A Europe Made of Money: The Emergence of the European Monetary System

By Emmanuel Mourlon-Druol

A Europe Made of Money is a new history of the making of the European Monetary System (EMS), based on extensive archive research. Emmanuel Mourlon-Druol highlights two long-term processes in the monetary and economic negotiations in the decade leading up to the founding of the EMS in 1979. The first is a transnational learning process involving a powerful, networked European monetary elite that shaped a habit of cooperation among technocrats. The second stresses the importance of the European Council, which held regular meetings between heads of government beginning in 1974, giving EEC legitimacy to monetary initiatives that had previously involved semisecret and bilateral negotiations. The interaction of these two features changed the EMS from a fairly trivial piece of administrative business to a tremendously important political agreement.

The inception of the EMS was greeted as one of the landmark achievements of regional cooperation, a major leap forward in the creation of a unified Europe. Yet Mourlon-Druol’s account stresses that the EMS is much more than a success story of financial cooperation. The technical suggestions made by its architects reveal how state elites conceptualized the larger project of integration. And their monetary policy became a marker for the conception of European identity. The unveiling of the EMS, Mourlon-Druol concludes, represented the convergence of material interests and symbolic, identity-based concerns.

• Language: English
• Publisher: Cornell University Press
• Release date: Aug 15, 2012
• ISBN: 9780801465499

Book preview

A Europe

Made of

Money

The Emergence of the European

Monetary System

Emmanuel Mourlon-Druol

CORNELL UNIVERSITY PRESS ITHACA AND LONDON

Contents

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List of Abbreviations

Introduction: Multilevel Governance, History, and Monetary Cooperation

1.   European Monetary Cooperation, 1945–1974: Background and Debates

2.   Shifting Away from the Werner Approach, May 1974–May 1975

3.   EMU off the Agenda? June 1975–June 1976

4.   Economic Rapprochement, Monetary Standstill, July 1976–June 1977

5.   Conflicting Options, July 1977–March 1978

6.   A Semisecret Negotiation, Late March–Mid-July 1978

7.   Chasing the Ghosts of Failed Negotiations, Mid-July–Late September 1978

8.   A False Start, October 1978–March 1979

Conclusions: The Emergence of a European Bloc

Acknowledgments

A Note on Sources Cited in the Notes

Notes

Sources

Abbreviations

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Introduction

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Multilevel Governance, History, and Monetary Cooperation

Since the Werner Plan a dozen years ago and since the days of the snake, since the founding of the EMS in particular, different bodies and groups have done enormous preparatory work for further monetary cooperation. This work resembles a hidden treasure: all the papers are written by monetary experts and for the use of monetary experts; they therefore hardly ever have reached the attention of the leaders or heads of state or government; in most cases they have not even been given full attention and full reading by finance ministers.

—Helmut Schmidt

The creation of the European Monetary System (EMS) is traditionally considered one of the landmarks of postwar Western European history. Many textbooks stress that it was an example of how European elites coped with global economic change. The advent of floating exchange rates, following the collapse of the Bretton Woods system in the early 1970s, was harmful for Western European economies, and the EMS constituted a European response. The EMS represented, indeed, the first serious attempt at reintroducing a semifixed exchange rate system on a European basis. And most important, that European response would have a strong influence on the economic and social policies of many participating European countries from 1979 onward. The EMS would be an external constraint—lauded or criticized—for the domestic economic policy choices of many European governments. Further adding to the importance of the EMS, countless European policymakers would present it as the first necessary step on the road to economic and monetary union (EMU). The European Currency Unit (ECU), the argument goes, was the forerunner of the euro. Though both of these assertions are certainly debatable, they do hint at one of Western Europe’s perennial problems: the need to stabilize monetary relations in a geographical zone where internal trade is intense. From the nineteenth-century Latin Monetary Union to the present-day euro, organizing currency fluctuations within Europe has remained a central issue for European policymakers.

