The best that can be said about the
results of the G-20 meeting in Seoul is that a full blown currency and/or trade war was postponed. What is urgently needed is a stabilizing foreign exchange system. The conclusions of the Seoul
meeting did not go much further than suggesting to “move toward market-determined exchange-rate-systems”. The US administration seems prepared to head that way and thereby accepting a devaluation
of the dollar (the mirror image of a revaluation of the renminbi) while some minor countries form currency blocks like the Europeans have done.
It seems highly questionable whether such a ‘non-system’ will be stable. Experience shows that market-determined systems are
highly instable, while currency blocs (monetary unions between sovereign states) generally have a life of 12-15 years before they disintegrate. What are needed are politically governed systems
that are adjustable. And skilful politicians/economists, of course.
There is no doubt that it will take years before a stable international system is established. But it may take only a few years
before the European monetary union will disintegrate, considering the pressure it is exposed to now. The doyen of Financial Times’ columnists, Samuel Brittan, recently (November 4) published a
column where he stated that it is futile to attempt to save the eurozone. “The disintegration is likely to be a messy process and it will take time to clarify whether there will be a reversion to
national currencies or whether two or three successor zones will emerge.”
It might be helpful under these circumstances to look back and learn from earlier attempts to construct a stabilising system.
When John Maynard Keynes in 1942 drafted a proposal for an international monetary system, he started out by saying that we need :
* an instrument of international currency (later named bancor)
* an orderly, agreed method of determining relative exchange values
* a quantum of international currency
* a symmetric internal stabilising mechanism
* a central institution, purely technical and non-political.
These needs were far from met in 1946 when the Bretton Woods System (BWS) was instituted because the US got in charge of the
system. The dollar became the international currency and the quantum of international money therefore became determined primarily by national American interests. The system was not symmetrical,
but heavily biased by the US, and the American Treasury came to dominate the central institution IMF.
When Chancellor Helmut Schmidt and President Valéry Giscard d’Estaing in April 1978 presented the European Council with a plan
for a European Monetary System, it was a regional version of Keynes’ 1942 draft, not a precursor of monetary union. It met the five demands because it included :
* an instrument of European currency (later named ecu)
*an orderly method of timely adjustment of relative exchange rates
* a proposal for pooling of reserves (in a future European monetary fund)
* a symmetric internal stabilising mechanism
* a purely technical, non-political exchange rate mechanism, ERM
However, when the EMS was launched in February 1979 the most essential elements of it had been severely amended, primarily by
Bundesbank demands. The ecu was not to be at the centre of the system and the idea of a fund had been abandoned. The symmetric stabilising mechanism was scrapped and the Bundesbank was released
from the obligation of unlimited intervention in the exchange rate mechanism.
The system became far from as disciplined as originally intended in April 1978. Not only were the rules slackened between the
two meetings of the European Council in July in Bremen and in December in Brussels. But in the following years a number of exchange rate adjustments were made in a rather disorderly way until the
exchange rate mechanism in fact was suspended in 1993.
The Bretton Woods System, which was in operation for only 12-15 years after 1958, was a distorted version of Keynes’ plan for a
Clearing Union which had been his prescription as a reaction to the collapse in the 1930s of the system of the gold exchange standard between the wars. The plan for a European Monetary System
likewise was a reaction to American dollar dominance and the flood of greenbacks (in the words of Helmut Schmidt) into Europe in the 1970s after the oil price hike in 1973. The actual EMS also
was in operation for only 12-15 years after 1979. In both cases the systems were terminated because the centre country, USA and FRG respectively, abandoned them due to dominating national
interests. The question now in 2010 is: “Will it be possible to mobilise a European interest that can save the monetary union and the euro from national interests?”
Keynes’ intention had been to introduce an international system geared to keeping the balance of payments of the participating
countries in equilibrium in the long run. Each country should have a reserve of international liquidity to meet short run deficits and in the medium term have access to conditional loans from a
monetary fund in order to gain time to adjust the balance by tighter economic policies. However, had a country run into fundamental disequilibrium, it could as a last resort be permitted to
adjust its exchange rate to regain equilibrium.
He emphasized the symmetry of the system. The burden of adjustment should not be placed exclusively on the weaker economies.
