Orchestrating Europe (Text Only)

Unfortunately, as Tsoukalis has pointed out, the Treaty of Rome provided ‘very little, if any, guidance with respect to monetary policy’. This was hardly surprising since conventional wisdom at the time assumed that the multilateral arrangements enshrined in the Bretton Woods agreements could be fulfilled – and did not envisage their imminent demise. Expectations were high, but the Treaty’s provisions for monetary integration or cooperation (arts 104ff.) were rather pale and dim, stipulating the liberalization of payments on both current and capital accounts. Within a framework of overall equilibrium in the balance of payments, member states were enjoined to pursue policies directed at high employment and stable prices. To accomplish this, it was seen as necessary – and apparently sufficient – that there should be a loose coordination of economic policy accompanied by the creation of an advisory monetary committee to observe, report and comment on current problems. Although exchange rate policy fell within the purview of this body, it remained a national prerogative. Should countries face difficulties, the Community could offer financial assistance in addition to making recommendations, but no fund for this was created.

The first decade of the EEC’s existence brought various proposals but few achievements. It was characterized by almost uninterrupted balance of payments surpluses for the EEC-members and a parallel decline in the position of both reserve currencies, the dollar and sterling. After the devaluations of the French franc in 1958, the payments situation within the Community attained some equilibrium. The small, five-per-cent revaluations by the deutschmark and the guilder in 1961 stemmed largely from the size of their respective surpluses with non-members. The only internal EEC crisis was the Italian deficit in 1963–4 which was resolved by non-Community credits and without recourse to changes in exchange rates. Several initiatives for institutional change and closer monetary integration came from the European Parliament and the Commission.25 Suggestions for closer consultations and the creation of a separate committee of central bankers were accepted in 1961 and 1964 respectively. However, more radical proposals, if not rejected outright, found little positive support among the member states, partly because monetary reform was seen as an issue that required the involvement of the USA and the UK, and partly because the ever-open question of British membership of the Community made several members reluctant to press ahead with more drastic schemes.

Nonetheless, the increasing outflow of dollars and the need for a common line by the ‘surplus’ countries (which included all the EEC states) kept the issue of regional monetary reform on the agenda. In 1964 the French finance minister Giscard d’Estaing proposed the creation of a new reserve unit to eliminate use of the dollar and to serve the needs of intra-European trade. This idea was killed by a combination of the point-blank refusal of the US to contemplate such arrangements, the reluctance of some EEC partners, and a policy conflict within the French government. Jacques Rueff, architect of the French reform programme of 1958, favoured instead an attack on the pre-eminence of the dollar, through using the ‘rules’ of the international system rather than through changing them. Since the dollar was convertible into gold, France decided in 1965 simply to do just that; a decision that provoked d’Estaing’s resignation. Although member states shared France’s underlying concern, they were uneasy about these tactics; and varied in their degree of susceptibility to American diplomatic pressure. On this last point, West Germany was particularly sensitive to US pressures, since the country depended upon the large American troop presence for its security.

A further impetus towards creating a Community attitude on monetary problems came from the decision in 1964 to adopt a common ‘unit of account’ for determining national prices. This implied that domestic prices would need to adjust proportionately to any future change in exchange rates. Although such adjustments were considered unlikely, the Commission wanted mechanisms to reduce the chances further still. At this point it faced opposition on the grounds that tying down one part of the monetary equation made no sense without tightening other components – a line of argument which had already been voiced by German delegations at various international gatherings for over a decade. They demanded economic policy coordination as a prerequisite for monetary union.

