Orchestrating Europe (Text Only)

The era of détente in Europe seemed assured, not least because these three developments seemed to be an external sign of the ‘fundamental bargain’ made with the United States, that American firms which had already set up within the EC boundary should be treated as Community ones, offsetting the disadvantages of discrimination and trade diversion outside. But a currency crisis in January 1973 had forced the lira to float outside the ‘Snake’ (as sterling and the Irish punt had done since June 1972). The lira’s exit forced the remainder to stop supporting the dollar, then close to its floor against EC currencies. Despite French efforts to push Britain into the Snake,6 the Snake had, in effect, left the ‘tunnel’, and the last attempt to shore up the vestiges of Bretton Woods ceased, ushering in a dangerous era of violent fluctuations and huge capital movements, later styled ‘casino capitalism’ by Susan Strange. The crisis forced the EC to forgo plans for the first stage of monetary union. Nevertheless plans for a European Monetary Fund surfaced briefly and the Economic Policy Committee emerged at the end of 1973.

That summer, the Commission won Council support for its first industrial and technology policy. But Ortoli reported to Council in indignant terms on the lack of progress with the internal market, intra-EC trade being still obstructed by a mass of quantitative restrictions and technical barriers. Member states, he implied, were responsible for the bureaucratic delays which obfuscated the customs union and which, intentionally or not, had increased since enlargement. While the EC prepared for the next GATT talks in Tokyo, it was clear that its own commitment to total harmonization, lacking member states’ consensus on the means, had created a vast backlog of work. The Council however showed no disposition to take up Ortoli’s more flexible alternative, which threatened the physical and psychological barriers to free trade in which each state still had such vested interests.

On 6 October 1973 the Israeli-Arab War began, closely followed by the oil crisis and rampant monetary instability, leading to the first full-blown European recession since 1947. OPEC countries’ use of oil supply and price as weapons to deter Western support for Israel had not been entirely unforeseen (at least by the Heath government) but there was little short-term action that any EC state could take, certainly not to look for strategic energy alternatives unless, like the Netherlands, they possessed gas reserves. Italy suffered most (and received help with its oil supply from Holland and Britain) but none escaped the initial shock, and even when OPEC restored production levels, the price rise (initially from $5 to $11.65 a barrel, but finally $14) induced serious cost inflation and balance of payments problems, with lasting consequences for industry.

The sauve qui peut among member states in late autumn and winter was such that for many observers (unaware of the oil companies’ swap agreements) the EC seemed to have lost its rationale as an economic, let alone a political, organism. Commissioners argued for a common energy policy, but Council ministers demonstrated themselves quite unable to broker a solution. The IMF Committee of Twenty did no better: only Italy and Britain tried out its recommendation that members should accept their oil deficits and not shift payments problems onto each other at the world economy’s expense. The USA, West Germany and Japan all deflated, the latter most drastically. Meanwhile, EC-USA relations almost ruptured over ECOFIN’s agreement to borrow $6 billion from IMF facilities with Saudi Arabian-OPEC underpinning.7 Although ECOFIN eventually got its money, thanks largely to the UK delegation, the US Congress vetoed further funding and it became clear that, without American backing, the EC could stand alone only on a limited scale and then only if it were united, well-briefed and determined.

Such conditions proved rare during the next ten years as the Nine’s economies diverged sharply. Large reductions in output and working time occurred, and in Britain a three-day working week was introduced. Once the immediate crisis had passed, the underlying problems of meeting external deficits emerged, with almost insupportable consequences in Britain and Italy, together with contingent problems of recycling Arab petro-dollars into OECD investments. The effect was like that after an earthquake: a primary shock followed by disorientation, secondary shocks, immediate crisis responses, and then, at very different times, adaptation and reorganization.

