The Tragedy of the Euro

CHAPTER THREE The Road Toward the Euro

The Werner plan had been the first attempt to establish a common fiat currency in Europe. It was drawn up by a group surrounding Pierre Werner, Prime Minister of Luxembourg, and presented in October of 1970. The plan entailed three stages and called for a monetary union by 1980. In stage one, budgetary policies were coordinated and exchange rate fluctuations were reduced. The third stage fixed exchange rates and converged economic policies. But it was not clear how to get from the first to the third stage; stage two had never been spelt out. The Werner plan did not call for a common central bank, and it was finally dropped after France left the snake in 1974. Nevertheless, it set a first precedent toward European integration, a supposedly essential goal.

The plan for a common currency was revived by Jacques Delors, a president of the European Commission for ten years and an individual with a long career in French socialist politics.1 A technocrat and a politician through and through, he was raised in the spirit of French interventionism and pushed toward political integration and harmonization during his terms as president of the Commission. The Single European Act of 1986 (one year after Delors took over the European Commission) was a step toward political union. It was the first major revision of the Treaty of Rome and its objective was the establishment of the Single Market by December 31, 1992. One of its long term goals was a single currency, and majority voting (in contrast to the previously prevailing unanimity voting) was introduced into new areas such as currency, social policy, economics, scientific research and environmental policies.

In 1987, pressure toward a single currency intensified. Helmut Schmidt, a social democratic and former chancellor of Germany, and Valery Giscard d’Estaing, a former president of France, founded the lobbying group “Association for the monetary union of Europe.” Large German companies such as Volkswagen, Daimler-Benz, Commerzbank, Deutsche Bank and Dresdner Bank soon became members.

In April 1989, the Delors Report, a three stage plan for the introduction of the Euro, was published. It was a milestone on the road toward the Euro. At the summit of Rome in December 1990, i.e., two months after the German reunification, the three-stage plan was officially adopted, based on the long-term goals as established in the Single European Act.

The first stage had been underway since July of 1990 with strengthened economic and monetary coordination. Exchange rate controls were eliminated and the common market was completed.

In January 1990, Helmut Kohl agreed with Mitterrand to approve the single currency according to Kohl’s foreign adviser, Joachim Bitterlich.2 But Bundesbankers still saw the single currency as an undesirable end for the then-near future.

Karl Otto Pöhl, President of the Bundesbank at the time, was confident that the single currency could be prevented. For Pöhl the monetary union was a bizarre idea. He argued that a monetary union would only be possible given a future political union—which was still far off. His tactic was to define conditions for a currency union that France and other states would never accept.3 But he miscalculated. The French government accepted a central bank based on the model of the Bundesbank, and Kohl had to give up his aim of introducing monetary and political union in a parallel way.

The political will favoring a uniform currency was expressed in the Maastricht Treaty, signed on December 9 and 10, 1991. In Maastricht, Kohl distanced himself from the aim of a political union, but went ahead and sacrificed the Mark. He also agreed to set a date for the introduction of the single currency: January 1, 1999. Moreover, participation in the monetary union was not voluntary for countries who signed the Treaty. This implied that Germany could be forced to participate in the monetary union in 1999.

The Treaty set down the details of the introduction of the Euro and also the start date for the second stage of the Delors Report: 1994. In the second stage, from 1994 to 1998, the European Monetary Institute, the forerunner of the ECB, was founded, and participants in the monetary union would be elected. Five criteria for selection were negotiated and established.

1.Price inflation rates had to be under a limit set by the average of the three aspirants, with the lowest inflation rates + 1.5 percent.

2.Public deficits had to be not higher than three percent of GDP.

3.Total public debts had to be not over sixty percent of GDP.

4.Long term interest rates had to be under a limit established by the average of the three governments paying the lowest interest rates + two percent.

5.Countries had to join the European Monetary System for at least two years and could not devalue its currency during this period.

The fulfilment of these criteria was facilitated by the political will demonstrated in favor of the Euro. The support in a common monetary system implied that interest rates converged. As expectations for an entry in the Eurozone increased, highly indebted governments had to pay lower interest rates. Also, inflation rates decreased in highly inflationary countries as people expected a lower inflation of the Euro than they did of the preceding currencies.