The essential underlying assumption that international parities were somehow immutable was punctured by the crises of 1967–8. When sterling devalued in November 1967, a two-tier gold market was introduced in March 1968. As speculation built up against the franc, France introduced exchange controls in spring 1968. Germany provided a safe haven for funds but the government denied that an overvalued DM had caused the problem. Instead, in autumn 1968, it imposed extra taxes on exports and took fiscal measures to encourage imports. The Bundesbank’s stubborn refusal to revalue, despite massive pressure, worried all concerned and pressure for a realignment of exchange rates could not be avoided. But it was a symptom of the depth of the conflict that when the decision was made, the action was not coordinated. France, unilaterally, devalued by 11.1% in September 1969. With German honour thus satisfied, the DM was allowed to float that same month and was formally revalued by 9.3% the following month.

These events produced a surge of interest in regional solutions. The Commission tabled two memoranda in the course of 1968, and in February 1969 the so-called ‘Barre Report’ was submitted. Although the reports differed in emphasis and tactics, they agreed on creating a new reserve unit, improving policy coordination and a establishing a mutual aid system. The Council of Ministers responded, since it also ‘recognized the need for fuller alignment of economic policies in the community and for an examination of the scope for intensifying monetary cooperation’. Even so, there was no immediate follow-up. Meanwhile, the need for some initiative was underlined by the situation created by the 1969 currency realignment. Since neither France nor Germany had wanted national farm prices to change in line with the new exchange rates, (rather than allow the CAP to collapse) the Commission had to produce a system of ‘green’ exchange rates to preserve the fiction of common price levels.

It was some relief when, prompted by the German chancellor, Willi Brandt, the Hague summit of December 1969 endorsed the aim of ‘Economic and Monetary Union’ (EMU) and set up the Werner Group. Although Brandt’s proposal seemed a major departure from the usual German line of insisting on the primacy of prior policy coordination, the Werner Group very soon found itself embroiled in old conflicts. Two schools of thought prevailed: the ‘monetarist’, which saw fixed exchange rates as a means of forcing policy coordination, and the ‘economist’ school, represented by Germany and the Netherlands, which saw the maintenance of fixed parities as impossible without convergent economic policies. The Werner Report, submitted in October 1970, adopted a compromise position. It called for the realization within ten years of complete and irreversible convertibility, closely aligned exchange rates, the full liberalization of capital movements and the creation of a common central banking system.

To achieve these ends it recommended a narrowing of the margins of fluctuation (from 1.5% either side of par) and a better organization of policy cooperation, especially in the area of foreign monetary policy. It took until March 1971 before the measures were approved. Although the French endorsed the monetarist approach, they wanted to avoid at all costs any discussion on the political and institutional aspects of EMU. But it was exactly a commitment on these aspects that Germany and the Netherlands saw as the price for their concessions. As a result, the resolution approving the goal of EMU left the questions of the transfer of power and institutional reform undecided.

Thus nothing was in place when the Bretton Woods system experienced its next, and ultimately terminal, crisis. In 1970 the USA, still experiencing mounting balance of payments deficits, had eased its monetary policy; consequently, speculative funds flowed back to Europe and, in particular, to Germany. The thinking of the German Bundesbank now moved quickly in the direction of a DM revaluation as a means of reducing the attraction for foreign funds, but there was still the question of how to reconcile this with maintaining parities within the EEC. In spring 1971, the German finance minister, K. Schiller, apparently against the feelings of the majority within the Bundesbank, proposed a joint flotation of all EEC currencies against the dollar. This was resisted by those countries that did not want their currencies dragged upwards in the slipstream of the DM. Instead something reminiscent of the 1966 Luxembourg ‘agreement to disagree’ was decided. The DM and the guilder floated, while other countries introduced capital controls. The decision by Nixon to suspend dollar convertibility in August 1971 only reinforced the divide. Italy now joined Germany and the Netherlands in advocating flexibility of exchange rates, while France, Belgium and Luxembourg preferred a system of exchange controls. Action was further delayed by a general agreement that the key to a global currency realignment lay in a dollar devaluation and not in a revaluation of other currencies. Thus another four months elapsed before the Smithsonian Agreement validated a change of most EEC rates against the dollar of between 7.5 and 16.9%.

