EMU: The First Time Around

Martin Dedman recalls the background to European Monetary Union.

At the European Council meeting at Luxembourg in April 1980, the EEC heads of government abandoned the objective of completing the final stages of a European Monetary System, which would have included setting up a European Monetary Fund with central banking powers.

This original scheme to establish full economic and monetary union (EMU) within 10 years was hatched at the Hague Summit in December 1969. Both France and Germany initially enjoyed taking the credit for getting the scheme going. Only just over a year later in January 1971 each was blaming the other for having started Europe on its way to EMU without first having worked out where it would lead politically!

Why then did France and Germany embark upon the project in the 1970s? Even more curiously, why did President Mitterrand and Chancellor Kohl do the same thing twenty years later? Were lessons learnt from this first effort at EMU in the 1970s; are there parallels between the two initiatives?

EMU the first time round was partly inspired by recurrent international monetary crises and the financial turbulence of the late 1960s. In 1967 sterling's devaluation (which ended Harold Wilson's Labour government's attempt to enter the EEC) was followed in 1968 by crises affecting the US dollar, gold and the French franc. EMU was originally presented as a solution to recurrent monetary crises by supposedly creating a zone of monetary stability within the EEC. However, it was clear by January 1971 that France was back-pedalling vigorously on full EMU itself - apparently all the French really wanted was common banking and credit arrangements following the monetary upheavals of 1968. France wanted to stick at just the first stage of EMU, which was limited to regular economic co-ordination meetings and a scheme to bind the dollar values of the six EEC currencies more tightly to each other (the 'snake-in-the-tunnel'). The aim was to reduce exchange rate fluctuations between the six, which were reducing the Value of French exports of farm products under the Common Agricultural Policy.

France also wanted to give the appearance of the EEC acting together in monetary affairs. Denis Healey, Britain's Chancellor of the Exchequer, subsequently remarked in 1975 that the EEC was adept at dressing up 'a coincidence of policies as a coordination of policies'.

A third and perhaps more important French motive was to make Germany's large foreign exchange reserves available to prop up the EEC's weaker currencies, like the French franc. In principle some $2 billion should then have been generally available as a medium-term credit facility for use during exchange rate crises.

However, West Germany and other EEC members, notably the Dutch, professed to want a common currency for all member countries or at least to move to fixed exchange rates between all the Six. Dr Karl Schiller, the West German Economics Minister in 1971, refused to let France renege on the original plan. Three months of open wrangling followed inside the EEC which was finally 'resolved' in February 1971 with the compromise statement that the 'declared aim' was to reach full EMU during the next ten years. However, this declared intent did not carry the same weight as a full 'decision' under EEC law. The wording of this 1971 agreement was completely free of the idealistic supranational rhetoric seen in the original outline for EMU drawn up by Pierre Werner, the Luxembourg Prime Minister, only a year before.

In this respect EMU first time round was different from the current attempt. For now EMU is a legal requirement under the 1992 Treaty on European Union (TEU) and should happen automatically according to the Maastricht timetable providing the criteria are met. However, EMU in the 1970s shares with EMU in the 1990s the saga of disputation, crises, deals and rivalry between France and Germany and their fundamentally incompatible and divergent objectives for monetary union.

This time the dispute between France and Germany became public in June 1997 at the EU's Amsterdam Summit when Lionel Jospin, the French Prime Minister, tried to back-pedal over the EMU agreement on a 'stability pact'. An unnamed French official was reported as saying that 'France will decide when to join a European currency', whereas joining in 1999 is mandatory under the TEU 1992 for all members meeting the stipulated financial and economic criteria, except the United Kingdom which had negotiated the celebrated 'opt out'.

In 1971 Willy Brandt, the West German Chancellor, eventually gave way on EMU, disowning his Economics Minister who wanted to see the 1957 Rome Treaty revised to permit the creation of a European Federal Reserve Bank by a fixed date. Brandt let France off the supranational hook - only a vague pledge to achieve full economic union by 1980 or soon after remained. However, a diplomatic 'side payment', for which the EEC is renowned, was that President Pompidou agreed to support Brandt's ostpolitik in return. This was important for Germany as their American allies were, at best, lukewarm about ostpolitik by 1971 and French help was needed to push for an agreement over Berlin -so essential to Brandt's foreign policy at that time.

