Keith Middlemas - Orchestrating Europe (Text Only)

Sporadic moves towards a more comprehensive currency alignment revealed similar discords and inertia. Ideas about a European Monetary System had been aired even in de Gaulle’s day, when Giscard d’Estaing had been finance minister, with the support of the Banque de France. Additionally, EC central banks had always cooperated together, albeit secretively, both in the Governors Committee (established at Basel in 1964) and on the EC’s Monetary Committee where, with finance ministers, they provided advice to the Council. Monetary Union had been latent as an ultimate aim since 1957 and had been recommended by the Werner Committee in 1970 as an aim realisable by 1980.

Such dreams had faded fast after the end of Bretton Woods. But French re-entry to the ‘Snake’ and the evolution of a system of managed rates around the DM anchor encouraged hopes of a zone in which, crucially, the franc and lira might be stabilized. The liberal Giscard’s long intent was to abandon the policy of habitual devaluations as acts of French policy. France was, in fact, forced out of the ‘Snake’ again early in 1976 and the DM had to be revalued later that year. But in the face of continued, variable rates of inflation, the new Commissioners of 1977, and above all the President, Roy Jenkins, were avid to restart the immobile machine and again set their sights on EMU.

Jenkins’s proposal for a European Monetary System (EMS) reached Council at a moment in late 1977 when Japan’s trade surplus and its aggressive competitive edge seemed only too clear to a Community locked into a pattern of weak growth and high unemployment. Among member states, Britain was now far more amenable to the imposition of an external discipline, its chancellor, Denis Healey, having imposed a measure of budgetary restraint and money supply control after the IMF’s intervention in November 1976. There is evidence of consultation between the UK Treasury, Bonn and Paris, at ECOFIN meetings. But at this stage both Banque de France and Bundesbank opposed it. Among bank governors, only Gordon Richardson and Paolo Boffi of the Banca d’Italia supported it (the latter seeing progress to EMU as a restraint on his own reckless political class). These two however drew indirect support from German industrialists who wanted a lower DM – as in fact occurred in the early 1980s. 20

They would have got nowhere without Franco-German concertation. Initially sympathetic to the Bundesbank’s view, put by Otmar Emminger, that EMS would weaken the Bundesbank’s independence and its capacity to control inflation through domestic price levels, as well as impose stresses on the DM as core currency that would ultimately force West Germany to become a leading political force, 21Helmut Schmidt tried at first to share the burden with France, Italy and if possible Britain. Callaghan declined, but Giscard accepted, taking this as a first step towards EMU. The Italian government hesitated. But for three months the scheme stalled on France’s unwillingness to accept what looked like a West German initiative.

Schmidt finally accepted the DM’s anchor role in February 1978 during the French elections, but since it was a political-economic initiative rather than a fiscal discipline, it was agreed that EMS should be handled by the Council, not the Commission. 22Germany’s conversion owed much to Schmidt’s perception that, as the dollar fell steadily during 1978, President Carter had abdicated the role of Western leadership and that something had to be found to fill the gap. Thus at the Bonn Summit in July 1978 (before the Bremen Meeting where EMS was given its final shape by heads of government, with bank governors filling in the details), West Germany reluctantly agreed to reflate, under US pressure. 23A stimulus of 1% of GDP was thus given, with some success. But Germany met massive retribution later, when the second oil crisis seriously weakened the DM and aroused a new surge of inflation.

On the macro-economic level, German unease at a rising DM coincided with the Plan Barre’s anti-inflationary aims. But EMS was intended by the Commission and the main participants to lead on to a full exchange rate mechanism (ERM) from which would emerge a European Monetary Fund or pan-European Central Bank with pooled reserves – with the ecu acting as a reserve currency. 24Delayed because of objections, by Ireland among others, it finally came into force on 1 March 1979. Britain, though a member of the EMS, refused to join the ERM. By 1981, despite severe balance of payments problems, worst in Belgium, Denmark and Ireland, all had regrouped except sterling and the drachma, hoping to enforce discipline on their unruly domestic economies. (In the event, since sterling rapidly became a petrocurrency when North Sea oil came on stream, only massive EC intervention could have sustained Britain as a member, even if its new Conservative government had been willing at first to measure sterling against the DM rather than the dollar.)

Yet despite the appearance of stability guaranteed by EMS, German reflation, and Carter’s new energy policy, the second oil shock initiated another recession and four realignments more occurred before 1982. Since West Germany would not revalue, the weaker currencies had to fall, causing growing resentment among their governments. Central bankers, led by the ever-reluctant Bundesbank and with Council assent, postponed the Monetary Fund indefinitely.

In the brief period of renewed optimism however, and before the French Presidency of the Community opened in January 1979, Giscard determined that French political leadership should be reestablished lest West Germany fulfil the role that Emminger feared, or the Commission take advantage of its enhanced status. 25In French terms, reform of EC institutions, crucial to preparations for the next stage of enlargement, therefore implied reducing the Commission’s initiating role, subordinating the European Parliament’s ambitions, and putting the Council firmly and formally in control. This involved a revival of de Gaulle’s early concept of a Directoire, with greater sway for the larger member states. 26Hence the appointment of the Comité des Sages set up under the French Presidency, with a brief to examine the reform of institutions, while retaining the Council’s role, together with the Luxembourg Compromise, except in cases where qualified majority voting (QMV) had been unanimously accepted.

The three ‘wise men’, Berend Biesheuvel (NL), Robert Marjolin (Franee) and Edmund Dell (UK) could not but be influenced by the inter-governmentalism of the time: the way the EMS had been instituted, the impact of Franco-German leadership on smaller members, and the Atlanticist dimension set by the Group of Five. 27Moreover, their report in October 1979 reached a Europe in which members were either self-absorbed, like Italy and Britain, or on the defensive like Belgium. It was not a time for visionary thinking outside the limits set by France and West Germany.

Nevertheless, despite the French Presidency’s leverage, the Committee did not simply follow Giscard’s agenda, but tried to measure the validity of small states’ complaints (Luxembourg, Denmark and Ireland) against the larger ones. In particular, they examined the methods used to operate the European Council, and the suggestion of a two-tier Presidency in which large states would serve for longer periods. In the end, the three accepted the logic that the Council should give ‘overall direction’, setting out the EC’s priorities, but that the Presidency should not be extended beyond the existing six months for each member state in rotation.

This report was a symptom of the prevalent malaise rather than a factor in what followed. The Commission had not, despite Jenkins’s attempts, recovered its old influence as it had existed under Hallstein. It now suffered criticism from West German leaders as much as French ones – often directed at individual Commissioners for their national partiality – criticism whose validity both Jenkins and Emile Noël, Secretary General since 1958, had to admit, yet could not easily remedy, and from the European Parliament President, Emilio Colombo, who saw it becoming ‘renationalized’. The Spierenberg Committee claimed that it had become too large and recommended that the number of members of the Commission should not increase pro rata with future accessions from Mediterranean countries. 28Worse, from Brussels’ point of view, despite manifest delays, some of the big states were not prepared to ease their veto powers under the Luxembourg Compromise, even though some of the smaller ones, led by Belgium, might have been.