But the EMS was more than just an exchange rate system. The inception of the EMS was part of a wider trend toward the tentative affirmation of the European Economic Community (EEC) as an international actor amid the profound economic, political, institutional, and social transformations of the 1970s. The EEC, created in 1957, had specific competences, multiple levels of governance, and a record of diverse successes and failures. But in the course of the 1960s and ’70s, it witnessed a steady enlargement of its sphere of influence. The EEC became a major international trade actor, set up diplomatic relations, and concluded a trade agreement with the People’s Republic of China; the European Political Cooperation (EPC) process, created in 1970, attempted to give a single voice to the EEC in foreign policy, with many failures but one important success at the Conference on Security and Cooperation in Europe (CSCE) in 1975.¹ The emergence of the European Council, created in 1974, was itself a clear attempt to provide some form of European leadership.² In addition to the European Council, the EEC’s complex political system was further developed with the first direct elections to the European Parliament in 1979.³ Nonstate actors increasingly tried to lobby the EEC to support new policies or reform older ones, thereby showing that the EEC increasingly mattered in terms of public policy choices.⁴ The successive enlargements (with the addition of Britain, Denmark, and Ireland in 1973; Greece in 1981; Portugal and Spain in 1986) further increased the size and importance of the EEC as a regional bloc.⁵ And finally, a new generation of policymakers had progressively replaced those who had first created the new institutions of Western European cooperation after the Second World War, showing that the EEC was something more than just a short-lived experiment. If the story of European monetary cooperation in the 1970s was, in many ways, the story of a regional attempt to provide an answer to global problems, there were also other solutions. Social, regional, industrial, and development policies, and the institutionalization of summitry (the G7 and European Council), to name but a few, were part of a response to the dramatic challenges posed by the collapse of the Bretton Woods system, the oil shock, the global recession/stagflation, the Third World and emerging countries, and the ongoing cold war.⁶ However imperfect and limited it was, the EEC of the 1970s was an affirmed polity, with a life of its own, more than a decade after its creation.

Among all these attempts, monetary cooperation was arguably both the most unsuccessful and the most pressing issue. Monetary fluctuations put at severe risk the key achievements of the EEC, namely, the common agricultural policy (CAP) and the common market. The creation of a European monetary identity would also consolidate the European polity. Some mechanism aimed at stabilizing monetary relations in the European Economic Community was therefore needed. The Werner Plan, an ambitious three-stage proposal for EMU put forward in 1970, suffered the breakdown of the Bretton Woods system and the advent of generalized floating, and was quickly abandoned. Monetary cooperation was in a paradoxical situation: its improvement was urgently necessary, but it appeared to be caught in an inextricable deadlock.

Yet this should not be taken to mean that further EEC monetary cooperation, let alone integration, was bound to happen. To the contrary, I will argue that if indeed a European polity was emerging, the central problematic was how a regional level of cooperation could fit into global developments. The historical reconstruction of the EMS creation invites us to show the alternatives that existed at the time. In other words, monetary relations did not respect the strict boundaries of the EEC. The snake—the first EEC exchange rate system, created in 1972—was not seen as an obvious instrument for EEC integration by all member states. Some saw it as merely an instrument of monetary policy stability, and were therefore quite keen to associate non-EEC member states with it. That an exchange rate system would become an instrument for furthering European integration per se was certainly not obvious in 1974, just when the first concrete attempt at EMU—the Werner Plan—had failed.

Deus ex Machina?

The conventional reading of the years 1974–1979, in terms of monetary cooperation in Europe, is well-known, and can be summarized briefly.⁷ The Werner Plan was quickly abandoned and nothing happened until late 1977, when Roy Jenkins, president of the European Commission, had the controversial idea to call for a European monetary union in a famous speech in Florence. This revived the debate about EMU. West German Chancellor Helmut Schmidt, upset by the dollar’s fall, then adopted this theme, and, once the French government had been reappointed following the March 1978 general elections, he presented his plan in close cooperation with his French counterpart, Valéry Giscard d’Estaing, at the Copenhagen European Council of April 1978. A few months later, French and German leaders set out the terms of the EMS in the so-called Bremen Annex attached to the conclusions of the July 1978 Bremen European Council. Negotiations over the details of the scheme lasted until the Brussels European Council in December of that same year, when the EMS was agreed on, and finally entered into force in March 1979 following a last-minute French obstruction coming from their request for reform of an obscure technical aspect of the CAP’s functioning—the monetary compensatory amounts (MCAs). Compared to the snake, the EMS is usually interpreted as a considerably improved scheme with a major new technical device (the divergence indicator), the embryo of a future common currency (the European Currency Unit, or ECU), and the planned inception of a European Monetary Fund (EMF). Overall, the EMS appears a deus ex machina of European monetary cooperation: after years of stagnation, the EMS suddenly appeared and was intensely but swiftly negotiated. It provided an EEC answer to the so far intractable problem of monetary instability thanks to the intervention of the divine fathers of Europe, who this time were Jenkins, Giscard, and Schmidt in place of Monnet, Schuman, and Adenauer.

There is some truth in that simplified story—and not all the EMS literature tells it in this way.⁸ Yet each of these events, taken separately, deserves some nuance, and the most problematic element is the link among them. The underlying assumption of such periodization—that is, an almost exclusive focus on the creation of the EMS in 1978—is that the EMS negotiations alone form a coherent and autonomous whole. This is highly misleading in that it downplays the influence of other, mid- to long-term trends preceding and underlying the EMS creation, and it also tends to reinforce some sort of European integration mythology surrounding the EMS inception. This traditional reading therefore gives us a retrospective simplification of what had been an uncertain, protracted monetary cooperation, and thereby overestimates the originality of the EMS (earlier, ill-fated plans suggested similar ideas) and downplays the role of other actors and processes (notably transnational), as well as other motivations (notably those that cannot be reduced to material interests). The EMS in the history of European monetary cooperation of the mid- to late 1970s plays the role of the deus ex machina in Greek tragedy: a previously intractable problem is suddenly solved due to a divine intervention—but at the expense of the story’s internal logic.

