Year XL, 1998, Number 3 - Page 201

 

 

Towards the Monetary Union: A Comparison of Two Methods*
 
GUIDO MONTANI
 
 
The Federalist Method and the Intergovernmental Method.
 
Jean Monnet tells in his Memoirs[1] how, in 1950, when the war wounds dividing the European states had not yet healed, it was only after observing the French Government’s reticence in supporting the creation of the European Federation that he proposed the project of the European Coal and Steel Community (ECSC). Monnet had realized that the time was ripe only for the first step towards European unification with ‘‘an immediate action on one essential point”. But this was to gradually change the “course of events”. In short, the ECSC was conceived of by Jean Monnet as “the first meeting of the European Federation”. Jean Monnet’s method, in opening the way to Franco-German reconciliation, the true political engine of European unification, really did change the course of events: European integration became the irrevocable point of reference for post-war European politics. It was a process not lacking in contradictions, at times opposed and refused by the governments and the political forces, but which the European countries could not do without. The method of integrating Europe by sectors, by small steps, has its limits however, as Monnet was perfectly well aware. It proves inadequate when the transfer of sovereign powers from the national to the European level must be dealt with, in other words the crucial questions of defence and currency. Here, gradualism must give way to the constituent method. This is what happened with European defence. The question of a European Defence Community (EDC) arose when the European governments, faced with the need to choose between the reconstitution of the German army and the creation of a European army, had to acknowledge that there would be no sense in establishing a European defence without a democratic European government. So it was that in 1952 the Six assigned the Parliamentary Assembly of the ECSC to draft a project for a European Political Community; a genuine constitution in fact. It is well-known that the EDC Treaty, having been ratified by Germany and the Benelux countries, was rejected in August 1954 by France. Thus the hope of a European political union vanished for a very long time. This episode is recalled to understand what has happened and is happening in the development of the Monetary Union. Briefly, in recent years, the national governments have proceeded to develop the Monetary Union as if it were a matter of one of the many sectorial problems. On the contrary, creating the European currency involves a transfer of sovereign powers from the national to the European context. For this reason, after Maastricht, a turning point was reached: the intergovernmental method has exhausted its function.[2]
 
The Origins of the Monetary Union.
 