The Smithsonian Agreement also allowed currencies to float by 2.25% on either side of the new central rates, which implied that EEC currencies could diverge by as much as 9% before triggering intervention to stabilize the exchange rate. This prospect produced a compromise whereby European currencies would maintain a tighter rein on their rates with each other, whilst moving jointly against the dollar: the so-called ‘snake in the tunnel’. The system was also briefly joined by the aspirant members. However, there was still no mechanism to produce convergent policies, nor were convergent policies adopted. Soon the new rates appeared as unrealistic as the old ones they had replaced. In June 1972, sterling left the snake and floated downwards. Ireland and Denmark, heavily reliant on the UK market, immediately followed suit, although Denmark rejoined after four months.

These mutations notwithstanding, the ‘success’ of the system prompted new moves, agreed in October 1972, to reinforce EMU but, significantly, no agreement was reached on the second step towards attaining the ultimate goal. Meanwhile divergent policies continued to exact their toll. Attempts to get the UK to rejoin the float in January 1973, when it joined the EEC, were rebuffed by a government that did not want to sacrifice recovery for exchange rate equilibrium. The following month, the Italian lira was forced out of the system. The fact that Sweden joined was little consolation. However, the final blow to the system (and to the chimera of economic and monetary union by 1980) was the fate of the French franc which in January 1974 was also left to float. As Tsoukalis comments, by this stage a group comprising Germany, Benelux and Scandinavia had to be understood as ‘little more than a DM Zone’.

The 1966 Luxembourg Compromise had allowed the Council, and thus the EEC, to resume its work by postponing the introduction of majority decision-making and allowing the right of national veto. For many observers who had looked for further progress towards supranationality and contributed to a body of neo-functionalist literature to rationalize their aspirations, the Community appeared interesting but no longer exciting. Moreover, the issue of UK membership again strained relations among the member states. The second British application in May 1967 – followed by applications from Norway, Ireland, Denmark and Sweden – was again aborted by a negative French vote in December 1967. It was clear that on this particular question France was immune to the feelings of its European partners. The Five tried to maintain pressure on France by using the WEU for initiatives to extend cooperation to the political as well as monetary field. This ‘rebellion’ could only be prevented by de Gaulle’s intervention, using the so-called ‘Soames Affair’ (in which the British had leaked details of confidential conversations with the General that suggested a revival of a free trade area to include agriculture) which produced another ‘Empty Chair’. The mood deteriorated further: if the Community were ever to be enlarged to embrace the UK, something in France itself would have to change.

In fact French attitudes shifted surprisingly fast. It is possible that there were objective factors behind the change. For example, new concern about German economic power emerged, especially as France’s balance of payments weakened. Germany’s refusal to revalue during the monetary crisis of 1968 reinforced the fear about the balance of power within the Community which may have produced a feeling that the UK could serve as a countervailing force. Secondly, the Warsaw Pact’s invasion of Czechoslovakia had led de Gaulle to repair relations with the USA. It has been argued that this made it senseless to persist in seeing the UK as an Anglo-Saxon ‘Trojan horse’ in the Community. Although both of these arguments are plausible, until evidence is provided to the contrary it seems most likely that the contemporary view, which attached the greatest importance to the shift in power from de Gaulle to Pompidou, was closest to the truth. Although the government was still ‘Gaullist’, under Pompidou it contained four ministers who were members of Monnet’s Action Committee for a United States of Europe. Whatever the ultimate reason, in July 1969 Maurice Schuman announced that France was willing to countenance some European rélance. Proposals linking the completion, strengthening and enlargement of the EEC would be forthcoming at the Hague summit in December.26

The Commission quickly wrote the Hague summit into its hagiology calling it a ‘turning point in its history’ (EEC Bulletin, 1/1970). It would be churlish to deny that much was accomplished, although different countries laid different emphasis on different parts of the package. France was most interested in completion of the Community and, specifically, the financing of the CAP. The others were primarily committed to enlargement. Nevertheless the decisions at the Hague, taken together, represented an ambitious programme for future development. It was agreed to find a definitive financial arrangement for the CAP by the end of 1969. By July 1970, ministers had requested a report to deal with possible developments in the field of political unification. By December 1970, they wanted a further report on Economic and Monetary Union (EMU). Last, but undoubtedly not least, it was agreed to open negotiations with candidate-countries.