I focus, by contrast, on the internal logic of that story. By moving away from an exclusive focus on the EMS, I challenge a rather simplistic interpretation of its creation and shed new light on the wider trends in European monetary cooperation. A long period of brainstorming, from the collapse of the Bretton Woods system and the failure of the Werner Plan to the Schmidt Plan of early 1978, led to the emergence of several themes—policy against the dollar, symmetry of interventions, role of a currency unit in the exchange rate mechanism—that would return, in one form or another, in the EMS negotiations. The book is thus about the hidden treasure mentioned by Schmidt and why, how, and to what extent it had (or had not) reached the attention of European decision makers. I suggest that the peculiarity of European monetary cooperation between 1974 and 1979—and interest in the wider perspective of post-1945 international economic history—rests in the interweaving of transnational, intergovernmental, and supranational dimensions as well as the interaction among economic, political, political-psychological, and technical dimensions.

International History and European Integration History

The last decade has witnessed the refinement of methodological approaches to the history of European integration. Partly in reaction to the first writings on European integration by federalists, Alan Milward stressed the role of economic interests and national governments in his analysis of the origins and later development of the integration process.⁹ Yet some scholars felt that two types of actors were missing in his analysis: supranational institutions (the European Commission in particular) and transnational actors (nonstate actors, political parties, formal and informal networks). Wolfram Kaiser, Ann-Christina Knudsen, and Piers Ludlow, among others, have—with different time frames and different topics—attempted to use a different methodology in order to make up for these shortcomings.¹⁰ As Piers Ludlow’s book on the EEC in the 1960s has shown, an approach such as supranational history can better trace the development of the EEC by taking into account the role of the Commission in particular, and the peculiar development of EEC institutions in general. Wolfram Kaiser has shown that transnational actors—transnational political parties and interest groups—influenced European decision making and should therefore not be overlooked. Furthermore, he argued that social science concepts should be taken into greater consideration in writing this history.¹¹ It has thus become increasingly fashionable in the last decade to assert that brand-new approaches are needed in the study of European integration. While this book does not deny the merits of these works and the significant contributions they have made, I aim to bring two important qualifications to this general methodological discourse.

It is, first of all, striking to note that historiographical developments in the area of European integration history largely happen without regard to the wider field of international (economic) history, to which I think this book belongs. Perhaps because this niche is at times too anglophone-centered, it is often overlooked that French and Italian historians have developed l’histoire des relations internationales/la storia delle relazioni internazionali, which, in reaction to diplomatic history, also aimed to go beyond the nation-state and include other actors (nongovernmental) and other dimensions (the so-called forces profondes : perceptions, economy, power, psychology, mentalités, and so forth).¹² In the case of European economic and monetary history, francophone and Italian historians have long stressed the importance of transnational networks and nongovernmental actors.¹³ Even using social science concepts is certainly not an invention of the past decade, as the Annales School, from the 1920s and 1930s onward, attempted to improve cooperation not only between historians and sociologists or political scientists but also between geographers and anthropologists. This book tries to demonstrate that an application of these older methodologies still brings many rewards. It focuses on the European level of cooperation; many studies have so far focused on one member state’s policy toward the EEC.¹⁴ It also includes some of the debates that interested mostly economists and political scientists. It is of vital importance to bring in, for instance, the debate about optimum currency areas (OCAs) initiated by Robert Mundell—and thereby the question of economic convergence—in the discussion on European monetary cooperation.¹⁵ Similarly, given that the creation of the EMS is an interesting case study about the policymaking of the emerging EEC polity, it appears also very important to include some political science debates—constructivism, systemic perspectives on US policy, neofunctionalism, liberal intergovernmentalism, and the notion of epistemic communities.

Second, and even more important, this book aims to show that study of transnational or supranational phenomena alone does not suffice to explain why some European states decided on further (monetary) cooperation. Recent advances stressing the role of supranational and transnational actors are welcome and needed. Yet an exclusive focus on these dimensions cannot provide a comprehensive answer to problems of multilevel governance. At times, as we will see, supranational institutions were impotent, informal nongovernmental networks irrelevant, or governments powerless—or just the opposite. It is an analysis of the combination of these strands that helps us understand the EMS story, not their compartmentalized, isolated study. In order to render a comprehensive picture of European discussions and decision making, research for this book has been carried out using eighteen archives in six countries, including Britain, France, Germany, Ireland, Italy, and the EEC.¹⁶

