ABSTRACT
The EMU: historical background Europe has historically been strongly attached to the institutional system of fixed exchange rates. This preference has assumed different forms over time: the gold standard, the Bretton Woods regime and European exchange rate cooperation (such as the ‘currency snake’ and the European Monetary System). A constant source of difficulty has been that European nations differ from each other in ways which make it difficult to maintain exchange rate stability. The current crisis is merely the most recent illustration of a general problem (Lundberg 2013; Mayer 2012). The Maastricht Treaty set the main architecture of and timetable for (Stage 3 of ) the EMU. The European Central Bank (ECB) started operating in June 1998,
the euro was introduced as a national currency as of 1 January 1999, and notes and coins were circulating as of 2002. Why was the Maastricht Treaty agreed to and subsequently implemented? On the one hand, there was certainly nothing inevitable about this development: there was no path dependency. It was characterised by contemporaries as a bold and historical experiment, a jump into the unknown (Bilefsky et al. 1998; James 2012) while at the same time being related to the political developments in the 1980s (which had spill-over effects on monetary and institutional issues). The economic environment changed in the 1980s in ways which made fixed exchange rates increasingly vulnerable to capital flows and speculative pressures. As explained by the famous ‘impossible trinity’, free capital flows cannot be combined with fixed exchange rates and an autonomous monetary policy:1 one of them must give in. With free movements of capital and fixed exchange rates, there is no scope for monetary autonomy. The difficulties encountered by European exchange rate cooperation (the European Monetary System) led decision-makers to think that a transfer of power over monetary policy to the Union level would be a necessary precondition for exchange rate stability. A common currency would be the definitive solution, as it would eliminate the possibility of intra-area exchange rate changes. The Internal Market programme added impetus to the single currency project. Exchange rate changes were perceived as a serious threat to the functioning of the Internal Market. The single currency would complete the Internal Market by eliminating (intra-area) exchange rate uncertainty and transaction costs, which should stimulate trade and cross-border investments. Moreover, exchange rate uncertainty was felt to cause great problems for the common agricultural policy.2 The spill-over from the Internal Market to the EMU was often mentioned in the literature around 1990 (Nedergaard 1990). A further factor was the development in the 1980s of an economic doctrine stressing the importance for credibility of tight norms for monetary policy. The independence of the Central Bank was seen as a precondition for such credibility. Empirical evidence seemed to support the contention that an independent central bank, run by technocrats and free of political influences, could achieve low inflation without excessive costs in terms of lost output or unemployment. The German central bank (‘Buba’) was exceptionally independent and successful, an object of envy in France and other countries. However, achieving credibility takes time and tough action. An important aspect for many countries with weak central banks was that the EMU could become a short-cut (or quick fix) to a credible policy of low inflation by delegating power over monetary policy to a strong institution at the monetary union level, particularly so if this was seen as a successor to the Buba, with the same norms and independence as Buba.3 Political objectives figured prominently on the agenda. Ever since the establishment of the European Coal and Steel Community in 1952, it has been presumed that Europe would gradually develop towards an ‘ever closer union’.