Implementation of the agenda began immediately after the conference. Between 19 and 22 December, agreement was reached on financing the CAP and on the EEC’s financial resources. The latter involved allocating to the Community all receipts from levies and customs duties, as well as national contributions to cover any deficits, and their gradual replacement by receipts to be calculated on the basis of an assessment of harmonized VAT. Committees were installed to draft the requested reports. Two major reports were published in 1970: July saw the publication of the Davignon Report on political unification, while October saw the Werner Report on Economic and Monetary Union. The fate of EMU has been dealt with in the previous section, but the cornerstone of Davignon’s recommendations was foreign policy coordination, described as ‘European Political Cooperation’ (EPC), which rested upon regular meetings of foreign ministers and high officials. Its first achievement was to produce a concerted position during the Conference on Security and Cooperation in Europe that produced the famous Helsinki Accord in 1975.

However, the Hague summit’s main achievement was to re-open enlargement negotiations. Within the UK, a range of studies had attempted to balance a calculable economic ‘loss’ (attributable entirely to the structure and funding of the CAP and the structure and direction of UK foreign trade) against potential economic gains (as the economy benefited from both the static and dynamic effects of customs union). Most managed to arrive at a favourable result. Nonetheless, the negotiations did result in the adoption of new policy areas, noticeably in the creation of a regional fund, from which the UK was likely to emerge as a net beneficiary, in an effort to redress at least part of the transfer problem. These measures, however, stopped short of any automatic redistributive mechanism. No such problems arose with Denmark or Ireland, which were expected to emerge as net beneficiaries from the system.

The membership negotiations were sucessfully concluded in June 1971, following a top level meeting between Edward Heath and Georges Pompidou the previous month. Negotiations for a series of industrial free trade agreements with the remaining EFTA states ran in parallel and were concluded in subsequent months. January 1973 thus represented not only the moment of the first Community enlargement but the closing of a passage of history that had begun in 1958 with the failure of efforts to secure industrial free trade in western Europe. The moment was marked by an optimism scarcely dented by nagging differences on monetary policy. However, 1973 was also the year in which the inflationary boom of 1971–3 was savagely punctured, one of the immediate casualties being the prospects for Economic and Monetary Union. But although it was not immediately apparent, other treasured assumptions that had marked the 1950s and 1960s were destined to be discarded: economic growth, full employment, efficacious Keynesian economic management, technological leadership, to name but a few. It was in these new conditions that the Community had to absorb its three new members.

PART ONE

HISTORY

3

The Stagnant Decade, 1973–83

There is a received picture in Britain of a Community slumping from the high point of optimism reached at the Hague in 1972 into a dismal decade of inertia, relieved only by fractious competition among its member states. Like all received pictures it contains truths. The aspirations of 1972, such as the Davignon Report’s attempt to address the issue of political cooperation for the first time since the mid–1960s,1 and the Community’s first enlargement in 1973, did little to break the pattern of self-interested national bargaining vying with rare bursts of collective altruism. Worse, the recession set off in 1973–4, and renewed in 1980–82 after an uneasy remission, brought internal problems and a pan-European sense of relative decline. Yet EC institutions sustained the idea of integration with an often surprising momentum in the interstices, so that the astonishing regeneration of the mid–1980s has to be explained not only in terms of a sudden shift around 1984 but in an accumulation of long-planned strategies at different levels within the Community and among different categories of players in the game.