Taking the decade as a whole, the far-reaching consequences of this ‘mid–70S crisis’ can be seen to have been decisive in re-shaping European nations’ ideas and policies for the remainder of the century. It shifted concern from full employment to inflation (with notable impact on the relative strength of unions as against management, and on the EC’s concept of a ‘social area’), and led to new power relations in each society’s major centres of economic activity: finance departments became dominant over those of trade and industry, central banks and the financial ethos superseded industrial priorities, and accountants gained ascendancy over both engineers and personnel managers. Finally, this crisis created a prolonged, pervasive questioning of the cost, priorities and effectiveness of state social service provision which, in the second oil-induced recession after 1980, brought about a revaluation of the state’s role itself. In this sense, (with the notable exception of France) it caused the end of that series of post-War settlements established in the late 1940s, and completed what the collapse of Bretton Woods in 1971–2 had begun: the Community’s severance from the long post-War boom.

Britain’s essay after 1979 in new-right economics and social politics – usually called ‘Thatcherism’ – thus turned out to be only the most urgent and extreme case of a wider trend that was to be replicated, in different national contexts, right across the Community and EFTA. The post-War corpus of ideas which had infused economic growth and political institutions since the 1950s ceased first to have absolute validity, and ended by being virtually obsolete – as the EC’s experience of prolonged high unemployment in the 1990s recession demonstrated.

Within the Community, it was soon clear that as currency cooperation in the OECD had been lost so had unlimited access to cheap energy and the belief in the automatic efficacy of neo-Keynesian macro-economic management. As the IMF’s Committee of Twenty noted, currency cooperation could not be restored until the USA resolved its trade imbalance, or until the surplus countries, Germany and Japan (which had restored themselves to surplus by mid–1975) reduced theirs. As the DM and yen rose, the dollar and sterling declined and, with the IMF’s relaxation of its rules in 1976 (to help out those with the severest problems), international coordination appeared lost in the impasse. France now floated the franc, leaving only four member states clustered around the DM in the ‘Snake’ from which the EFTA countries rapidly distanced themselves.

Certain industrial sectors suffered most: shipbuilding, textiles, above all steel. Car producers and consumer electronics did not escape and, in the general retrenchment of capital investment, a rapid loss of competitiveness ensued vis-à-vis Japan and the Pacific rim ‘tigers’ of South Korea, Taiwan, Singapore and Hong Kong. Low growth, low investment, inflation and unemployment were common to all, but in Europe, as elsewhere, responses varied widely, inhibiting any EC-wide industrial policy.

The West German economy readjusted faster than any other in Europe. After twenty-five years of holding the DM’s value down, to the benefit of trade and industry rather than of the consumer, the Bundesbank allowed the DM to rise, as did interest rates. The subsequent restrictive monetary policy, in conditions of restored price stability and independence from the dollar, made West Germany the natural basis for the ‘Snake’, but this was at the expense of domestic growth. Banks took the lead in the rationalizing process that followed, generally to the detriment of large overstretched firms such as AEG and Volkswagen. However, the harsh social consequences of this monetary policy were offset at government level by the SPD/FDP coalition, based on corporatist understandings with unions to cushion austerity measures.

Meanwhile, on the diplomatic front, and despite the fall of Willi Brandt in 1974, the ostpolitik survived under Helmut Schmidt, insuring stable relations with East Germany as well the Soviet Union, the USA and France. The Franco-German entente remained in place, since all three German parties accepted westpolitik as the only way to balance that in the East.

In France, after Pompidou’s death, despite the Gaullists’ preference for Chirac (RPR) rather than the UDF leader Giscard d’Estaing, it was the latter who succeeded as presidential candidate against the socialist challenge of François Mitterrand, in spring 1974. Giscard’s government held to the 6th plan, hoping to sustain both planned growth and industrial restructuring during the emergency. But being a liberal by inclination, Giscard also wished to diminish the Gaullist emphasis on state direction, while deflating the economy and reducing France’s dependence on external sources of energy. This was a policy which required heavy investment in civil nuclear development, yet which, for fear of a recurrence of the 1968 disorders, proceeded via monetary means rather than by direct wage cutting. It led first to negative growth, then, in 1975, to reflation, and ultimately to a 38 billion franc budget deficit, together with high unemployment accompanied by a weak currency.

