After the Second World War, cooperation between European states was necessary to realize reconstruction and prevent a new war. This collaboration has a long history at both political and economic levels. European integration peaked with the introduction of the new currency; the euro. The political tug-of-war is depicted in this article.
The bond of Europe and currencies
After the Second World War, the European Coal and Steel Community was established in 1951 during the Treaty of Paris. This treaty was signed by France, West Germany, Italy, Belgium, the Netherlands and Luxembourg. The cooperation was important for the reconstruction of Europe and guaranteed an uninterrupted supply of coal and steel throughout Europe. The ECSC was the first step towards European cooperation and integration.
Bretton Woods crisis
After World War II, the American economy was the largest in the world and they had the world’s strongest currency, the dollar. The rivalry between Europe and the US grew and came to an economic climax in the 1960s. This happens when DeGaulle comes to power as president in France. DeGaulle wants to see France grow into the center of Europe; a Europe of states, the most important of which has its seat in Paris. DeGaulle wanted to reduce the influence of the dollar, because the dollar became the international currency through the Bretton Woods system. This system means that European currencies are linked to the US dollar and the dollar is in turn linked to gold. This was possible because the US controlled about three-quarters of the world’s gold supply after World War II.
When the economic situation deteriorated, a monetary crisis arose in 1967. Some countries began to wonder whether there was still enough gold available for their dollars (encouraged by DeGaulle) and whether their own trade reserves would not decline in value. Many countries began converting their dollar reserves into gold, leading to a contraction of the US gold supply and to a decline and inflation of the dollar. DeGaulle refused to bear the costs of this inflation by increasing international payment methods. Both the US and England were in favor of this increase. Tensions arose in the International Monetary Fund. The fall of the dollar caused the Deutsche Mark to rise and by revaluing the German currency, dollar inflation could be stopped. After consultation, Germany refused this, because Germany did not want to revalue something as healthy as the German mark. The US saw the relationship between currencies very differently than Germany, which is evident from the following metaphor: the dollar is the sun and nothing else changes unless it is the planets. Countries such as Germany and the Netherlands linked their exchange rates separately to the dollar. As a result of this Bretton Woods crisis, international monetary relations between Europe and the US were disrupted.
The foundation of the EEC
Around 1970, the idea to bring the economies and currencies of the European Member States of the EEC more into line: the European Monetary System. In 1970, the Werner working group was founded to investigate the possibility of a single European currency. This could be achieved through three phases with the ultimate goal of complete liberalization of capital movements and the fixing of exchange rates, ultimately leading to a common European currency. This should be achieved around 1980-1981.
Expansion with Great Britain proved to be difficult. Due to a bad economic situation, a meeting was held between Pompidou (France) and Heath (England). DeGaulle’s successor, Pompidou, did not strive for France as a world market, but for a common Europe in order to contain Germany and connect it to the West. France therefore wanted Great Britain there because of the growing strength of Germany. Great Germany was France’s motive for a supranational Europe. The German economy grew considerably during this period, while the French economy was in decline. Germany therefore actually had no direct (economic) interest in an EMU. But Germany did have its political reasons: after the Second World War, Germany still wanted to be lenient with regard to its relationship with Western Europe.
The snake
Fluctuation margins were set in 1972 on the basis of the Werner report from 1971. This is also called the snake and was intended to link the currencies and limit fluctuations. The Bretton Woods crisis and Nixon’s decision to float the dollar (to separate the dollar from gold) lead to an unstable situation. The snake was put in a tunnel, which meant that currencies could only fluctuate to a limited extent against the dollar. In 1973, war broke out in the Middle East, resulting in an oil crisis. In combination with the weak dollar and different economic policies among the member states, this led to the withdrawal of participating member states: France, the United Kingdom and Italy are leaving the pipeline. The United Kingdom is struggling with high British inflation and poor economic conditions. Great Britain is joining the EMU. As a result of the member states dropping out, the snake became much less effective and therefore only a eurozone was introduced with Germany, the Benelux and Denkmarken as the only participants. The snake fails.
Adjusting economic policy
In 1978, Schmidt (Germany) and Giscard (France) create the European Monetary System. The EMS is based on a concept of fixed exchange rates that can be adjusted. The currencies may fluctuate with each other at a central rate with a maximum of positive and negative 2.25%, with an exception for Italy, which fluctuates by 6%.
By buying and selling currencies, central banks could support member states when a currency threatened to devalue. The mechanism was therefore also partly based on supporting Member States among themselves (intervention obligations). Schmidt’s motives were economic, not geopolitical. Schmidt hoped for lower interest rates and pursued a stimulus policy, but between 1979 and 1982 the Deutsche Mark rose enormously and the German economy struggled with inflation. This is partly due to the second oil crisis in the early 1980s. The EMU does not bring Schmidt what he expected. Giscard had a supranational monetary institution in order to reduce the power of the Bundesbank. Giscard pursues an economic policy mainly aimed at anti-inflation, budget deficits and exchange rate stability. The French currency could now rely more on the strong currencies of the other member states.