The accession of Britain, Denmark and Ireland on 1 January 1973 occurred while the optimistic mood survived, so that the immediate consequential processes of adapting EC institutions and negotiating the informal areas took place against a background of goodwill, buoyed up by affinity between Edward Heath’s government and that of Georges Pompidou. But ministers and officials in Brussels had also to adapt to – or frustrate – the expectation of two new small states (Denmark and Ireland), both with a high agricultural content to their economies, and one large one (Britain) whose predominantly industrial economy, currency and financial institutions were, by the end of 1973, manifestly in disarray, and its industrial relations close to civil disorder.

Yet in the years of Britain’s final negotiations, the climate of opinion both in the EC and in the Heath government had been optimistic, even euphoric. To French observers, Heath seemed not only willing to pay the full price of entry but to bring for the first – indeed in retrospect the only – time a genuine willingness to follow European models of industrial policy and industrial government. In turn, Heath saw his DTI and regional innovations as material for the EC to emulate.2 The fact that an anti-EC wing already existed in his Conservative party seemed unimportant, for Enoch Powell, then the chief critic, was not to turn to outright hostility until 1974. The fact that all Britain’s initial advantage was subsequently lost should not obscure the possibility that, had the oil crisis not struck then, and had Heath not lost the February 1974 election, Britain might have fitted into a novel triangular relationship with Germany and France in a way quite different from its actual halting, semi-detached progress thereafter.

Denmark, in spite of some internal opposition, could take advantage of the experience of other small states in northern Europe, and its economic linkages with West Germany; Ireland (whose emergence from a long period of introspective isolation which stretched back to the late 1920s had now begun) increasingly found a political ally in France. But British entry posed questions for the future of the Franco-German entente, and since the accession terms represented an act of will by the Heath government, with the close support of business, banking and industry, rather than the nation as a whole, Britain’s long-term stance under the next Labour government remained problematic – something which not only French and German governments but those of Benelux and even Italy watched with trepidation.

The new entrants’ responses differed from the beginning. As the Commission recruited new staff, experts and linguists, the Irish took up the offers speedily and successfully, the Danes less so, and the British with marked reluctance. Whitehall’s resistance to transfers, and fears among expatriates for their promotion, lost a great potential advantage during the next decade.3 Due to the lack of full cooperation between ministries, for example, Britain found its former colonies losing out on the share of Yaoundé/Lomé aid even as late as 1981, when they gained only 11 % of the total despite the existence of an informal system of apportioning on a geographical basis, because the form had been shaped originally with Francophone Africa in mind, on which UK representations subsequently made small impression. The Labour party also refused to take the seats allotted to it in the Parliament, as trades unions did in the Economic and Social Committee (Ecosoc) – again in contrast to the other entrants, ensuring an illusory Tory parliamentary contingent at the first direct elections in 1979.

Meanwhile, the new Commission President, from France, Francois-Xavier Ortoli, encouraged the Paris Summit momentum on three broad fronts. As free trade agreements came into force with EFTA countries (Austria, Sweden and Switzerland, followed by Norway, Iceland, and Finland in January 1973, together with Portugal in 1974, newly liberated from dictatorship) it seemed for the first time since Messina that the ‘real Europe’ could be achieved. Discussion began with North African countries about long-term trading relationships, although nothing tangible was likely to emerge until the Council had agreed its own policy for the European side of the Mediterranean. By July 1973, EC and ACP countries started to negotiate both renewal and extension of the Yaoundé Convention, clearly necessary in terms of former British colonies, and despite this potent source of Anglo-French tension, what emerged as the Lomé Convention between the EC and forty-six Third World states was signed in February 1975.

Secondly, the Commission began serious planning for the Social Fund and the new European Regional Fund (which was to have an important impact on the British budgetary question in the early 1980s, and on the attitude of poorer member states who began to argue for what in the end became ‘cohesion’).4 July 1973 brought the ‘Social Action Programme’, with involvement by management and unions in all member states. Thirdly, using the EPC machinery, the Nine successfully aligned their national policies at the CSCE meetings in Helsinki, an essential precursor of the final accord with the USA and the Soviet Union in 1975.5