In 1976, Giscard replaced Chirac with Raymond Barre (a former Commissioner) as prime minister, who had the more robust aim of cutting feather-bedded state industries down in size, reducing wages, and liberalizing prices. After strikes and much industrial conflict, the Plan Barre achieved surprisingly good results, notably with the rationalizing of steel production into two massive new holdings, Usinor and Sacilor.

In contrast with France, Italy, which had tried to avoid deflation, experienced 26% inflation in 1974 and suffered a steady fall in the lira. A period of political instability saw the regional electoral success of a much-reformed Communist party in 1976 (though it remained excluded from participating in the governing Christian Democrat-Socialist coalition). A strategy of terror mounted by the extreme left culminated in the murder of Aldo Moro, prime minister, in May 1978, and led to reinforcement of the right and extension of political warfare and corruption into almost every level of administration, finance and industry – with long-term repercussions through to the 1990s. Beset by crisis, with constant recourse to the IMF and West German support, Italy failed either to restore confidence in its institutions or to meet the external criteria for fiscal reform.

In Britain inflation continued to rise until it reached 23% in 1976,8 thanks to a period of drift under a Labour government with only a small majority, preoccupied with instituting its Social Contract with the trades unions and sorting out the aftermath of a massive secondary banking crisis. Only in 1976–8, after Britain’s referendum on EC membership, and under the direction of James Callaghan and Denis Healey, did Britain achieve some control of inflation and a sounder monetary policy, together with an industrial strategy which, by the late 1970s, had had some effect on micro-economic industrial adjustment. For economic and political reasons therefore neither Britain nor Italy took much part in determining EC-wide patterns before 1980.

Recovery across the Community was correspondingly varied and patchy, depending on the sector and the level of demand, and was nowhere so strong as in Japan or the United States.9 Currency fluctuations also fragmented agricultural markets and disrupted the CAP, so that the system of monetary compensation amounts (MCAs) grew ever more complex and had to be bolstered by export levies. Attempts by the Commission to reduce guaranteed prices were rejected by the main beneficiary states, so that MCAs, having been merely a temporary expedient, became an integral part of the CAP in six zones of varying price levels. This in turn caused a rift in the Franco-German entente, since the French government believed MCAs worked to the advantage of countries with stronger currencies.

Increased complexity reflected an institutional crisis. The oil shock and member states’ nationalistic responses produced in Brussels a mood of deep gloom: Ortoli declared that the Community had lost its vision and that its institutions were near collapse. Indeed at the OECD Energy Conference in Washington, in autumn 1975, the EC exposed all its differences, and the UK insisted on a separate seat. At home, members applied individual trade safeguards, many of which the Commission was forced unwillingly to accept. Collectively the EC turned protectionist, imposing a 15% anti-dumping duty on Japanese ball bearings. Of greater significance, it agreed to the Multi-Fibre Agreement’s cartel arrangements on September 1977 in order to keep the EC textile industries alive. There was infighting over fisheries, and a wine war between France and Italy which the Commission had to take to the European Court.

Whatever the language still used by EC institutions, the reality lay in national defensiveness, absence of a common energy policy, and inability to address new issues collectively. The EC’s outward appearances by 1976–7 had come to depend on the Franco-German understanding represented by Schmidt and Giscard, and on the DM core of the ‘Snake’. It was hardly surprising that, within the wider periphery, EFTA countries went their own ways, Austria for one set of reasons,10 and Sweden for another. (Norway’s electorate had of course already voted against its government’s entry application in 1972.) Only the two Iberian states and Greece showed signs of wishing to join: all three, unlike the EFTA countries, seemed on balance to be assets of doubtful value.