Combining Intergovernmental, Supranational, and Transnational Approaches

My central question is, how was a European consensus built regarding European monetary cooperation in a world of floating currencies? This book tries to break new ground by analyzing a story where simultaneously transnational, intergovernmental, and supranational phenomena mattered, and by explaining why, how, and to what extent attention shifted from one level to another. Intergovernmental refers to the cooperation between states at world or European level (be it bilateral or multilateral, as in the G7 or the European Council). Transnational refers to processes above and beyond the structures of the nation-state, the central idea being, as Badie and Smouts put it, the bypassing of the state (le contournement de l’État).¹⁷ This typically means informal networks of academic economists in addition to a monetary elite not exclusively relying on its national allegiances but also reacting to various institutional logics, such as the EEC. Supranational refers to power transferred to a nonnational common authority (typically the European Commission, the European Court of Justice, or today’s European Central Bank), this common authority having in turn exclusive or shared competence in certain policy areas. A key question of European monetary debates therefore relates to whether a central institution will have authority over EEC member states—who would thus lose part of their sovereignty.

One actor belonging to one of the three categories outlined above can also play a role in another. Hence the European Council could deal with supranational issues, like the CAP, for instance—an intergovernmental institution could have implications for Community affairs. A transnational nongovernmental actor (an academic economist, for instance) could suggest creating a supranational EEC institution in charge of monetary policy. An intergovernmental institution (the Bank for International Settlements, or BIS) could serve as a forum of socialization, of exchange of ideas, for a transnational monetary elite. Members of the supranational Commission could have transnational links (with academic economists, for instance), or be themselves part of both categories.

Rendering the complexity of European decision-making processes prevents me from delving into more specific issues linked to European monetary cooperation. Hence there is no space here to explore in detail the consequences of a potential break between the British and Irish pounds, to carry out an in-depth study of the perennial debate about the respective merits of fixed and flexible exchange rates, or to analyze the German Christian Democrats’ opposition to the EMS. This book will nevertheless make the following arguments:

1. There was much more than simply a financial story at stake. Technical developments mattered, of course, but technicalities mattered economically and politically, in the sense that technical proposals—whether accepted or rejected—reflected the way in which European governments thought about European monetary cooperation and EMU. Technical suggestions were not politically innocent. Even more important, one of my central themes is the complex interlinkage between domestic politics, economic policy, international developments, institutional issues, economic thought, and even apparently remote topics such as defense issues and memory. Different policy areas all had an impact, of greater or lesser extent, on European monetary developments. Many historians have stressed the complexity of the history of international monetary relations and the need to think of it in global, comprehensive terms.¹⁸ Schmidt famously quipped that monetary policy is (also) foreign policy.¹⁹ This book is an attempt to reconstruct these complex interconnections, and thereby render the multifaceted nature of monetary issues.

2. Monetary stability is not an end in itself. Indeed, aiming to stabilize monetary fluctuations also had a lot to do with the perception de puissance, as Robert Frank put it.²⁰ Monetary issues—and their wider implications for economic and financial strength—are one of the elements of this perception, with respect both to each member state and to the EEC as a whole. For example, through the perception de puissance we can find an implicit (rather than explicit) link between the cold war and European monetary cooperation.

3. Discussing European monetary cooperation led the EEC to think about its own identity, not only in terms of image (the symbol of a single currency) but also in defining what it wanted to achieve (EMU), and to what extent its members were committed to it. This was in a sense comparable to the challenge posed by EEC enlargement in the 1960s. The parallel is striking, since in strict monetary terms, the crux of the problem in the 1970s was the enlargement of the snake. In addition, the story of monetary cooperation in the 1970s is a story of the fight by the Commission and some member states for the integration of the snake in an explicit EEC framework.

4. Monetary cooperation was not only a story of material interests. It would be impoverishing to portray the European monetary story exclusively in terms of interests. What is the interest of actor X in doing Y? leads us to overlook many other significant factors like the influence of trust, ideas, or even sentiments (pro- or anti-Europeanism for instance). The attempts to improve European monetary cooperation often reactivated a sort of European integration mythology that cannot be reduced to interests.²¹ The importance of trust (or mistrust) in politics is a case in point. Good examples can be found in the Giscard-Schmidt relationship (or the Schmidt-Carter relationship), the perception of the Barre government by the Germans, or the perception of Giscard by his EEC counterparts. Still, the Giscard-Schmidt friendship should not lead us to take for granted their agreement on all topics, even those where they claimed they had a common vision.²² Quite often their agreement de façade hid differing interpretations that help explain the time it took to negotiate the EMS and the limited outcome of the negotiations.