The process of European integration would be incomprehensible without taking into consideration the global political context, i.e. the USA-USSR bipolarism. This was why, against all economic logic, the Treaties of Rome which established the Common Market in 1957 entirely ignored the problem of the European currency. The tacit assumption was that the United States would succeed in guaranteeing the system of fixed parities decided on at Bretton Woods. And indeed, the Common Market, little more than a simple customs union, proved a success thanks to international monetary stability, allowing the countries of the Community to develop at higher than average rates for the western area, to considerably reduce unemployment and to compete with the United States as an autonomous commercial pole.
It was only in 1971, when the Bretton Woods system was close to collapse, that the European governments were forced to conceive the objective of a European monetary union, to protect Europe from the growing waves of speculation generated by the stateless market of the eurodollar and by the instability of the exchange rates. The Werner Plan, drawn up on the mandate of the Summit of Heads of State and Government at the Hague in 1969, envisaged the phased realization of a monetary union by 1980. The final objective was precisely defined in the Werner Plan, but its realization was unfortunately left up to the good will of the central banks and the governments. The monetary storm which broke at the beginning of the seventies, due both to the end of the regime of fixed parities, and to the international economic disorder caused the oil crisis, left the Werner Plan on the rocks. Even the Common Market seemed threatened at its very roots. Indeed, it became difficult to defend the unity of a market based on an agglomeration of independent monetary areas, with divergent rates of inflation, interest rates and fiscal policies.
The first reaction to the crisis in the process of European integration came from the European Federalist Movement (MFE). They proposed a relaunch based on two projects, one political and one economic-political. The first was the election of the European Parliament by universal suffrage, in order to involve the citizens and parties in the debate on building Europe, which up till then had been confined to the sector of foreign policy. The decision on the European election was actually taken in 1975. The second project concerned the European currency, as an indispensable means of economic policy of the European government. With this proposal the federalists aimed to oppose a tendency, at that dominant among economists and the political class, favourable to fluctuating exchange rates and to the illusory “autonomy” of national economic policy. With the support of P. Werner and D. P Spierenburg, who had played an important role in the first phase of reflection on the Monetary Union, the federalist economists (including Robert Triffin), organized a series of initiatives beginning in 1976 (in Pavia, Turin, Paris, and Eindhoven), culminating in June 1977 with the important conference in Rome on Economic Union and the Problem of the European Currency,[3] which had a great impact on the Community. Indeed, the proposal of a European currency was immediately taken up by the then President of the Commission, Roy Jenkins, in a far-reaching speech held in Florence in October 1977. Shortly afterwards Jenkins presented the same ideas to the European Parliament (1978). What followed is history: at Bremen the European Council decided to launch the European Monetary System, which actually came into force in the spring of 1979, shortly before the European citizens went to the polls to directly elect supranational Parliament for the first time in history.
There are two aspects of the federalist proposal which must be underlined. The first concerns the relationship between the European currency and the European budget. According to the federalists, the establishment of the European currency should be accompanied by a reinforcement of the budgetary policies, and they therefore considered the McDougall Report (1977), which indicated2-2.5 per cent of Community GDP as a minimum pre-federal European budget, complementary to the Monetary Union project. The second aspect concerns the relationship between the European currency and the European government. The federalists were aware of the fact that the creation of the European government ought to precede the creation of the European currency, but they were equally aware of the fact that the method by which the governments were advancing in building Europe presented contradictions which had to be reckoned with. “As the failure of the Werner Plan shows”, Mario Albertini observed in 1976, “it is contradictory to propose to establish a European currency before creating a European power capable of starting up a European economic policy. There is no meaning in a European election for a European Parliament with no powers, just as there is no meaning in a Union which is not expressed in a genuine European government”.[4] Thus, if the governments wanted to go ahead with building the European currency without adequate institutional reforms, they would set in motion a process which would leave them faced with growing contradictions, until the establishment of a democratic European government. The European currency is a federal power, as Lionel Robbins points out. One can create the currency before creating the State, but only as an intermediate stage in a constituent process. This is the method which the federalists have called “constituent gradualism”, and which the governments, even if unconsciously, have in fact followed so far.
 
The European Parliament Draft Treaty of Union.
 
In the course of its first legislature, the European Parliament seemed to intend adopting the constituent method for the construction of the European Union. Indeed, thanks to the initiative of Altiero Spinelli, on 14th February 1984, the vast majority of the European Parliament approved a Draft Treaty of European Union, which can essentially be summarised thus: a) a system of democratic government of the Union, by transforming the Commission into an executive body responsible to the European Parliament (Articles 25-59); by giving the European Parliament effective power of legislative co-decision making and of approval of the budget, together with the Council (Articles 14-17); and by transforming the Council into a second chamber of the states, deliberating by majority (Articles 20-23); b) the attribution of “concurrent competence” to the European Union as regards the transformation of the European Monetary System into a “complete monetary union” (Article 52); c) the establishment of the Union’s “own finances”, the composition, destination and amount of which would be decided by a budgetary authority, composed of the European Parliament and of the Council of the Union (Articles 70-81); d) as regards foreign policy, recognition of the Union as a legal person (Article 6); the Commission was indicated as the body which would represent the Union “in its relations with third countries and with the international bodies” and which would negotiate “international agreements in the name of the Union” (Art. 65).
This brief synthesis of the draft Treaty of European Union, which Maurice Duverger[5] considers to be the Michelin Guide of all future reforms, is sufficient to show the alternative way which could have been followed to build the Monetary Union. If the draft of European Union had been ratified by the member countries, the “concurrent” competence of the Union as regards the European monetary system could have become a de facto “exclusive” competence, with the attribution to the Union of monetary sovereignty before beginning the process of convergence between the national economies. This would have led to a transition from national currencies to the European currency through a process in which the monetary authorities and national budgetary authorities could have cooperated closely with the monetary and budgetary authorities of the Union. In short, the reserves of the Union would have been directly administered by the Central European Bank.[6] Moreover, with its own resources, the Union would have benefited from the spending capacity judged necessary, on the basis of the principle of subsidiarity, to facilitate the process of convergence between the national economies.
However, as is well-known, the European Parliament’s draft was not submitted to national ratification. Despite the support of France, Germany, Italy and the Benelux countries, it came up the explicit and insurmountable refusal of Mrs Thatcher. It was thus that the European governments decided to proceed on the path of European integration through the intergovernmental method. In the conviction that one could go ahead without first creating a European government the internal market project was launched (Single Act, 1986) and then that of Economic and Monetary Union (Treaty of Maastricht, 1991). But the adoption of the intergovernmental method has brought costs which can be summed up as follows: a) prolonged timetables and increased difficulties of convergence; b) lack of development policy; c) excess of European centralism; d) delays and inefficiency in the realization of a Union foreign policy.
 