Nevertheless, the Community’s level of activity maintained a certain momentum with the Commission’s establishment of its science and technology policy, its social action programme (which included provisions for disabled workers and equal pay for women) in December 1975, and further limited advances in the free movement of goods in the few sectors, such as pharmaceuticals and medical services, that were still profitable. The Regional Fund took off in March 1975, albeit with smaller resources than were originally envisaged, thanks to disagreements between the main payer, West Germany, and Italy, Ireland and (for different reasons relating to budgetary adjustment) Britain. The ECJ handed down several important rulings on transport and demonstrated a clear commitment to integration which put it, in national governments’ eyes, on the same side as the Commission.11 Political cooperation also broadened out after Helsinki into bilateral agreements with Comecon countries and Yugoslavia, and in a continuing commercial dialogue with the Mahgreb countries of North Africa.

Even these limited gains came about primarily not because the Commission initiated policy but because the Council of Ministers willed it.12 When the heads of government, jockeyed by the French Presidency, agreed at the Paris Summit in December 1974 to establish the European Council, they went beyond the founding treaties to formalize the existing informal, occasional inter-governmental mode of regulating business, over and above the EC’s existing, and Treaty-based institutions. This Council’s subsequent request to the Commission, Parliament and Coreper to prepare one report on European Union, and to Leo Tindemans, Belgian prime minister, to produce another, together with the agreement by seven states to introduce direct European Parliament elections and to increase the Parliament’s powers, showed how priorities stood. Although the decision for direct elections had been very controversial in France, being referred on grounds of national sovereignty to the Constitutional Council, France had taken the political lead with German acquiescence and Italian support – the latter predicated on the assumption of political influence with France and economic support from Germany.

Meanwhile, without becoming any more communautaire, or any less hostile to harmonizing laws and taxation, the British won an acceptable (though actually useless) formula on their budget contribution at Dublin in March 1975, an apparent redress which probably helped Harold Wilson’s last government to gain its referendum on retaining EC membership in June, after which Labour MEPs at last took their seats.

This emphasis on inter-governmental supremacy, as the recession began to lift, indicated that European integration would proceed without fundamental alterations in the balance of power or the patterns of activity set in the mid–1960s. France returned the franc to the ‘Snake’ in July 1975, and at a minor but not unimportant level acquired some support from Ireland, during the Irish Presidency. The restructuring of basket case industries was to follow the EC pattern of crisis cartels, first set out by the Commission in the case of steel in April 1975, followed by textiles, then the aircraft industry (1977), and shipbuilding (1978). Only in the novel areas covered by the Regional Development Fund was the Commission able to extend its informal autonomy by remedying grosser inequalities between north and south, core and peripheral regions, so that what had earlier been only an attempt to recuperate the Italian Mezzogiorno, became a more general policy of aiding poorer and peripheral regions.

The interplay between the Council and the Commission led to a flurry of activity, ranging from harmonizing company law to reports on a passport union and special rights for EC citizens. Most Commission draft directives at this time derived from the twin themes of harmonization or the internal market, free of border restraints, but those on worker participation and company law were clearly intended to restore an earlier tripartite balance between the social partners which the recession had severely damaged.13 In a series of tripartite conferences, the Commission sought to inspire some sort of interdependence rather than sectoral competition, firstly between financial interests and secondly between management and labour – all to no effect. The Council rejected the directive on co-determination and the Vredeling Directive on worker consultation within large firms, and the ETUC discovered that the EC saw the ‘social question’ only in terms of markets and industrial survival.14

This failure of an earlier dream can be attributed both to the real loss of union influence, especially in labour-intensive industries such as engineering, metalworking and textiles, and to the implicit defensive alliance between management and union leaders to safeguard what employment still remained. But it also emphasized how the earlier consensus had been eroded, and how the Commission was now powerless to restore it.

As Etienne Davignon observed in his report on European Union, it was becoming increasingly difficult to resolve even apparently specific issues without reconstructing the general political conception of what Europe should become. What had appeared to exist in 1971–2 had largely disappeared. The McDougall Report, for example, recommended in 1977 that member states should concert macro-economic policy and structural adjustment, together with the Commission’s regional strategy. But what might in the 1960s have been the beginnings of a genuine attempt at redistribution between core and deprived periphery was rejected by a Council whose members could not agree on what macro-economic policy might be, and therefore refused either the powers or the money. The ERDF itself had become ‘a pawn in the debate over far wider issues’.15 At this stage, the total of 1.3 million units of account was split 40% for Italy, 28% UK, 15% France, 6% Ireland and 6% Germany. In 1981, Greece entered the arena with 13%.

