Mr. President of the Swiss Confederation
Mr. "Conseiller d'Etat", Member of the Vaudois Government
Mr President Valery GISCARD D'ESTAING,
Herr Bundeskanzler Helmut SCHMIDT, Dear Helmut,
The genesis of the EMSBefore addressing the question that leads to the creation of the European Monetary System, it is without doubt worthwhile to recall that cohesion among Europeans had not been able to resist the dual decision of the Americans, first of all in August 1971, to end the Gold Exchange Standard, created at Bretton Woods in 1944, and then to devalue the dollar: the dual standard dollar-gold no longer existed. In relation to the dollar that was now no longer convertible into gold, currencies could fluctuate inside a band of 4.5% (According to the terms of the Açores Agreement). The Europeans decided among themselves, on a reduced band of 2.25%. The famous snake in the tunnel.
But nothing was going to stop speculation. Currencies attacked quit the snake of 2.25%, and sometimes even the 4.5% tunnel. President NIXON would make the disequilibrium worse, deciding in February 1973 on a second devaluation of the dollar. Amen to relatively fixed exchange rates. The world entered into the non-system of floating exchange rates that one could call, lessons drawn from the facts, the least bad solution in this period of never ending turbulence. The oil producing countries reacted by multiplying the cost of energy. Inflation was rampant and unhappily, confronted by these dangers, the European countries had neither the same analyses nor the same reaction. Thus it was that certain currencies would be forced out of the system as they could not remain within the snake, this attempt to limit the fluctuations of European currencies.
The truth obliges us to admit that until 1976, the technical dialogue between the Federal Republic of Germany and France was not very easy, due to a divergence in their inflation rates. French authorities nevertheless argued for the world to accept a return to a regime of relatively fixed exchange rates. A lost cause, the facts were against them. The Jamaica Agreement of 1976 officialised, in some way, the system of floating exchange rates.
A long period followed which saw France convert, not without jolts, toward the objective of the "Franc Fort". President GISCARD D'ESTAING gave an impetus to the movement in 1976, with the government of Raymond BARRE, who, while member of the European Commission, had done so much to rally the Member States around disciplined and efficient monetary co-operation.
There were but lessons to be drawn for our two recipients who without doubt thought, as Robert MARJOLIN observed in 1975:
"Europe is no further down the path of economic union than it was in 1969. In fact, if there has been, a movement, it is a movement in reverse."
And, I would add, the publication of the WERNER report in 1970, did nothing to provoke a change in spirits. The Committee, which was head by the Luxembourg Prime Minister was charged with studying with a large group of top civil servants, the form that an Economic and Monetary Union could take. Such a project seemed distant from the sad realities of the European Community at this time.
President GISCARD D'ESTAING and the Chancellor SCHMIDT inaugurated a series of bilateral meetings, round tables, the first was held in Alsace, at BLAESHEIM. Their relations became so confident, that one or the other could permit themselves an audacious gesture. Indeed, this is what President of the Republic did when he presented to the Chancellor an analyse of not only the consequences of a floating exchange rate, but also of the practices that placed the costs of readjustment on the so-called weak currencies, which were against the long term interests of Europe.
An expert was designated from each side, the Governor of the Bank of France, Bernard CLAMAPPIER, who we all know played an eminent role next to Robert SCHUMAN, and Secretary of State, Doctor Horst SCHULMANN.
Their joint propositions called for a more constraining system than the snake, and were marked by a seal of reciprocity, between weak and strong currencies. The reaction of the Bundesbank was no surprise, it was against the project.
It was thus up to our two Statesmen to pick up the pilgrims baton and convince their partners, and for Helmut SCHMIDT; the more difficult task, obtain the consent of the German monetary authorities. They could also count on the efficient influence of the President of the European Commission, Roy JENKINS. However, the British Prime Minster, James CALLAGHAN, remained, despite his open mind, more reserved, least not to say hostile.
The project began to take form at the Bremen European Council, in July 1978. Helmut SCHMIDT, who's profitable stubbornness is well known, desperately wanted British adhesion to the European Monetary System project. He was helped by other colleagues, and even proposed to the British a large margin of fluctuation - 6% percent instead of 2.25% - as Italy had asked for. Bur the English maintained their opposition. It was a dead-end, because, as is often the case, political vision and the technical qualities of a project can run aground due to a hardening of positions, and the tiredness of the participants.
President GISCARD D'ESTAING thus had the idea of dividing the project in two: a general agreement to which Great Britain could adhere and a relatively fixed exchange rate mechanism that these countries would not yet apply… for the moment. In its stride, the European Council accepted to name the new unit of account the ECU, otherwise known as the "European Currency Unit".
8 months later, on 13th March 1979, the EMS came into force. Lets us remind ourselves of the essential principals.
· The exchange rate mechanism limited the fluctuations of currencies around a peg rate by 2.25%.
· In order to manage the system, under the responsibility of the governors of the Central Banks, a European Monetary Fund was created, into which was placed 20% of the gold or dollar reserves of the Members. This management was accounted for in ECUs.
· Interventions were foreseen in order to maintain the stability of the system and if necessary there was also the possibility of short and medium term credit...."