5. The mid- to late 1970s provide a good example of learning among a transnationally connected monetary elite. These years were characterized by a fascinating circulation of monetary ideas that would remain on the European/EEC monetary agenda in the following decades. This transnational monetary elite was made up of networks both formal (Committee of Central Bank Governors, Monetary Committee, snake members meetings) and informal (Clappier-Schulmann-Couzens group; academic economists, notably around Robert Triffin). Central bankers and academic economists, and the extent to which they could be seen as epistemic communities (a transnational network of knowledge-based experts), will be of particular interest.²³ Their cohesion, their real intentional influence, their conscience as a group is uneven, as the following pages will show. Yet they provided crucial anchors for the volatile circulation of monetary ideas in the 1970s. This transnational transfer of ideas was not limited to Europe nor to political circles. It also went from the United States to Europe, and from academic to administrative and political circles (for example, monetarist ideas or the debate about the introduction of a parallel currency). The Monetary Committee and the Committee of Governors, as well as contacts between (monetary) officials outside these official channels, contributed to the slow formation of a common language among European monetary experts. In a period of crisis, the policy learning and common language slowly built between experts (particularly snake members) provide a basis on which they can lean, in an atmosphere of uncertainty. This transnational learning process was centripetal in that it resulted in the formation of a consensus around the core Bundesbank-led snake members; or, to put it differently, the periphery of non-snake members progressively (and with the exception of Britain) joined the central group of snake members.

6. This transnational learning process was protracted and tortuous, but continuous, and led to the rethinking of the motivations, aims, and scope of European monetary cooperation. The outcome was the setting up of the EMS. I stress in particular that the EMS was more the outcome of what was in the air already, rather than a sudden qualitative leap forward. Although the 1970s were years of stagnation and crisis, the decade was also a period when a new economic and monetary consensus began to emerge, which would influence later developments in the EEC. Regular references to the so-called economists versus monetarists debate have a heuristic value; they help us better map the place of the mid- to late 1970s in the wider history of European monetary cooperation.

7. The improvement of administrative and political cooperation, largely in reaction to the challenges posed to the nation-state, was a constant trend of the 1970s, and its impact goes well beyond a purely institutional story. The fact that monetary cooperation remained on the EEC agenda was, for instance, facilitated by the European Council, which had become, over the second half of the 1970s, the most visible EEC agenda setter. The emergence of the European Council as a case study of the functioning of the EEC as an emerging polity is central to this book. The furthering of administrative cooperation happened at various levels: domestic (Barre’s new weekly consultations with his administrations: Trésor, Budget, Prix); bilateral (Franco-German mini-convergence experiment from 1977 onward); EEC (European Council); international (G6/7). All these changes had deeper roots, yet they were all, to different extents, thought of as institutional cooperative answers to international economic and monetary challenges.

8. In more general terms, a clear distinction must be borne in mind, particularly in monetary affairs, between actual phenomena and their perception by the actors of the time. For instance, the preservation of EEC internal trade was often given as a motivation behind stabilizing EEC exchange rates. Yet as Otmar Emminger underlined, unstable exchange rates did not prevent EEC internal trade from continuing to grow.²⁴ Hence, the problem lay also in the perception that the erratic fluctuation of exchange rates would hinder trade rather than simply its actual wrongdoings. Similarly, there is an important difference between inflation perceived and actual inflation, as well as between an anti-inflationary economic policy and its perception as a credible policy. In a similar vein, I stress that the existence of pertinent policy solutions or economic models did not mean that decision makers would use them.

9. The story of European monetary cooperation in the mid- to late 1970s was not a one-way street. I challenge the view of a unitary process: there existed different ways to reach monetary stability in Europe, and the following pages explore how different strands of thinking developed in Europe in the 1970s. Alternative options included parallel currency, an economist approach, and a monetarist approach. The EMS option eventually managed to attract a consensus, in which only one EEC member state refused to take part. Furthermore, the views of each EEC government should not be seen as monolithic.

10. More generally, European monetary cooperation in the mid- to late 1970s was one of the European responses to international economic and monetary crisis. It should be considered in the wider history of globalization in the twentieth century. For instance, a parallel with the great interwar crisis should be kept in mind, although of course the nature of the problems was different. As Robert Boyce put it, "Midway through the interwar period the international economic and the international political system simultaneously broke down."²⁵ Coincidence or not is the subject of intense debate, but the simultaneous occurrence of both crises, economic and political, marked decision makers for generations. The concurrent collapse of the Bretton Woods system, the oil crisis, stagflation, and the ongoing cold war provoked widespread fear that history might repeat itself and that Western liberal democracy might well collapse. Schmidt’s constant stress that Western liberal democracy was vulnerable is an example, even though his fears were often considered exaggerated.²⁶

