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1.2.1.1. Have there been other attempts at monetary union in Europe?

History shows a continuity in the relation between people and their money: experimentation in monetary alliances have been tried and repeated.  In ancient times the Greeks joined together to mint a common coinage.  Later, Rome established itself as capital of the world and spread its coinage throughout the conquered territories.  During the Middle-Ages, there were periods where periods where a common currency dominated local ones - followed by times where local or national currencies re-established themselves, as occurred in Luxembourg, Catalonia and Scandinavia.

Roman Empire.  Hadrian.  Aureus, gold  134 AD  (photo Wenger).  

In 1834 the regions of Germany united under the leadership of Prussia, in a customs union which led to a coinage union in 1857.  Complete monetary union followed in1875 with the birth of the "Reichmark".  The Deutschmark (DEM)  followed only in 1948, as a result of the change in the monetary system.  From 1865 to 1914, Belgium, France, Italy and Switzerland  (joined later by Greece)  created a monetary union called the "Latin Union".  They were followed in 1873 by the three Scandinavian countries (Denmark, Sweden and Norway) who formed a monetary union which continued until 1924.

Illustration : « A single currency for Europe : Victor Hugo had already thought of it »
© Promeuro - Illustration 1.2.1.a 

1.2.1.2. And in the more recent past?

During the inter-war period sovereign states deemed it necessary to organise their economic and monetary relations (Genoa Conference 1922). During this period, the Pound Sterling (GBP) gradually lost its status as an international reference currency.  Il took up to 1944, or 20 years for the United States dollar to replace the British £ and establish its hegemony* over the international monetary system. This example shows that it takes time for a currency to establish itself as a reference currency in this system. The fixed exchange rates led inevitably to irregular price adjustments* which led to disastrous levels of unemployment, which were politically unacceptable.  But national monetary policies during this time, which were very much hostage to changing circumstances, were characterised by exaggerated nationalism, insufficient understanding of economics, errors in judgment by political leaders, attachment to the past and disoriented public opinion.

There were repeated episodes of international financial chaos caused by competitive devaluation by individual states.  (The more a currency of one state is devalued in relation to others, the cheaper the goods of that state become in international markets.)

1.2.1.3. Couldn't the international monetary system, established after World War II, resolve European monetary problems?

The Bretton Woods Agreement* (1944) in the immediate post-war period, was aimed at a world-wide financial solution and ignored the possibility of regional organisation, something omitted entirely from the statute of the International Monetary Fund (IMF).  It was considered, at that time, sufficient to have a system of fixed rates of exchange* based on a new international currency - the convertible US dollar - to maintain a stable international monetary system.

In April 1949, the Westminster Economic Conference, organised by the International Movement following the Congress of the Hague (1948) resulted in a resolution in favour of a European monetary union. Winston Churchill* declared that this conference constituted the beginning of process which would result in the unification of Europe.

Winston Churchill

1.2.1.4. What were the first steps toward European monetary union?

In 1950, the implementation of the Marshall Plan required improvement in the methods of payment within Europe. This led to the creation of the European Payments Union (EPU) within the framework of the European Organisation for Economic Development (EOED) and the replacement of strictly bilateral payment agreements with a multilateral clearing* system. The position of each participant (in credit or in debt) was established at the end of each month and regulated with a single payment.

In this system the public sector surplus or deficit* of each country is compensated, resulting in a multilateral balance, not in gold or the US dollar, but essentially in credits.


Illustration © Promeuro - Illustration 1.2.1.b  
Appeal by esperanto users for a single European currency.
The Bretton-Wood Agreement on the "ibiblio" website: www.ibiblio.org

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The EPU adopted an accounting unit called the European Unit of Account (EUA) defined - just as the US dollar - as 0.888g of pure gold. The member countries declared a rate of exchange between their currency and the EUA.  Thus the EPU created a "regional monetary union", but without actual monetary cooperation.  It was the period of the "transferability" of currencies, that is to say, the possibility of using local currencies within a defined monetary zone - such as the EPU - controlled by exchange rules, which governed certain operations within the zone, given that they constituted the same weight of gold: 1 EUA = 1 US dollar.

In 1958 the EPU was replaced by the European Monetary Agreement (EMA).  The same unit of account was adopted.  The EMA created a fund for the purpose of supplying credit to countries which were confronted with balance of payment* difficulties.  It was the period of "convertibility" (at least externally) of money.  It replaced "transferability": non-residents could freely exchange their money for gold or other currencies.  Later, total convertibility (external and internal) became generalised.
 

