Friday, November 30, 2012

MTF - Britain & the origin of the EMS, 1978

The Euro has its roots in the EMS - the European Monetary System - which operated for 20 years between March 1979 and January 1999.

Files on the setting up the EMS are now being released in Britain and other European countries. We review them here and place the best documents online.

    the first English translation of the secret 30 Nov 1978 meeting at the Bundesbank where Helmut Schmidt won over his sceptical bankers with the promise that the rules of the new system need not be taken too literally, if and when they conflicted with German interests - discovered by David Marsh in researching his new book The Euro (Yale University Press, 2009)
    papers from the European Union archives in Brussels recounting what heads of government actually said to each other in Council
    British documents showing how Prime Minister Callaghan was excluded from key decisions, and how he reacted when the penny dropped

1973 Mar: pre-history - "the snake"

Late in the evening of Thursday 1 March 1973, the British Prime Minister, Edward Heath, met with West German Chancellor Willy Brandt at Schloss Gymnich, near Bonn. It was a time of acute crisis in international markets. The last components of the post-war system of fixed exchange rates, Bretton Woods, were collapsing – the US authorities unilaterally unpegging the dollar from gold, allowing it to float – and European governments were struggling to formulate their response.

Brandt made an astonishing suggestion. The member states of the European Community should join a “common float” against the dollar, linking their currencies and pooling reserves to defend their parities. Since the Bundesbank held vast reserves, unlimited support from this source would have transformed market perceptions of sterling and other participating currencies. It would also have constituted a large step towards full monetary union. For a strong supporter of European integration like Heath, the prospect was alluring. In fact the proposal was not entirely a surprise - we had heard something similar a few weeks before in Paris from Brandt's Finance Minister, Helmut Schmidt - but voiced by the German Chancellor himself, the idea had historic significance.

Bretton Woods had been in decline for several years, destabilised by the weakness of its anchor currency, the US dollar. Responding in March 1971 the six EEC countries agreed in principle to link their currencies as a first step towards monetary union. They made their first practical move towards that goal in April 1972 by launching a currency alignment, soon nicknamed "the snake", setting a limit of 2.25 per cent on deviations between its members. The snake as a whole was permitted to move within a broader range of 4.5 per cent against the dollar, while the dollar itself held a fixed value against gold, at least until March 1973.

Britain had been a founder member of the snake (though yet to join the EEC at that point), but was forced out in humiliating style only six weeks later, sterling then floating free. Under German insistence the snake did little to support the currencies of weaker members: the UK itself had insufficient reserves to defend the parity and indeed its policies lacked the credibility an effective defence required. With a recent history of devaluation and relative economic decline, the markets were inclined to treat British assets as a bad bet. Brandt’s proposal for a kind of super snake offered sterling a way back, and more.

But if there were gnomes in Zurich (as an earlier British PM discovered), there were trolls in Frankfurt, the home of the Bundesbank. West Germany's central bankers tenaciously defended their mountain of gold. Bloodied, Brandt and Schmidt speedily retreated from the idea that German reserves might underpin the joint float and the British were sent away disappointed. Sterling stayed out of the unreformed snake, although for a period, on Heath's instruction and in deepest secrecy, we shadowed it. Over time the system became too tight a discipline for the French franc and lira also, coming to resemble a Deutschmark (DM) bloc rather than a European currency in embryo..."


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