England has been able to reduce inflation since the 1980s under the leadership of Prime Minister Thatcher. However, Thatcher does not want to cooperate with an EMS, due to ideological and economic considerations. According to Thatcher, the EMS increased inflation, but during the 1980s the EMS received more support from the business community and politicians.
Ultimately, Britain’s ideological motives for not tying the pound would delay EMS membership until 1990.
Pro-European leaders
Mitterand came to power in France in 1981 and Kohl came to power in Germany in 1982. These two leaders, Mitterrand and Kohl, will build a friendship over time and are both in favor of European integration and have worked for it.
After 1983, the United Kingdom, France and Germany want a liberalization of the internal European market. This would be enshrined in the Single European Act in 1985 with the aim of completing the common market by 1992. Britain had economic motives for a common market and the geopolitical motives were therefore slightly set aside. Germany, under Kohl’s leadership, was also in favor of this market, because it had advantages both economically and politically. Kohl used European integration to profile himself politically; European integration was popular in Germany. There was also a pro-European atmosphere in France. This is because of the failure of Mitterrand’s socialist policies. High inflation, high national debts and high wages compared to Germany created a moral of modernization or destruction.
The economic motives weighed heavily in the early 1980s and were also one of the reasons for the conclusion of the Single European Act in 1985. The SEA also contains a reference to a possible European Monetary Union.
The fall of the Wall
In 1989, the Berlin Wall fell, which was an important event for European integration. The unification of East and West Germany would greatly strengthen Germany’s power. The Western European countries therefore wanted to participate in European integration for Germany in order to maintain control over this superpower. Kohl was already a supporter (together with Mitterrand) of EMU before the fall of the wall, but after 1990 Kohl had a very strong negotiating position. Germany already wanted an EMU, but could now also achieve unification. Germany takes advantage of this by allowing the common European currency in exchange. Geopolitical rather than economic motives were therefore decisive. France agreed: German unification was OK, but with a European currency. With this decision, Mitterrand ensured that Germany did not form a bloc with Eastern Europe and therefore continued to move towards the West. With the European currency, France had a voice in the European Central Bank, in contrast to the position they took compared to the strong Bundesbank. To get rid of the D-mark was the ideology of France at that time.
The United Kingdom was, as usual, a troublemaker. Thatcher’s ideological motives for not joining the EMU were omnipresent, but it was also not attractive from an economic point of view for Great Britain to join the EMU, because she was faced with high inflation and would therefore have a high exchange rate. to get in. Great Britain did not participate in the single European currency. Thatcher wanted to keep open the possibility of joining the EMU at a later stage. The unification of Germany did not change British foreign policy.
Political negotiations
Germany had a good position in the EMU negotiations. The other member states had to come up with good proposals, because Germany itself could also handle the EMS thanks to its strong DM. The people also had difficulty with the abolition of the DM, especially after the reunification of east and west. The EMS was an acceptable alternative to the EMU. The influence of the Commission led by Delors was limited, because the member states themselves already came up with proposals.
The negotiations regarding the EMU mainly focused on the structure of the EMU; single or based on three pillars? Much attention was also paid to voting by qualified majority. But above all, there was talk about the common European currency, the euro. Denmark would not join the Euro after a referendum, due to strong opposition among the population who had no confidence in a common currency.
The outcomes of these negotiations were a significant delegation of supranationality to the European Central Bank and were enshrined in the Maastricht Treaty. The Maastricht Treaty was signed in Luxembourg on 7 February 1992 by Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal and the United Kingdom of Great Britain and Northern Ireland. The treaty entered into force on November 1, 1993. It was agreed to strive for further European integration and the treaty lays the foundation for achieving a political union within Europe. It was also decided to create an Economic and Monetary Union (EMU) by 1999 at the latest.
This EMU would be achieved through three phases. On the basis of the Delors report, the Madrid European Council decided in 1990 to enter the first phase. The Council would assess progress on economic and monetary convergence and Member States should take measures to comply with the established bans. The second phase had no formal decisions, but non-binding measures were taken on financing public budgets. The European Central Institute (ECI) was also set up to strengthen cooperation between national central banks and make the necessary preparations for the single European currency. The third phase starts in 1997 and more or less marks the start of EMU, permanent measures are taken with regard to budget deficits, with the result that sanctions can be imposed. The European Central Bank will replace the EMI, which will conduct monetary policy in collaboration with the national central banks. On the first day of the third phase, the exchange rate would be fixed between the national currencies and the single currency. Since January 2002, twelve EMU countries have had the same currency, namely the Euro.