ABSTRACT
The year 1973 marked the end of the ‘long post-war boom’, 1945-73, the break-up of the international monetary system based on fixed exchange rates and the Yom Kippur war in the Middle East. This war resulted in an energy crisis, with a massive oil price increase from $2 per barrel mid-1973 to $10 in 1974 and $12 in 1975. The effect was worldwide economic recession, unemployment and inflation. The combination of inflation and stagnation (‘stagflation’) had several implications for the EEC in the 1970s. It challenged governments’ policies and techniques for managing their economies. Orthodox Keynesian demand management, spending one’s way out of unemployment and recession, would not work but simply cause more inflation and so worsen the problem. With such uncertainty the nine EEC states were not prepared to risk experimentation with EMU, which required the transfer of economic and monetary instruments from national to supranational control, when faced with balance of payments crises and inflation. The original scheme to establish full economic and monetary union (EMU) within ten 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 launching Europe towards EMU without first having worked out where it would lead to politically. EMU was originally 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 (Dedman, 1998). However, it was clear by January 1971 that France was back-peddling 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 coordination meetings and a scheme to bind the dollar values of the six EEC currencies more tightly to each other. Thus the 1973
arrangement was known as ‘the snake in the tunnel’ whereby they agreed to float their currencies against the dollar and try to keep the six currencies’ fluctuations between each other to a small margin. The aim was to reduce exchange rate fluctuations, which were reducing the value of French exports of farm products under the CAP. 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 Ger-
many’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 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 EMS 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 Minster, only a year before. In 1971 Willy Brandt, the West German Chancellor, eventually gave way
on EMU, disowning his Economics Minister who wanted to see the 1957 Treaty of Rome 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 EEC internal diplomacy 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, as previously observed, the timing of initiatives for monetary
union in both the 1970s and 1990s was linked to Germany’s Eastern policies of the time. Ostpolitik played a role in triggering Monetary Union attempts, as well as encouraging the Common Market’s enlargement. West Germany’s growing links with Communist Eastern Europe between 1969 and 1971 began to alarm France and others. It looked as if its economic feet had outgrown its Common Market boots. British entry would make the CM bigger and EMU would give that CM a wider role tying member states more closely together.
