Alan J. Dillingham
Political Science Department
"The monetary construction of Europe resembles the myth of Sisyphus in its origins, but will finish, I hope, as well as the Aeneid."
- Valéry Giscard d'Estaing
January 25, 1974
"...Since 1969, there has been a definite movement in French monetary diplomacy away from national sovereignty and towards greater integration. While Charles de Gaulle saw no need for coordinated policies, new European institutions or compromising French national sovereignty in any way, his successor, Georges Pompidou, proposed closer European cooperation through a narrowing of intra-EC parity margins and the creation of a Community Reserve Fund. When Valéry Giscard d'Estaing took office in 1974 he proposed creating a common currency for the EC, which was later incarnated within the European Monetary System (EMS) as the European Currency Unit (ECU). Building on Giscard's ideas, Edouard Balladur proposed constructing a European central bank in January 1988. The French draft treaty on economic and monetary union, submitted by Pierre B‚r‚govoy in January 1991, went beyond Giscard and Balladur's ideas, suggesting that national central banks be required to implement the decisions of a politically independent European Central Bank and that the Ecu be transformed into a single currency that would replace all national currencies within the Community. In accepting the final version of the Maastricht Treaty, France went further still in its willingness to surrender sovereignty by agreeing that all national central banks should be made politically independent and by accepting strict convergence criteria for economic policy covering price stability, interest rates, deficits, debt and currency stability..."
"...The failure of the Snake to protect the French economy from the economic and monetary turmoil of the early 1970s led Pompidou's successor, Val‚ry Giscard d'Estaing, to push French monetary diplomacy further in the direction of Europe. French'proposals centered around an idea that had long been one of Giscard's pet projects -- the creation of a common currency for the European Community. The Community currency Giscard had in mind would not replace national currencies. Rather national currencies would remain in use within each national economy, while the Community currency would replace the dollar as a means of settlement between European countries. The Community currency would actually be a basket made up of the national currencies and would be backed by a portion of the official reserves of the member states pooled into a European Monetary Fund. Each national currency would have a central rate against the Community currency that could be changed if necessary.
Giscard's designs were formed to counter external constraints. As his close political ally, Michel Poniatowski noted:
"(Europe) will make itself, slowly, progressively .... (I)t will be a response, a defense, a resistance to external pressures. The institutions will vary according to the intensity of these pressures. The weaker the constraint, the weaker the unification, but the stronger the constraint, the greater unification will be."..."
"...Giscard himself identified monetary integration as the primary objective of France's European diplomacy. The primary purpose of the Community currency would be to raise the specter of an alternative to the dollar as an international currency and thus perhaps nudge the US into taking the policy measures necessary to protect its currency. If this succeeded, a measure of international, and thus European, monetary stability would be restored at little cost to Europe. If this failed, a Community currency could still provide a defense for the franc against dollar instability. By reducing the dollar's role in intra-EC payments it would reduce the vulnerability of EC currencies to fluctuations in the dollar..."
"...Giscard found turning his dream of a European currency into a reality rather difficult. In March 1975, a new unit of account for the Community was defined against a basket of EC currencies, but its use was far more restricted than the French had originally hoped. Giscard's decision to bring the franc back into the Snake in July 1975 was followed by a second humiliating withdrawal in March 1976, severely weakening his diplomatic efforts to create a Community currency. It wasn't until 1978 that an opening for French diplomacy presented itself. A new dollar crisis and international pressures on West Germany to reflate its economy, motivated its chancellor, Helmut Schmidt, to join with Giscard in launching the European Monetary System (EMS), which came into operation in March 1979...."
"...The new EMS saw the transformation of the European unit of account into the European Currency Unit, or ECU. Each national currency was given a divergence threshold relative to its central rate against the ECU to single out which countries might be the source of instability within the system. Crossing the divergence threshold would entail a "presumption" to act, unless after consultation with the other central banks, it was agreed that action was unnecessary.
However, French unwillingness yet again to compromise on the issues of policy coordination and supranationality prevented the ECU from becoming the centerpiece of the EMS. The German Bundesbank thwarted French proposals for a European Monetary Fund that would manage the ECU's rate against the dollar and insisted that the ECU be treated merely as a swap arrangement by central banks, renewable every three months by unanimous consent of the member states. The system of central rates against the ECU did not replace the parity grid system of the Snake, but rather existed alongside it. Furthermore, in practice, the divergence'indicator failed to operate as a symmetrical system of adjustment between EMS currencies...."
"...Balladur's central bank initiative represented a step beyond previous French proposals to create a reserve fund and a significant movement towards closer integration. However, in some significant ways Balladur's proposals reflected a continuing French desire to minimize surrendering national sovereignty. If the French desired a European central bank, they had a very particular view about what kind of bank they wanted. A "central bank of central banks" was the desired goal which would complement, but not replace national central banks. The European central bank itself would be outside the institutional framework of the European Community and clearly subordinated to the political control of the national governments. It would manage a portion of the member states' official reserves and act on international markets to protect EC exchange rates against external disturbances. For their part, national banks would act to maintain intra-EC parities according to precise obligations for intervention and adjustment affecting strong as well as weak currency countries. It was also clear from this arrangement that the ECU would be a point of reference, a reserve instrument and a means of intra-European payments, but would not replace national currencies within their own states.
Balladur's central bank initiative started the process that eventually culminated in the signing of the Maastricht Treaty in December 1991. The Hannover EC summit of June 1988 approved the appointment of an expert committee to report on monetary integration. This committee produced the Delors report in April 1989, which delineated a three stage process for creating a European central bank and a single European currency. The Madrid summit of June 1989 endorsed the Delors report and called for an intergovernmental conference to draft a new treaty for European monetary integration. The Strasbourg summit of December 1989 decided to convene this intergovernmental conference in 1990. The Rome summit in October 1990 approved an agenda for economic and monetary union which would include a European central bank and fixed exchange rates. The intergovernmental conference itself, which would produce the Maastricht Treaty, opened in Rome in December 1990...."