Yet something more integrated could still be discerned, in direct suffrage for the European Parliament and the consequent distribution of seats (December 1975), in the strengthened budgetary system, backed now by the Court of Auditors with power to investigate members states’ spending practices, and in the institutional reports on EU, accompanied by the Tindemans document. Under the Dutch Presidency in November 1976, the European Council accepted a cautious statement about an incremental road to European Union. Six months earlier, under the Luxembourg Presidency, the Council had accepted no fewer than eighteen directives on the removal of technical barriers to trade, and resolved some of the fisheries disputes by extending EC limits to 200 miles in the North Sea and Atlantic.

But very many directives remained for approval, and the emergence of a common fisheries policy led to often violent disputes between members and with Nordic countries, which were not finally settled until 1983. At the same time, with the second Portuguese revolution16 and Franco’s death, the issue of extension surfaced again, in circumstances prejudiced rather than eased by the case of Greece.

Greece, freed of its military junta, had been encouraged to apply in mid–1975 by member governments who had backed the government-in-exile and who saw membership as a safeguard of the new democracy’s future. The implication at that point had been that similar support would extend to Spain and Portugal;17 and Spain’s centre-right government under Adolfo Suarez did indeed formally resume negotiations in mid–1977, after the first democratic elections, with the consent of the centre-left. The Socialist government in Portugal, led by Mario Soares, followed suit in 1978.

At this stage, Greece, liberated from military dictatorship in 1974, under prime minister Karamanlis, (who was widely liked in western Europe) stood furthest down the road to EC membership, untainted by the suspicions of member states, that the military might intervene as in Spain, or the Communist party return to power as in Portugal. The Commission on the other hand regarded all three rather more dispassionately, and recommended against early Greek entry, but the Council, mindful of the dangers of hostilities with Turkey’s military government in the Aegean, overrode it and opened negotiations in July 1976, ignoring Greece’s very different level of social, political and economic development.

Member states differed, depending on whether they looked at the political arguments or the economic ones: on the latter they were harder and more sceptical in the case of Spain, and by association Portugal. Spain also suffered from the outright opposition of French farmers in the south, some unease in Belgium and Holland, and uncertainty in Italy, tom between agricultural interests and Mediterranean solidarity.18 At a time when the largest entrants from 1973 had not still fully been assimilated, Spain represented too sizeable a risk, whereas the dangers of incorporating Greece seemed relatively small and apparently containable when it came to the CAP and regional funding.

Debate among member states had centred upon Spain’s potentially large new markets and the investments that could be made there, which seemed likely to offset the budgetary drain and to be especially profitable for Germany. But they also took account of the world strategic situation – in the tail end of Nixon’s presidency, the threat from the Greek Left to leave NATO and abrogate American air bases, and the economic conflict between France and Spain.19 In the end they compromised, agreeing to deal with Greece quickly and to delay the Iberians at a pace acceptable to France and Italy. Delay stretched into the 1980s, exacerbated by Greece’s own bout of factious campaigning to get more financial advantage before Spain and Portugal actually came in.

In the event, negotiations opened with Portugal in 1978, Spain a year later, and proceeded desultorily. In a speech in June 1980, Giscard linked Iberian entry to solution of the EC’s own problems – i.e., the Greek Kalends – an attitude which derived retrospective justification from an attempted coup by sections of the Spanish army in February 1981. Although the king’s firm stance and the rally by the great majority of senior commanders revealed that Franco’s ‘bunker’ had become obsolete, the excuse of unripe time continued, prolonged by Colonel Ynestrillas’s failed coup in October 1982, until Mitterrand’s political turnabout in 1983.