Prolonged Timetables and Growing Obstacles to Convergence.
 
After the years of monetary and financial disorder which followed the Bretton Woods crisis, in which substantial differentials in inflation rates (up to 15 per cent) emerged among the countries of the Community, the European Monetary System proposed to start a process of convergence. The EMS consisted of a system of fixed exchange rates, with restricted margins of variation around the Ecu. It was therefore initially conceived as a symmetrical system, in the sense that the European economies were to converge towards average rates of inflation, in a system of fixed exchange rates of which the Ecu represented the point of reference. However, after a few years, it became clear that the real point of reference was not the Ecu, but the German mark. The EMS was able to continue to function as a system of fixed exchange rates only if all the countries of the Community converged towards the economy with the lowest rate of inflation, which was therefore accepted as the model of European economic policy. However, this “asymmetrical” or “hegemonical” system of the European economy could not have functioned for long without creating unsustainable political tensions between the European countries. Sooner or later, a stable point of arrival had to be identified, in which all the countries could share the same burdens and the same privileges. This target could only be Economic and Monetary Union.[7] The Delors Committee was set up by the European Council of Hanover (1988) to propose a phased plan for the creation of Economic and Monetary Union. Its proposal, completed in spring 1989, was first, liberalized movements of capital; second, a European System of Central Banks (ESCB); and third, irrevocably fixed parities. However, in November 1989 Europe was rocked by unexpected political turbulence: the fall of the Berlin Wall and the beginning of the disintegration of the Soviet system. German reunification, in 1990, represented a dramatic turning point in European politics because it raised the spectre of German economic and political hegemony. Without these events, both the speed with which the Treaty of Maastricht was arrived at, and its content would be inexplicable. It represented a compromise. On the one hand, Germany understood that only the sacrifice of its sovereignty over the mark would allow the continuance of the common path. On the other hand, France refused to accept adequate institutional reforms (in particular the strengthening of the powers of the European Parliament), as called for by Germany. For this reason, Germany subordinated the timing of European monetary unification to the adjustment requirements of the German economy following unification. According to the authoritative opinion of one of the participants of the Delors Committee, “From the Delors Report (1989) to the European Council in Rome (1990), the idea that the Central European Bank should be created at the beginning of the second was maintained; between Rome and Maastricht (1991) this fundamental result was lost, and it was the only real withdrawal with respect to the conclusions of Rome… the refusal of every partial cession of sovereignty before the exact beginning of the final phase was improperly invoked, particularly by the German delegation, to put off the creation of the European Central Bank, even prevailing over the undertakings made in Rome by Chancellor Kohl”.[8] It was thus that the date initially identified for the creation of the European System of Central Banks, i.e. 1994, was postponed to 1997, if a majority of member states were agreeable; otherwise, by 1999 at the latest (Art. 109 J of the of Treaty of Maastricht). This unexpected delay in the schedule of monetary unification had very serious consequences on the expectations of economic operators and of the political class. The uncertainties relating to the process of ratification of the Treaty of Maastricht, particularly in France, then did the rest. The climate of “euro-euphoria” which had characterized the phase of the realization of the European internal market, up to the planning of monetary union, suddenly changed into “euro-scepticism”, because the determination of the governments to actually achieve the currency now appeared questionable. It was thus that international speculation made a mass attack on the pound sterling and the Italian lira, in the consciousness that convergence would be a long and difficult process. Actually, at Maastricht the European governments had not fixed certain parameters of monetary and financial reference (protocol on art. 109 J), but had also decided that each government was bound to realize convergence with its own resources, without setting up any European economic policy for development and employment. Moreover, as a consequence of this procedure, a distinction was inevitably introduced between the “in” countries, which would succeed in participating in monetary Union, and the “out” countries, excluded from the Union. In conclusion, it seems reasonable to maintain that the creation of a “multispeed-Europe” aggravated the process of convergence, both because of the monetary, financial and economic tensions which might be generated between the two groups of countries, and because of the institutional difficulties which must necessarily arise in the common bodies, like the European Parliament, the Commission and the Council.
 
