic of Germany, France, Italy, Belgium, the Netherlands, and Luxembourg.
Karl Schiller was the main architect of the “economist” viewpoint of the EMU.
The principal architects of the “monetarist” view were Raymond Barre and Valéry Giscard d’Estaing.
A committee had been formed under the chairmanship of Pierre Werner in March 1970 to design an EMU plan.
Werner, Pierre, Baron Hubert Ansiaux, Georg Brouwers, Bernard Clappier, Ugo Mosca, Jean-Baptiste Schöllhom, and Giorgio Stammati. “Report to the Council and the Commission on the Realization by Stages of Economic and Monetary Union in the Community,” Commission of the European Communities, Luxembourg, 1970.
Werner Report, 1970, p.7.
Werner Report, 1970, p.12.
In addition to being endorsed by the six original EC member governments, the Werner Report was subsequently also endorsed by the three new entrants, Denmark, Ireland and the U.K. in October 1972.
Werner Report, 1970, p.27.
Werner Report, 1970, p.28.
Werner Report, 1970, p.28.
Werner Report, 1970, p.28.
Werner Report, 1970, pp.13, 26 and 29.
Later, in 1973, founded as the European Monetary Cooperation Fund (EMCF).
Under the Delors Report this is known as the “European System of Central Banks” (ESCB).
The Bretton Woods system collapsed in March 1973.
Also known by the French acronym FECOM.
The Basle Agreement became effective on April 24, 1972.
Ireland and the U.K. were in a monetary union from 1800 to 1979 in which the Irish punt was pegged to the pound sterling. The last 56 years represented a “voluntary” linkage as Irish independence was achieved in 1922.
Although the French franc had dropped out of the “Snake” in January 1974 owing to rising inflation, oil prices and exchange rate volatility, its reentry into a revised “Snake” looked feasible in September 1974. The franc eventually returned to the system in July 1975 at its previous central parity.
McDougall, Sir Donald et al. “Report of the Study Group on the Role of Public Finance in European Integration,” Vol. I-II, Brussels: Commission of the European Communities, 1977.
At the 1977 London Economic Summit, the U.K., in cooperation with the United States, attempted to pressure Germany to become the principal engine of increased global economic growth and of the reduction of current account imbalances within the Triad (United States, EC, Japan).
France had long been involved in plans to develop a more stable international monetary system. It participated in the Committee of Twenty (1972–74) which studied the possibility of fixed-but-adjustable exchange rates for the global monetary system and also took part in the IMF effort to develop a multilateral surveillance of economic policies (Second Amendment to the IMF Articles of Agreement of 1976). During most of the 1970s, France played an active role in modifying the global monetary system and the European integration process.
They continued to discuss the 1977 EC Commission Plan.
The Ecu was not “real money,” as it fulfilled only two of the three requirements of money; it was a store of value and a unit of account, but not a medium of exchange.
The original date of January 1, 1979 was changed owing to unresolved issues in relation to the Monetary Compensatory Accounts (MCAs) which linked the newly created Ecu to the price system of the CAP.
The ERM requires participating central banks to manage their currency within the set bands. They can use a range of tools as, for example, interest rate adjustments and/or central bank market interventions, which are the most common and most effective.
Ecu is also the name of a medieval coin used in France and England.
It should be noted that since 1979 the shares of the Deutsche mark and the Dutch guilder in the Ecu basket have always exceeded their economic weight, while the weaker currencies have always been underrepresented.
The bilateral fluctuation bands of the ERM were not exactly +/−2.25 percent, as they were computed by multiplying (dividing) the central rate by 1.022753 in order to bring consistency to the grid. Thus, the exact percentages were +2.275 and-2.225 percent.
The lira moved to the narrow +/−2.25 percent band in January 1990, but dropped out of the ERM during the September 1992 crisis only to rejoin again in November 1996 under the new +/−15 percent band.
The pound sterling joined the ERM in 1990 and left it during the September 1992 ERM crisis.
The Spanish peseta joined the ERM in 1989.
Germany and the Netherlands continue to adhere to the narrow +/− 2.25 percent bands on a voluntary basis under a bilateral agreement.
For more detail, see the section on “Performance of the EMS (1979–95)” in this chapter.
These gold reserves were revalued semi-annually to reflect market value.
The Basle-Nyborg Agreements received their name from the Meeting of the EC Central Bank Governors in Basle, and from their ratification at the ECOFIN Council meeting in Nyborg.
For a detailed chronology of the ERM strains and subsequent realignments, see Ungerer, Horst and Jouko J. Hauvonen, August Lopez-Clatos, Thomas Mayer. European Monetary System: Developments and Perspectives. Occasional Paper no. 73, Washington D.C.: IMF, November 1990.
