Emmanuel Mourlon-Druol - A Europe Made of Money: the emergence of the European Monetary System

A Europe
Made of
Money

The Emergence of the European
Monetary System

Emmanuel Mourlon-Druol

CORNELL UNIVERSITY PRESS ITHACA AND LONDON

Since the Werner Plan a dozen years ago and since the days of the snake, since the founding of the EMS in particular, different bodies and groups have done enormous preparatory work for further monetary cooperation. This work resembles a hidden treasure: all the papers are written by monetary experts and for the use of monetary experts; they therefore hardly ever have reached the attention of the leaders or heads of state or government; in most cases they have not even been given full attention and full reading by finance ministers.

Helmut Schmidt

The creation of the European Monetary System (EMS) is traditionally considered one of the landmarks of postwar Western European history. Many textbooks stress that it was an example of how European elites coped with global economic change. The advent of floating exchange rates, following the collapse of the Bretton Woods system in the early 1970s, was harmful for Western European economies, and the EMS constituted a European response. The EMS represented, indeed, the first serious attempt at reintroducing a semifixed exchange rate system on a European basis. And most important, that European response would have a strong influence on the economic and social policies of many participating European countries from 1979 onward. The EMS would be an external constraintlauded or criticizedfor the domestic economic policy choices of many European governments. Further adding to the importance of the EMS, countless European policymakers would present it as the first necessary step on the road to economic and monetary union (EMU). The European Currency Unit (ECU), the argument goes, was the forerunner of the euro. Though both of these assertions are certainly debatable, they do hint at one of Western Europes perennial problems: the need to stabilize monetary relations in a geographical zone where internal trade is intense. From the nineteenth-century Latin Monetary Union to the present-day euro, organizing currency fluctuations within Europe has remained a central issue for European policymakers.

But the EMS was more than just an exchange rate system. The inception of the EMS was part of a wider trend toward the tentative affirmation of the European Economic Community (EEC) as an international actor amid the profound economic, political, institutional, and social transformations of the 1970s. The EEC, created in 1957, had specific competences, multiple levels of governance, and a record of diverse successes and failures. But in the course of the 1960s and 70s, it witnessed a steady enlargement of its sphere of influence. The EEC became a major international trade actor, set up diplomatic relations, and concluded a trade agreement with the Peoples Republic of China; the European Political Cooperation (EPC) process, created in 1970, attempted to give a single voice to the EEC in foreign policy, with many failures but one important success at the Conference on Security and Cooperation in Europe (CSCE) in 1975. However imperfect and limited it was, the EEC of the 1970s was an affirmed polity, with a life of its own, more than a decade after its creation.

Among all these attempts, monetary cooperation was arguably both the most unsuccessful and the most pressing issue. Monetary fluctuations put at severe risk the key achievements of the EEC, namely, the common agricultural policy (CAP) and the common market. The creation of a European monetary identity would also consolidate the European polity. Some mechanism aimed at stabilizing monetary relations in the European Economic Community was therefore needed. The Werner Plan, an ambitious three-stage proposal for EMU put forward in 1970, suffered the breakdown of the Bretton Woods system and the advent of generalized floating, and was quickly abandoned. Monetary cooperation was in a paradoxical situation: its improvement was urgently necessary, but it appeared to be caught in an inextricable deadlock.