Surplus countries should have an equal obligation to maintain equilibrium. To urge them to do so, they should also pay interest on the credit balance they had with the Clearing Union. This idea
was later changed to a rule whereby the currency of a ‘fundamental’ surplus country could be declared scarce and other countries be allowed to introduce trade restrictions against it.
The EMS degenerated after 1987 to a fixed exchange rate bloc and when it collapsed ten years later it was succeeded by a
monetary union. But the fruit of this union, the euro, was a bastard child. It had a ‘motherbank’, ECB, but no fatherland, since it had two fathers, Helmut Kohl and François Mitterrand. An
experienced scholar in international monetary affairs said in 1993 that “it is my luxury as an outsider to support the objective (monetary union) but to suggest that Maastricht is an undesirable
– indeed, I believe unacceptable – instrument to achieve it.”1 He had several years before “formed the view ... that the easiest and most direct way to get a European currency was to
europeanise an existing national currency ... (and) for reasons of credibility, the leading candidate would be the German mark” . In fact, it now seems that this is about to happen, but in the
disguise of the euro.
The euro in the hands of the ECB developed into a means to impose the German Stabilitätskultur on the other countries. “Die
Institutionen des Euro, die Europäische Zentralbank in Frankfurt am Main und das geld- und finanzwirtschaftliche Regelwerk, entsprechen weitgehend deutschen Vorstellungen“, according to Dr. Theo
Waigel . The German view last spring before the Greek crisis developed was that the ECB must remain absolutely true to its Stabilitätsauftrag.
However, when the Greek tragedy became apparent, Germany had to compromise with that view and accept an impressive bulwark
against the threat of a financial tsunami on the financial markets. In August it was institutionalized in a European Financial Stability Facility (EFSF) that has the capacity to issue bonds
guaranteed by the euro area members, for on-lending to euro area member states in difficulty. The legal implications with respect to the Regelwerk of not only the ECB, but also the Lisbon Treaty
and the German Constitution of this breach with the Stabilitätskultur have not yet been clarified.
The eurozone crisis is functionally closely linked to the near-collapse of public finances in most industrialized countries due
to the rescue operations initiated after the collapse of Lehman Brothers. The German finance minister Dr.Wolfgang Schäuble has recently presented a plan to tackle Europe's debt mountain (cf.
A plan to tackle Europe's debt mountain, by Wolfgang
Schäuble (europesworld.org) ). He presents it as “a blueprint for European economic governance”. He considers the EFSP “just to be s stop gap while we hone the tools and remedy the
shortcomings of the Stability and Growth Pact. … It is now clear that EMU’s current rules are insufficient to impose enough fiscal discipline on eurozone members. The EMU was in fact designed to
encourage structural reforms. Profligate members were supposed to be forced by the rules of the Stability and Growth Pact … to live within their means and strengthen their
The key word in Dr. Schäuble’s plan is discipline. He is known as a strong proponent for a European federation and thus finds no
difficulty in arguing for a federalization of fiscal policy as a logical complement to a federalized monetary policy. It will be a Federal Union based on the strong economic culture of the German
nation – the finalité of the Treaty of Rome.
That opens up for a direct confrontation with the idea of the nation state. We see it now happen in Greece and Ireland. If the
European project shall not collapse in this struggle there must be found a way out of the dilemma. We must try to build the so-called Union as a contradiction in adjectio, a ’federation of
nation-states’. But that will require high skills in both politics and economics, because as Helmut Schmidt told the Bundesbank Council in November 1978: “Money is politics!” and “there has been
a beautiful saying for two thousand years: ultra posse nemo obligatur”.
Keynes was aware of that when he drafted the plan for a Clearing Union. Europe must for a long time abandon the idea of a full
monetary union and try to manage a system of fixed but adjustable exchange rates between national monies. We have to go back to the original EMS plan before it was distorted by the Bundesbank.
That means that the five demands of the original plan for the European Monetary System must be realised reflecting Keynes’ idea of a Clearing Union.
The euro will remain as a European reserve currency, a reference currency as centre of the EMS and a basket currency like the
Special Drawings Rights composed of three or five of the dominating national currencies. If a hard core of the strongest economies in North-Western Europe have the courage to continue as a
monetary union, let them do so.