In 1982–83, French, Belgian and Danish economic policies converged to some extent. However, the impact of this convergence was experienced only after considerable delay.
Germany and the Netherlands continue to adhere to the narrow +/− 2.25 percent bands on a voluntary basis.
This refers to Sir Alan Walters’ (ex-chief economic advisor to Prime Minister Margaret Thatcher) critique of the ERM. See Chapter II for details.
This refers to Otmar Emminger’s (ex-Bundesbank president) letter to the German government with respect to the Bundesbank’s role in the EMS. See Chapter II for details.
See Chapter II for a detailed discussion of this crisis.
As agreed upon by a bilateral agreement, the Dutch guilder stayed in the +/−2.25 percent band with the Deutsche mark.
The market exerted pressure just prior to the lifting of Greece’s remaining capital controls.
“Progress Towards Convergence,” European Monetary Institute (EMI), Frankfurt am Main, November 1995, p.40.
“Pact sets rules for ins and outs of ERM”. Financial Times, December 17, 1996, p.2.
January 8, 1988 memorandum by Edouard Balladur to the ECOFIN Council as translated for the EC Monetary Committee (April 29, 1988).
February 23, 1988 memorandum by Giuliano Amato to the ECOFIN Council, published as “Un motore per lo SME” in the Italian newspaper // Sole.
Memorandum of 1988 by Hans-Dietrich Genscher, “A European Currency Area and a European Central Bank.”
Alexander Lamfalussy, the General Manager of the Bank of International Settlements (later President of the EMI); Niels Thygesen, Professor of Economics, Copenhagen University; and Miguel Boyer, President of Banco Exterior de España.
At the June 26–27, 1989 Madrid Summit, the European Council decided that Stage I of the Delors Report, should begin on July 1, 1990, and requested that the “competent bodies” implement the necessary provisions and to organize an IGC to begin the preparatory work required to “lay down the subsequent stages.”
Report on Economic and Monetary Union in the European Community. Article 22. Committee for the Study of EMU, Luxembourg: Office for Official Publications of the European Communities, 1989, pp. 18–19. These features were originally identified by the Werner Reports of the early 1970s.
The single currency’s name (the “Euro”) was decided at the Madrid European Council Summit in December 1995. Sections of this book that discuss 1989 Delors Report and 1992 Maastricht Treaty events in a historical context continue to refer to the single currency as the Ecu.
Delors Report, Article 60, 1989, p.40.
Delors Report, Article 24, 1989, p.19.
Delors Report, Article 32, 1989, p.25.
This is one of the major differences between the Delors Report and the Werner Reports. While the Werner Reports considered sustained growth and other macroeconomic aims as the major objective of the new common institution, the Delors Report identified price stability as the primary objective.
Delors Report, Article 32, 1989, p.26.
Delors Report, Article 32, 1989, p.26.
Delors Report, Article 32, 1989, p.26.
The decision to proceed with the revisions of the Treaties of Rome was also augmented by German re-unification.
Stage I was announced to begin on July 1, 1990 at the June 26–27, 1989 European Council Meeting in Madrid. This stage is not controversial.
Article 109.e.2 of the Maastricht Treaty, 1992.
Articles 104–104.a of the Maastricht Treaty, 1992.
Article 109.e.2.a of the Maastricht Treaty, 1992.
Article 109.m.1 of the Maastricht Treaty, 1992.
The EMI, located in Frankfurt, is the forerunner of the European Central Bank (ECB). As specified by the Treaty, its functions are the coordination of monetary policies and the preparation of all technical requirements for a common monetary policy. Although such policy will continue to be set by the national central banks, the Treaty requires that the central banks be independent of government control by the end of Stage II. In essence, the EMI will take the place of the EC Committee of Central Bank Governors and will assume the functions of the European Monetary Co-operation Fund (EMCF), currently administered by the Bank of International Settlements (BIS). Moreover, the EMI will monitor the smooth functioning of the ERM and thus can intervene in the market. However, the extent to which it can do so depends on the bilateral agreements it will have with member state central banks with respect to the transfer of foreign exchange reserves. The EMI can act as an agent for the member states as long as it does not undermine national monetary policies.
“Normal” fluctuation margins originally pertained to the +/− 2.25 percent currency bands of the ERM. It should be noted that in the aftermath of the ERM crisis and the subsequent widening of the currency bands to +/−15 percent, what was “normal” was debatable (among EU member nations) for a long time. However, to date, the EU’s official position is that the +/− 15 percent currency band is “normal.”
It should be noted that the wording of the Maastricht Treaty text allows a great deal of political and economic flexibility in determining if and when member states have met the convergence criteria.