European Monetary Cooperation in the 1970s

European here is Western European—excluding the countries under Soviet influence—but not exclusively the EEC.²⁷ My main focus is on the nine EEC members, but I do not ignore the position of or interest shown by non-EEC members, such as Switzerland. Most important, a central theme of this book relates to the nature of the EEC exchange rate mechanism, and whether it was—or was not—a Community instrument. What was often described as a Community exchange rate mechanism was managed by central bankers in meetings at the BIS in Basel, in Switzerland, and included only some EEC members. As in the field of technology, European did not necessarily equate with EEC.²⁸ I focus on the European level of monetary cooperation, but other levels—domestic, bilateral, Community, continental European, and international—are important in the story. One of my central tasks is to depict a set of interlinked types of cooperation, shifting quickly from one level to another, from domestic politics to European finance ministers, central bankers, academic economists, and heads of government.²⁹ Finally, I note the impact of the newly created European Council. In December 1974, the European Council was created in order to tackle at heads-of-government level the problems of an interconnected world.³⁰ It was critical in the international monetary/economic/energy crisis of the 1970s. If it did not always reach remarkable decisions, it manifested, at the very least, the will of EEC member states to attempt cooperation within an EEC forum.

Money has three commonly accepted functions. It is a means of exchange, a unit of account, and a store of value. Consequently, monetary cooperation, particularly in the 1970s, means not only projects of EMU but also the (superficially) lower-key story of the European Unit of Account (EUA), born in 1950,³¹ reformed in 1975, and renamed in 1978.³² In more general terms, I draw particular attention to the meaning attributed to monetary questions. Talking about an EMU is not the same as devising an exchange rate mechanism. The former is much more ambitious than the latter. An EMU implies a common or single currency; it can mean the inception of some stabilization systems involving important resource transfers, or imply a high degree of financial harmonization and the development of a significant common budget. In other words, full EMU implies important transfers of sovereignty to a supranational body, a move that is very different from an intergovernmentally managed exchange rate mechanism. That many actors of the time used these expressions interchangeably should lead the historian to be careful. There were, moreover, alternative routes to further European monetary cooperation or to reach monetary stability: the discussion about economic reflation from surplus countries, the debate about the creation of a substitution account at the IMF to absorb dollar surpluses, plans for reaching a European monetary union all at once, plans advocating a step-by-step approach, a reform of the snake, or the creation of a parallel currency. All of these options were considered in the 1970s, which ended with the implementation of a further option, the creation of a new exchange rate mechanism akin to the snake. The story of European monetary cooperation in the 1970s was a slow realization that EMU was not achievable in the short run, that reform of the snake was not acceptable to snake members, and that a new system—the EMS—was needed. The extent to which the EMS was truly new will be a central question in chapters on the EMS negotiations. Finally, I stress that the stability of monetary relations and the type of exchange rate system (flexible or fixed) are separate issues. There is no necessary link between the stability of a monetary system and the fixity of exchange rates: fixed is not a synonym for stable. A floating system might (or might not) prove stable—and looking for the fixity of exchange rates might (or might not) cause economic and monetary stability.

I prefer cooperation to integration inasmuch as the latter has now become a catchword for a complex and confusing set of ideas. Integration often implies the melding of competences into some sort of supranational body. The use of the word raises the issue of a teleological interpretation of European monetary developments—and of postwar European cooperation in more general terms. Mark Gilbert has recently delved into the narration of the process of European integration, often done with the underlying conception that the institutions of the EU are the outcome of a historical process whereby national institutions are being superseded and replaced by supranational ones.³³ The EMS is a good case in point. Not only is the EMS traditionally seen as the only significant event of the mid- to late 1970s but its inception is presented in a progressive and determinist way. It is, for instance, a problematic shortcut to state, as Marie-Thérèse Bitsch does, that it was in monetary affairs that the Community achieved the most striking progress.³⁴ This means first that it was the Community that did something (this is highly debatable), then that it was a progress (that the EMS was better than the snake also is debatable, as is the notion that further monetary cooperation or integration per se were desirable objectives),³⁵ and finally that it was striking (in mythological terms perhaps, but closer analysis does not necessarily leave such an impression).

In the wider perspective, the use of the word of integration is deeply problematic since we all know where the story ended: in the creation of the euro. We all know that many EEC/EU members have monetarily integrated themselves, simply because we witness it in our everyday life. Yet this should not lead us to conclude that the EMS was a necessary step on that road: alternative routes existed. As Gilbert puts it, such a progressive conception has blinded authors to the possibility that alternative narratives of European integration are possible.³⁶ Hence, for instance, some people, particularly some academic economists, thought that the most promising way for further integrating Europe was the introduction of a parallel currency, not the progressive narrowing of fluctuation margins.

Cooperation by contrast, carries less teleological weight. It also characterizes much better the work of monetary experts in the 1970s. Richard Cooper identifies six degrees of central bank cooperation.³⁷ To sum up, the first is simply to exchange information; the second is to standardise concepts and fill gaps of information; the third is to exchange views on how the world works and on objectives of central bank policy; the fourth is to share information on the economic outlook; the fifth is a more sophisticated version of standardization than in the second, involving the consequence that the data collected by different central banks can be directly compared, even added up; and the sixth and what many people think of as the sole form of cooperation, is commonly agreed actions. As I stress, cooperation does not only mean commonly agreed actions. An important dimension of cooperation, not confined to central banks, is more sociological: the progressive development of interpersonal trust, of a habit to work in concert, in a European framework.