Interestingly, it seems that the timing of the initiatives for monetary union both in the 1970s and 1990s was linked to Germany’s Eastern policies of the time. Ostpolitik played a role in triggering Monetary Union as well as encouraging the Common Market's enlargement. Ostpolitik and West Germany’s growing links with Communist Eastern Europe between 1969 and 1971 began to alarm France and others. It looked as if West Germany’s economic feet had outgrown its Common Market boots. British entry would make the Common Market bigger and EMU would give that Common Market a wider role, tying member states more closely together.

For France the combined weight of Britain and herself might stop Willy Brandt playing balance of power games in the middle of Europe. Also the fact that Willy Brandt was willing to stand up to France in 1971 was a sign of a shift to more equal bargaining power between France and West Germany inside the EEC. Both France and West Germany, in fact, saw the UK's EEC membership in 1970 as a useful balance and counterweight to the other.

The collapse of Communism in Eastern Europe, German reunification under Chancellor Kohl and the demise of the USSR itself between 1989 and 1991 upset the balance of power in Europe. Mitterrand and Margaret Thatcher initially reacted hostilely to German reunification.

According to Mrs Thatcher's memoirs, they briefly but seriously contemplated an Anglo-French axis inside the European Community. In the event, rather than abandon forty years of French foreign policy and the French special relationship with Germany, President Mitterrand resurrected the objective of EMU by 1999 as a joint Franco- German mission. His aim was to buy time and to keep Big Germany focused westwards. Thus the timing of both EMU episodes is largely accounted for by events in Eastern Europe involving Germany.

The demise of the 1970s EMU initiative is usually explained by the oil price shock of 1973-75, when the price went up from $2 to $12 a barrel, leading to global economic recession, the worst world slump since the 1930s, and rising unemployment with inflation at the same time. Governments, unsure of what to do, were not prepared to experiment with Stages 2 or 3 of EMU. France of course only wanted Stage 1 anyway, yet the oil price rise reversed progress even here.

The verdict of Marjolin's EEC Report on the first stage of EMU in March 1975 was that Europe was no nearer to Monetary Union than in 1969 '... and had probably moved backwards as national economic and monetary policies have never in twenty-five years been more divergent than today'. In August 1975 the UK and Ireland were reining back their economies to combat price inflation, while others were expanding in order to combat unemployment. Sterling and the lira slipped out of the 'snake'. (The same currencies were again in crisis in 1992 with the ERM, the snake's successor.) When the nine EEC Finance Ministers held a crisis meeting in Venice in August 1975 one of them was quoted (unnamed) by the Economist as insisting that the final communique very sensibly and a little cynically contained ‘... a paragraph of bullshit at the end to say how confident we all are'.

In 1975, just as with the ERM crisis of 1993, although EMU looked dead it nevertheless staggered on. Roy Jenkins in 1977, apparently to counter the tedium of being President of the European Commission, relaunched the EMU project. This was greeted with considerable scepticism particularly by Francois Xavier Ortoli, the Finance Commissioner, who thought it wholly unrealistic. Events were to prove him correct.

Chancellor Helmut Schmidt and President Valery Giscard d'Estaing, despite opposition from the UK and Italy and with considerable fanfare, announced a new fast track to EMU at Bremmen in 1978. Yet when France took over the Presidency of the EEC Council of Ministers the following January 1979, its first move was to delay the immediate planned start of the EMS until it could extract a promise from its partners to settle French grievances over common farm prices (a 20 per cent gap having opened up between French and German prices). The EEC was then beset by a whole string of crises in 1979-80 over the budget, Spanish entry into the EEC, farm prices, the second OPEC oil price shock (doubling the price of oil) and budget contributions. Amid all this EMU was again postponed.

To have had any hope of technical success EMU would have needed to be preceded by a real commitment to harmonise national economic and monetary policies and this was missing before 1984. Arguably a lesson learned from EMU the first time round was the demonstrable need for economic convergence already to exist between member states. Another lesson, though, appears not to have been learned concerning the political implications of Monetary Union, despite clear warnings in the work of economists who were writing 20 years ago about EMU.

Nicholas Kaldor and EI-Agraa argued independently that EMU must be preceded or accompanied by political unification or the Common Market itself would risk breakdown and dismantlement. Douglas Hurd, interviewed as the ex-Foreign Secretary, said on BBC radio last summer that the latest attempt at EMU was a 'mistake' - alluding to the fact that EMU implies political union for which there is no mandate, no popular appeal... and no chance?

  • Martin Dedman is Senior Lecturer in Economic History and European Policy Studies in Middlesex University and author of The Origins and Development of the European Union 1945-95: a History of European Integration (Routledge, 1996).