On February 17 1993, the deadline was extended to the end of 1996. Doubts about meeting the convergence requirements have grown because of their deflationary impact in times of rising unemployment (about 17 million people). On May 31, 1995, the EU Commission’s Green Paper further delayed the deadline to meet the convergence criteria to 1997 (and possibly to 1998). In the November 1995 EMI Report “Progress Towards Convergence,” the deadline was again revised and it was recommended that the participation decision deadline be set for in early 1998. This new deadline was officially adopted during the December 16–17, 1995 European Council Summit in Madrid with the understanding that actual 1997 performance data would be used to make the selection.
Article 109.1 and 109.j.4 of the Maastricht Treaty, 1992.
Later renamed the “Euro” at the Madrid European Council Summit in December 1995.
“Green Paper: On the Practical Arrangements for the Introduction of the Single Currency”. EU Commission: Brussels, May 31, 1995.
As before, the following section will continue to refer to the single currency as the Ecu because it is a historical recapitulation of the May 1995 Green Paper.
Article 109.j and 109.1 of the Maastricht Treaty, 1992.
Green Paper, para.29, May 1995, p.17.
In May 1995, the EMI Council released a report describing the TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) system. This is a unified EMU-wide payment mechanism provided by the ESCB at the beginning of Stage III of the EMU. The TARGET system is necessary to secure implementation of the common monetary policy and to facilitate the settlement of large-value cross-border payments among member nations. TARGET is based on the existing national Real-Time Gross Settlement (RTGS) systems and their interlinkages. The RTGS is in operation in four member states and is currently being implemented in all of the other EU member nations. It is expected that by the end of 1997 all national RTGS system will be operational.
Green Paper, para.32, May 1995, p. 18–19.
Green Paper, May 1995, pp.20–21, 38.
Article 7 of the EMI statute requires that once a year, it provides the European Council information on the readiness of EU member nations for Stage II of the EMU. “These reports shall include an assessment of the progress towards convergence in the Community, and cover in particular the adaptation of monetary policy instruments and the preparation of the procedures necessary for carrying out a single [common] monetary policy in the third stage, as well as the statutory requirements to be fulfilled for national central banks to become an integral part of the ESCB.”
“Progress Towards Convergence,” European Monetary Institute (EMI), Frankfurt am Main, November 1995.
“EU central bank maps road to Euro-currency.” Financial Times. November 15, 1995, p.3.
The Report uses the term European monetary unit for the single currency.
“Progress Towards Convergence,” EMI, November 1995.
“Progress Towards Convergence,” EMI, November 1995.
“Progress Towards Convergence,” EMI, November 1995.
“Progress Towards Convergence,” EMI, November 1995.
“Progress Towards Convergence,” EMI, November 1995, p.ix.
“Progress Towards Convergence,” EMI, November 1995, p.x.
The Austrian schilling joined the ERM on January 9, 1995.
The Belgium and Luxembourg francs are in a monetary association.
The EMI has evaluated the monetary policy options during 1996.
Reserve requirements require banks to deposit funds with central banks.
“Progress Towards Convergence,” EMI, 1995.
The IGCs are high-level meetings (i.e., European Council, ECOFIN Council, etc) added to the European Council’s bi-annual summits to discuss and negotiate common EU concerns and agreements based on previously agreed agendas.
This issue is discussed in Chapter 6 under the section titled the “New ERM II”.
“Progress Towards Convergence 1996.” European Monetary Institute (EMI), Frankfurt am Main, November 1996.
The November 1996 EMI “Progress Towards Convergence” report was in sharp contrast to the European Commission’s bi-annual report on economic prospects which painted a much more glowing picture of progress towards the EMU. It claimed that 12 nations, except Greece, Italy and the U.K., would meet the deficit criteria by 1997. This overly optimistic report matched the government budget and expected growth rate projections.
Long-term interest rates in Greece are indexed to the twelve-month Treasury bill rate. Therefore, they should not be used for comparisons with other nations, rather they serve as a rough guidepost for inter-temporal comparisons.
The Finnish markka joined the ERM on October 14, 1996.
The Italian lira re-joined the ERM on November 25, 1996.
In all of the 15 nations, the latter condition i.e. a recession of severe magnitudes has occurred 9 times over the last 25 years.
“EU warned over policing EMU.” Financial Times. December 17, 1996, p.1.
“Pact Sets Rules for Ins and Outs of ERM.” Financial Times. December 17, 1996, p.2.
Under the The Maastricht Treaty the Council of Ministers was renamed, the “Council of the European Union”. However, to avoid confusion, the original designation will be used throughout this book.
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Rehman, S.S. (1997). Overview of European Monetary Integration. In: The Path to European Economic and Monetary Union. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-5358-4_1
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