Finally, the teleological interpretation is particularly risky for the 1970s. This was a time of economic and monetary uncertainty due to a new type of crisis, namely stagflation. This crisis undoubtedly had a logic, but its logic was not necessarily yet intelligible to the people living it. On many occasions, as we will see, European officials simply did not understand what was going on. A teleological interpretation risks interpreting events with the benefit of hindsight. Hence if it is true that the EMS is a European response to international economic and monetary problems, its inception was not obvious, and does not concern only one year, 1978, at the end of the decade.

What types of cooperation does monetary cooperation exactly entail? Money normally being the creation of a state, and monetary affairs being arguably the second-most-sensitive issue for a state after defense, monetary cooperation is centered on interstate relations.³⁸ European monetary cooperation asks the question of how to go beyond the nation-state. These relations involve various state actors (heads of government, finance ministers, central bankers) as well as non-state (academic economists), EEC, and international actors. It is noteworthy that the independence of a central bank from a government, as in the case of the Bundesbank, crucially changes decision-making roles, as I will show. Moreover, the existence of the EEC renders the nature of monetary cooperation more complex by introducing other levels, transnational and supranational. The book therefore centers on the constant interplays in this multilevel governance. If academic economists are part of the story, pressure groups and civil society during this period and for this topic were by and large deprived of influence, and it is therefore hoped that their absence is understandable.

EMU had been the EEC’s major internal objective since 1969.³⁹ The early 1970s are already well covered in the historiography, and so I take spring 1974 as a starting point.⁴⁰ That moment was marked by the almost simultaneous coming to power of Harold Wilson in Britain, Giscard in France, and Schmidt in Germany, and is more generally the beginning of a new era after the breakdown of Bretton Woods and the oil shock. Other factors justify the choice of 1974. That year marked the almost official abandonment of the Werner Plan; it also saw the creation of the European Council, which significantly changed the EEC decision-making process. The book ends with the entry into force of the EMS in March 1979. By adopting a time frame that does not coincide with the EMS negotiations, the book in a sense confirms what Peter Ludlow cursorily suggested in the first detailed study of EMS negotiations: It is, in fact, arguable that the EMS negotiations can only be properly understood if they are seen within the context of a longer-term trend towards the emergence of a European monetary bloc.⁴¹ He probably meant a longer-term trend than five years. Yet it is very much the spirit of this book to place the EMS negotiations in the wider context of the 1970s, and particularly to conduct a detailed study of the post-Werner, pre-EMS attempts to further European monetary cooperation.

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European Monetary Cooperation, 1945–1974

Background and Debates

If the international monetary system was itself based on fixed exchange rates and on currency convertibility, the problem would have been much less acute. You know that there has been a historical coincidence between the progressive organization of economic and monetary union in Europe and the progressive dislocation of the international monetary system.

—Valéry Giscard d’Estaing

This first chapter recalls several key ideas necessary to understand the working of monetary coordination. A first important one is the so-called triangle of compatibilities, or trilemma. According to Mundell, of the three components of his holy trinity—high capital mobility, fixed exchange rates, and independent monetary policy—only two can be met at the same time. For instance, under the Bretton Woods system, fixed exchange rates and autonomous monetary policies were able to coexist thanks to low levels of capital mobility. The rising of capital mobility from the late 1960s onward rendered unsustainable the maintaining of fixed exchange rates, and the Bretton Woods system collapsed. In the specific European case, this trilemma is of particular interest. Indeed, seeking fixed (or semifixed or adjustable) exchange rates means that either international capital mobility should be restrained, or that the autonomy of monetary policy should be surrendered. Even more interesting, as will be discussed in the next section on EEC law, it would seem theoretically logical to surrender monetary policy autonomy, since the freedom of capital mobility within the EEC is provided for in the Treaty of Rome.

A second important debate, also associated with Mundell, was that of optimum currency areas (OCAs). The start of the OCA debate is usually associated with the publication of Mundell’s eponymous article in the early 1960s.¹ As its name suggests, the OCA debate is about determining in what area (group of countries) the use of a common currency would be optimum (that is, would not create any loss of well-being). Mundell listed a series of factors that identify such an area. Subsequently, other authors—Ronald McKinnon, Peter Kenen, James Ingram, Gottfried Haberler, Marcus Fleming, Charles Kindleberger—added new ones to the list. In a nutshell, the first two factors identified by Mundell were the mobility of the factors of production (labor and capital) and the symmetry of external shocks (i.e., the entire group must receive identical shocks). Other factors added to these two are varied: McKinnon stressed the openness of the economy, Kenen the diversification of production, Ingram the financial dimension, Haberler and Fleming the convergence of inflation rates, Kindleberger the homogeneity of preferences within the zone.² To what extent Europe forms such an OCA, then and now, is the subject of long and heated discussions. What the OCA debate highlights, however, is the profound implications of a full monetary union, in particular in fiscal and budgetary terms. As the Marjolin Report would stress in March 1975, it is not certain that European policymakers, while talking about the desirability of EMU, had realized its full implications.³