Lack of a Policy for Development and Employment.
 
In his 1977 speech as President of the Commission, Roy Jenkins proposed, in agreement with the federalists, that Monetary Union should be accompanied by a European policy for employment and by a federal fiscal system. The Delors Committee took a different way. A discussion on financial resources would have raised the problem of fiscal sovereignty. Since unanimity would have been impossible on this question, the Committee chose an easier way. It concentrated only on the objective of Monetary Union: the implicit hypothesis was therefore that the Monetary Union could be established without any reinforcement of the European budget. The reality, however, could not be brazenly ignored: the inertia of the Union had allowed rates of unemployment in the Nineties to exceed 10 per cent. Once the Maastricht Treaty was ratified, Delors himself sought to remedy the lack of a European employment and development policy with a new proposal, known today as the Delors Plan, or the Commission’s “White Paper on Growth, Competitiveness, and Employment. The Challenges and the Ways Forward into the 21st Century”, approved by the European Council in Brussels in 1993. The proposals of the Delors Plan seemed sufficient to reverse the European economy’s tendency to stagnation and to halve (this was the forecast) the rate of European unemployment by 2000. A plan of substantial community investment in road, rail and information networks, accompanied by appropriate national policies for a flexible labour market, would indeed have put European companies in an advantageous position to face the challenge of globalization. However, these objectives have not been reached. The relaunch of the European economy has not happened. The defect of the Delors Plan lay in the fact that its realization was made to depend on the Union decision-making system formed by the Treaty of Maastricht. So it was that from one meeting to another, the Council of Finance Ministers (Ecofin) imposed the logic of maintaining the status quo — no new budgetary resources were activated, until the European Commission itself gave up the project. For this reason, employment policy in Europe today is reduced to the simple coordination of national plans, whose basic objective is merely the flexibility of the labour market. This is a suicidal policy, for while it is beyond doubt that the labour market should be made more flexible, nor should there be any doubt that the European Union must face the challenge (in particular from the United States and Japan) of avant-garde technology, which requires investment in scientific and technological research and an effective industrial policy in certain sensitive areas, such as aeronautics and missile technology, which today are fundamental for the development of the telecommunications sector. But since this type of industry has evident implications for defence and security, the European governments are reluctant to cross the threshold of cooperation which would bring national sovereignty into discussion. Thus the defence of the past is endangering the current and future welfare of the Europeans.
 
An Excess of European Centralism.
 