1.2.1.5. Did the Treaty of Rome foresee a monetary union ?

In 1957,  the authors of the Treaty of Rome, which established the European Economic Community concerned themselves very little with monetary identity.  The system established at Bretton Woods was designed to regulate, at international level, the financial relations between states.  The EPU had contributed to the establishment of, at least, ordered relations between European countries, if not a true cooperation.

Hence the timidity with regard to the monetary arrangements within the Treaty: coordination of monetary policies (Art. 105), free circulation of capital (Art 106), stability of exchange rates (Art. 107), equilibrium with respect to balance of payments (Art. 108 and 109)

The Treaty of Rome on the Europa website of the European Commission: www.europa.eu.int

1.2.1.6. How and why was the idea of a European Monetary Union (EMU) born?

>From the 1960s onward, the evolution of the international monetary situation profoundly modified the context and gave a new direction to European monetary identity.

Video: History of the Euro

Since 1962, in its monetary program, the European Commission (EC) recommended a monetary cooperation between the central banks of the member countries.  This recommendation was followed slowly by some actions:  the establishment of a committee of governors of the central banks was decided on 8 May 1964.

Also in 1962, the first monetary expression of the community was defined : the Unit of Account (UA), with the objective of continuity with the same weight of pure gold  as the US dollar, the same as did the EUA.  The UA was applied to the budget, common customs tariffs and linked to European currencies to establish special rates of exchange used in establishing the amounts of agricultural compensation.

At the beginning of the 1970s, the instability of the dollar and the exchange rate fluctuations resulting from international speculation, gave impetus to the search for a European monetary zone, where the rates of exchange would still be variable but stable.  The growing differences in monetary policies of the member states and the development of multinationals revealed the insufficiency in monetary coordination within the EEC.

"In the absence of reforms leading to the creation of a true international currency, the use of several national currencies as reserve instruments acts as a substitute for the forms which are lacking, and increase still further the instability of the international monetary system."

Encyclopédia Universalis, 1982, pp. 209-213 (according to the theories of the economist Robert Triffin*).

It is within this context that a European monetary union is envisaged first in the Barre Plan* (1969) and then the famous “Werner Report* (1970).  The latter is the expression of a true European willingness to create an economic and monetary union.

Illustration : Ancestors of the euro
© Promeuro - Illustration 1.2.1.c  

"Europe will not be created in a single act, nor as a complete construction.  It will be created through concrete steps, establishing, first of all,  a solidarity of actions." Lecture given by Robert Schuman* from the Salon de l'Horloge, Paris,  9 May 1950.

1.2.1.7. Why didn't the Europeans design their own monetary system at the time of the collapse of the Bretton Woods agreements ?

The agreements achieved at  Bretton Woods collapsed mainly because the United States considered that the anti-inflationary measures, necessary to preserve the link between the US dollar and gold, were not compatible with public deficits* linked to the pursuit of the war in Vietnam.  When the international monetary system collapsed following the abandonment of the link to gold (the factor which stabilised currencies) the Europeans did not create their own system, despite the recommendations made by Werner.

Why?  Because several countries imagined that it was not in their interest to maintain a system of fixed exchange rates.  Germany let the value of the DEM rise in order to prevent importation of global inflation resulting from the first petrol crisis of 1973.  On the other hand, France, Italy and the UK hoped to obtain economic growth by devaluing their currencies in order to stimulate public demand (as did the United States).  These devaluations did not bring the benefits expected, because the devaluation of their currencies fuelled domestic inflation and imposed high rates of inflation, which broke growth.  

Not until 1983 did France realise that this approach was going nowhere, while in Germany lower rates of interest under a system of floating exchange rates assured a rate of growth greater than that of the Community.  The policy of monetary stability pursued by Germany became the model for Europe.  

The United Kingdom followed a different path.  In response to the challenge of the globalisation of markets the UK opted for a policy of liberalisation of the economy.  Doing this not only gave fresh impetus to economic recovery but, at the same time, developed an economic strategy that others would follow later.  At the time, however, this placed the United Kingdom on a different path than that followed by the majority of its continental partners.

At European level, the need for hegemony following the vacuum left by the abandonment of parity with gold or the US dollar, put Germany in a leading position, given the size of its economy and the success of its policy of monetary stability.