Underlining the uncertainties of the time, the mid-1970s also witnessed a resurgence of critiques about the economic idea of rational expectations and the stability of theoretical macroeconomic relationships. The so-called Goodhart Law in 1975 and the so-called Lucas Critique in 1976 are the most famous cases in point.⁴ Charles Goodhart, a chief economic adviser at the Bank of England, pointed out that once an indicator is chosen as a policy target, it loses its validity and reliability. In a similar vein, the economist Robert Lucas pointed out that econometric models used to conceive future economic policies are built on past behaviors, with the expectations that these past behaviors will repeat themselves in the future. Lucas argued, however, that this premise is mistaken since economic agents may well adapt their expectations in a new way and thereby undermine the initial theoretical validity of the economic policy model being implemented. Central bankers underlined their difficulty in choosing between these economic theories. Monetary policy is not a matter of dogma, be it Friedmanite, Keynesian, or Marxist; it is a matter of trying to understand the mechanisms and their application to the conditions of the moment, explained Renaud de La Genière, sous-gouverneur in the French central bank, in 1979.⁵ Of course, other central bankers might have had more clear-cut views. Yet, crucially, de La Genière’s remark underscores the uneasy position of the central banker having to choose among various, sometimes contradictory, monetary theories.

The variety of approaches to EMU reflected the academic divisions in economic and monetary theories. The most famous one is through the narrowing of exchange rates, examples of which can be found with the snake or the EMS. Another option is that of currency competition, and in particular the inception of a parallel currency. Nearly all those who defended this position, as the next chapters will show, were academic economists. In early April 1974, Robert Mundell argued, for instance, that the only antidote to current global problems (inflationary pressures) would be a further currency issued and managed by a regional political entity.⁶ He argued that a new currency unit—the Europa—would need a political base, which Europe could provide. Similarly, in 1974, Giovanni Magnifico published a book tellingly entitled L’Europe par la monnaie.⁷ He had earlier advocated the creation of a European Currency Unit (ECU).⁸ These interpretations remained almost permanently confined to academic experts’ circles, with the partial exception of the European Commission. The option of exchange rate unification was, by contrast, mostly associated with governments. It emerged most famously with the Werner Plan and the creation of the snake in 1972. Subsequently, one of the central underlying questions of European monetary discussions was whether this was a correct strategy.

As far as the method was concerned, there also existed different views. A first basic methodological difference lay in the strategy to be used: An incremental approach or a big leap forward?⁹ The former implied progressive steps, such as harmonizing policies and narrowing exchange rates, while the latter implied more immediate steps, such as establishing a full monetary union or introducing a parallel currency. Most famously, the perennial dichotomy between the economists and the monetarists nurtured European monetary discussions from the 1960s onward. The economists believed that the convergence in the economic situation of the member states should come before monetary union. Economic strategies and performance would have to be harmonized and coincide before Europe could proceed to monetary union. Economic convergence meant lowering inflation rates, synchronizing economic cycles, and eliminating excessive debts and deficits. The economists could agree that the creation of a common currency was a significant and desirable objective, but they totally rejected the idea that it would be the dynamic element of the integration process. This was also referred to as the coronation theory, in the sense that the locking of the exchange rate once and for all resembled the coronation of a king or a queen after a time of preparation.¹⁰ By contrast, the monetarists claimed that monetary constraints could induce economic convergence. This is, of course, not to be confused with Milton Friedman’s brand of monetarism. Monetarists believed that fixing exchange rates would itself cause macroeconomic convergence, and that as a consequence monetary unification would proceed sooner or later. Indeed, the need to maintain predetermined exchange rates would exert pressure on member states to make their own domestic economic policies compatible with the policies at Community level.¹¹ It would also have the advantage of focusing on the most salient, symbolic, and politically attractive aspect of EMU, namely, the creation of a common currency. This has also been referred to as the Nike approach: the best way to lock the exchange rate…was to ‘just do it.’¹² It is also called the institutionalist approach, since it could induce an increased development of common policies such as regional or budgetary.¹³ A monetarist strategy would thus start by the narrowing of exchange rate fluctuation margins. Admittedly, the position of both camps was not always clear-cut. Since each strategy had some internal coherence, the lines between the two were sometimes somewhat blurred. And indeed, in order to reach a European consensus, proposals often had to reach a compromise between the two options. It is hence often said that the Werner Plan had managed to strike a good balance between the