It is not possible to say how the European Union would have tackled the problem of convergence of the national economies if the Parliament’s draft Treaty had been ratified. However, the degree of political cohesion between the European peoples would indubitably have been very different if a Constitution had been approved in which the European Parliament and Commission had been given sufficient powers to set about creating Monetary Union. The true nature of the problem of convergence would have become apparent in this context: a problem of regional imbalances (where the nation states would have played the role of “regions”) within a federal state. The most reasonable way to build a European monetary union would therefore have been to immediately assign monetary sovereignty to the European Central Bank in order to protect the weakest economies from international speculation. Changing national currencies into the European currency could have been done at a later stage. This would have allowed the European Central Bank to effect adjustments between the community currencies up to the moment when the exchange rates were fixed irrevocably. In this way, national interest rates could have converged without tensions towards an average European value, and national policies of financial readjustment would have proved less onerous. The problem of limiting excessive budgetary deficits could not, in any case, have been avoided. Even in a federal Union, because of the particular importance of national public spending to the European budget, some constraints would have had to be fixed to avoid excessive borrowing, as was done at Maastricht. But respect for these constraints would have depended mainly on a political pact, because, in ratifying the European Constitution, every state of the Union would have made a commitment to the achievement of Monetary Union, of which those parameters represent an essential condition. “Sanctions” against deviant countries, as provided for in the Stability Pact, would therefore not have been necessary. Nor would it have been necessary to provide that all countries of the Union should reach the agreed values at the same time. There would have been no difficulty in setting different periods of adjustment for countries with particular difficulties. What counts most, however, would have been the fact that the process of convergence could have been accompanied by effective community policies for development and employment, the sector with the most evident need to apply the principle of subsidiarity, because the individual governments are not in a position to realize effective policies in this area. Certainly time would not have been wasted, as is happening now, in discussing coordination of national development policies: a sum of national policies is not a European policy. Moreover, the Union would have had the powers, on the basis of an open European debate, to tackle the question of the financial resources necessary to launch an effective Plan (like the Delors Plan) for sustainable development and employment. The process of convergence of the national economies could thus have been realized by the individual governments not in a situation of economic depression, of dominant euro-scepticism and uncertainty, but in a climate of confidence and recovery. In short, defending national sovereignty to the utmost (but only nominally), has obliged the European governments, simply to avoid subordinating their economic policy to a European government, to subordinate it to uniform and immutable parameters.
 
Lack of a Foreign Policy.
 
The Treaty of Maastricht included foreign and security policy for the first time among the competences of the European Union. But the administration of this policy is entrusted entirely to the Council of Ministers, in which no important decision can be taken unless it is reached unanimously. Moreover, there is little or no provision in the way of intervention. It should therefore be no surprise that, when put to the test, the European Union’s foreign policy proved a fiasco. Indeed, the first severe test was the challenge from Eastern Europe, when the European Union was called on from the Baltic countries to Yugoslavia to overcome the division which the Iron Curtain had artificially created. Initially, the response of the European Union was an embarrassed silence. The most effective policy which the European Union could have developed with regard to these countries, in need not only of material aid but of stability and democracy, would have been an immediate plan for their entry into the Union as member states. This response was late in coming. In fact, not until the European Council in Luxembourg, December 1997, was moral commitment translated into a precise political plan. But in the meantime, the countries of the East had to face their difficulties with inadequate strength. Some countries managed to maintain the democratic conquests. Others were ensnared by nationalist hatred, secessionism and ethnic cleansing. The incapacity of the European Union in facing up to the challenge of enlargement derives from the institutional limits of the Treaty of Maastricht. An immediate enlargement from 12 members to 26 or more, in a situation in which the Council of Ministers can be blocked by the veto of a single country, would certainly have changed the nature of the European Union, transforming it into a simple area of free trade, with no further prospects of political unity. For this reason, the decisions on enlargement were postponed till the end of the Intergovernmental Conference, which was supposed to solve some essential institutional problems. However, at Amsterdam (1997), these difficulties were by no means overcome, so that the decisions on enlargement again risk compromising the process of the political unification of the continent. Again, one cannot say that the sufferings of the peoples of Eastern Europe could have been entirely avoided if the European Parliament’s draft of Union had been ratified. But it is certain that the challenge could have been tackled by much more effective means. The existence of a European government would have allowed political rather than economic questions to come to the fore. If the peoples of Eastern Europe could have participated in the community institutions, above all the European Parliament, through the direct election of their own deputies, without having to wait too long, this would undoubtedly have been a factor of primary importance as regards the reinforcement and stabilization of democracy. Moreover, the entry of new countries would not have been in conflict with the development of monetary union, because whether the European currency had already been established or not, the transfer of monetary sovereignty from the nation states to the Union could have been made without traumatizing the economy with draconian convergence plans, as imposed at Maastricht. Finally, it would not have seemed a heresy, as it is currently considered, to increase the community budget to allow the necessary aid to overcome the economic imbalances between western and eastern Europe. The Union would therefore have had the possibility to offer Yugoslavia the prospect of the entering the Union immediately, united. In any case, even if faced with the folly of ethnic division, the European Union could have intervened to restore peace and unity by European means (with the Eurocorps or similar and not with a phalanx of national armies, coordinated the United States.
 