Since the Monetary Union as such will vanish and develop into a clearing union, the ‘shadow’ of the ECB will take shape as a
European Monetary Fund (EMF), a hard version of the newly created European Financial Stability Facility, a lender of last resort. It will become a European version of the Federal Reserve System,
and its board will consist of the Governors of the national central banks, acting as a European Monetary Council, with reference to the European (Political) Council of Heads of State and
The principal task of this council will be to administer an orderly method of timely adjustments of relative exchange rates
keeping the adjustments within a narrow band, perhaps 2,25 percent if not 1 percent as in the original BWS. Exchange rate policy will thus be taken out of pure politics and left in the hands of
economists, who hopefully are better equipped and able to evaluate what is a proper long-term equilibrium rate than short-sighted financial operators in the market. It is however important to
stress that the European Monetary Council should make such adjustments in time and ahead of market assessments (not a crawling peg), thus using sound judgment based on a long-term view and not
There must be a symmetric internal stabilising mechanism urging both deficit countries and surplus countries to strive to
achieve balance of payments equilibrium. A surplus is always reflected in a deficit elsewhere, and the burden of adjustment must therefore be equally placed on all countries. The principle of
symmetry in a Clearing Union must be accepted by the strong economies which mean that they have an obligation to bring down a structural balance-of-payments surplus by increasing internal demand
or by making funds available at favourable terms for long-term investments and structural reforms in the weaker economies.
There must be an internal stabilising mechanism requiring unlimited intervention in the financial markets to combat speculative
pressures. It will result in very short-term credits and debits among the central banks, which will cancel out when the speculators have been beaten. Luckily the Exchange Rate Mechanism ERM has
not been completely scrapped. It was cursed in the early 1990s, particularly by the British, but it exists as a sleeping beauty and must be woken and sustained by an obligation to unlimited
intervention where the European Monetary Fund, backed by the Monetary Council will play a crucial role.
In this way all the needs for an international monetary system that Keynes outlined in 1942 would be met. The great advantage
also is that it would be possible to include all EU member countries in the new European Monetary System although that would require excessive political skills.
The gist of Dr. Waigel’s statement in February and Dr. Schäuble’s plan in the autumn seems to be the fact that the present
EMU/ECB and its Regelwerk entsprechen weitgehend deutchen Vorstellungen. That means that the euro is the Deutschmark in European disguise. Are we seeing a German Europe arise out of the dust
after the fall of the Berlin Wall and not a European Germany?
The Bundesbank strategy has been successful, but it has brought the European project into a legal impasse where there is a
conflict between the Lisbon Treaty and the German constitution. This strategy was based on central bankers’ economic dogma of free markets and monetarist economics which dominated the Delors
report in 1989.
The German constitution has served as a solid base for the Federal Republic since 1949. The idea of Sociale Markwirtschaft has
been the base for the country’s economic system and was taken into the Treaty that in May 1990 established a monetary, economic and social union between FRG and the former DDR. But the idea of
‘social union’ was fatal in the pursuit of a Constitutional Treaty.
If Germany now places the whole burden of adjustment in a ‘monetary union of nation states’ on the weaker states then the
European Germany will be not a social but a pure Marktwirtschaft, thus undermining Germany’s own economic system which has been so successful. Therefore the lawyers of the courts in Karlsruhe and
Luxembourg must find a legal mechanism that can make the monetary union compatible with a renewed EMS without calling a new intergovernmental conference.
We must go back and seek advice from Keynes in the high politics of money.
1) Richard Cooper in Alfred Steinhherr (ed.) Thirty years of monetary integration from the Werner Plan to EMU. (1994), ref. also
R.N.Cooper, The International Monetary System. (1987).
Erik Holm is Director of the Eleni Nakou Foundation, a British Charity that supports cultural contacts
between European peoples. He is a former European Adviser to the Danish Prime Minister and a former Chief Adviser to the European Commission.
About these issues, see :
* Schaüble’s “Hamlet scenario”
risks heavy casualties amongst the actors, by Loukas Tsoukalis (europesworld.org)
* Retour sur image : le concept stratégique de la politique
monétaire de l'UEM doit être révisé !
* Gouvernance économique : il
faut donner un cadre conceptuel et doctrinal clair à la revitalisation de l'UEM ! (1)
économique : il faut donner un cadre conceptuel et doctrinal clair à la revitalisation de l'UEM ! (2)
économique : il faut donner un cadre conceptuel et doctrinal clair à la revitalisation de l'UEM ! (3)