Conclusions.
 
The project of a Europe united in peace was conceived during the Second World War by men who had developed a firm aim: “no more war.” No longer was the barbarism of total war to threaten the survival of civilization. Since then, many years have passed and the process of unification has ventured along paths which risk making the younger generations miss the profound significance of building Europe. Too many chances have been lost. But at every moment of hesitation, the fear that the national divisions of the past could again arise has in the end moved every obstacle. The European governments have therefore kept the process of integration active only because there is no reasonable alternative. Necessity, not reason, has led them towards the common currency, up to the very threshold of Federation. The political parties, no less than the governments, have serious responsibilities. The parties have been notable by their absence from the story of European unification. This is why the governments were able to reject the European Parliament’s Treaty of Union in 1985, without raising loud protest and without meeting any resistance. Today, perhaps, the path towards the European government, which is the path of reason, can be followed to the end. The European currency is a power destined to impose a new direction not only on European politics, but on the global balance itself. For the first time in its history the dollar will have to reckon with an equally strong and competitive international currency. With the European currency a process is starting therefore which could lead to the building of a new world order. But the European Union can only become an active subject in world politics if it succeeds in providing itself with an effective government. A federal power (the European currency) cannot be governed by an intergovernmental organism (the Council of Ministers). In the age of democracy, no power is effective unless it is legitimate: and no power is legitimate unless it is based on popular sovereignty. If this contradiction is not overcome, the development of the European currency could turn into a dreadful defeat, not only for Europe, but for the whole world.


*Address at the seminar “The European Project in the Thinking of Twentieth Century Italian Economists”, organized by the Department of Economic Sciences of the University of Pisa, 16th January 1998.
[1]J. Monnet, Mémoires, Paris, Fayard, 1976, Chapters 11 and 12.
[2]In 1973 Jean Monnet proposed the formula of the European Council only as “a provisional European government”, which was supposed to make provision for the direct election of the European Parliament and start the transfer of sovereignty necessary to the establishment of a genuine federal government. Cf. J. Monnet, op.cit., chap. 21.
[3]The proceedings of this conference are contained in L’Unione economica e il problema della moneta europea (ed. Movimento Europeo and Movimento Federalista Europeo), Milan, Franco Angeli, 1978; on the first stages of the debate cf. also R. Jenkins, P. Werner, R. Triffin, D. Biehl and G. Montani, Una moneta per l’Europa, Turin, lstituto Universitario di Studi Europei, 1978.
[4]M. Albertini, “Elezione europea, governo europeo e Stato europeo”, Il Federalista, 1976, p. 209.
[5]M. Duverger, L’Europe dans tous ses Etats, Paris, Presses Universitaires de France, 1995, p. 44.
[6]Back in 1940 Lionel Robbins pointed out in an essay that in a federation, if the national governments wanted to exploit exchange relations as an instrument of economic policy, monetary sovereignty over all currencies could be assigned to the government, while keeping all the national currencies in circulation in a transitory phase. Cf L. Robbins, “Economic Aspects of Federation”, in Federal Union, A Symposium, London, Jonathan Cape, 1940.
[7]For a more detailed analysis of this interpretation of the EMS I refer to G. Montani, “The European Government of the Economy”, in The Federalist, 1997, no. 3.
[8]T. Padoa-Schioppa, L’Europa verso l’unione monetaria, Turin, Einaudi., 1992, p. XXIII. Also cf. D. Gros and N. Thygesen, European Monetary Integration, London, Longman, 1992, pp.317-23.
 

 

 

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