The German government tried to impose automatic sanctions in the case of any infringement of the deficit limit after the Euro had been introduced. But Theodor Waigel, the German Minister of Finance, did not succeed. In talks in Dublin in December of 1996, other governments rejected automatic sanctions on countries with deficit overruns. On January 1, 1997, the legal framework of the Euro and the European Central Bank was established. The participants and the monetary instruments of the ECB were determined in the beginning of 1998.

Finally, the third stage of the Delors Report commenced with the official introduction of the Euro on January 1, 1999. Exchange rates between the participating currencies were permanently fixed. The third stage was completed when, three years later, the Euro was introduced into circulation.

GERMANY’S COUP D’ÉTAT

The introduction of the Euro in Germany resembled a coup d’état.4 The Bundesbank had supported a British 1989 proposal by Nigel Lawson concerning currency competition in the European Community including the new currency ECU (European Currency Unit). There would be thirteen currencies in the EU, with all thirteen accepted as legal tender. A year later John Major made another attempt for Britain when he proposed the ECU to be made a hard currency which could be issued by a European central bank coexisting with the national currencies.

But the German government rejected the British free market proposal. It preferred the socialist proposal of one fiat money for Europe. The German government acted against the will of the majority of Germans who wanted to keep the Deutschmark. The government launched an advertising campaign, putting ads in newspapers stating that the Euro would be as stable as the Deutschmark. The ad campaign’s budget was raised from 5.5 to 17 million Deutschmarks when the Danes voted against the introduction of the Euro.

German politicians tried to convince their constituency with an absurd argument: they claimed that the Euro was necessary for maintaining peace in Europe. Former president Richard von Weizsäcker wrote that a political union implied an established monetary union, and that it would be necessary to maintain peace, seeing as Germany’s central position in Europe had led to two World Wars.5 Social democrat Günther Verheugen, in an outburst of arrogance and paternalism typical of the political class, claimed in a speech before the German parliament: “A strong, united Germany can easily—as history teaches—become a danger for itself and others.”6 Both men had forgotten that after the unification, Germany was not as big as it had been before World War II. Moreover, they did not acknowledge that the situation was quite different in other ways. Militarily, Germany was vastly inferior to France and Great Britain and was still occupied by foreign troops. And after the war, the allies had reeducated the Germans in the direction of socialism, progressivism and pacifism—to ward off any military opposition.7

The implicit blaming of Germany for World War II and making gains as a result was a tactic that the political class had often used. Now the implicit argument was that because of World War II and because of Auschwitz in particular, Germany had to give up the Deutschmark as a step toward political union. Here were paternalism and a culture of guilt at their best.8

In fact, German chancellor Helmut Schmidt, when speaking of the European Monetary System, the predecessor to the Euro, said that it was part of a strategy to spare Germany from fateful isolation in the heart of Europe. In 1978 he told Bundesbankers that Germany needed protection from the West due to its borders with communist countries. He added that Germany, in the aftermath of Auschwitz, was still vulnerable.9 Germany needed to be integrated into NATO and into the European Community, and that the European Monetary System was a means to this end—as the Euro would be later. Upon re-reading his words in 2007, Schmidt stated that he had not changed his mind. He believed that without a unified currency, Germany’s financial institutions would become leaders, causing envy and anger on the part of its neighbors, and bringing about adverse political consequences for Germany.

A similar threat of political isolation occurred later within the context of German reunification. Mitterrand had raised the possibility of a triple alliance between Great Britain, France and the Soviet Union, as well as an encirclement of Germany. Only the single currency would prevent such a scenario.10

While the German political class tried to convince sceptical Germans of the benefits of the single currency, German academics tried to persuade the political class of the single currency’s dangers and urged the government not to sign the Maastricht Treaty. Sixty economists signed a manifesto in 1992 claiming, among other things, that its provisions were too soft.11 In 1998, 155 German economic professors demanded a delay of the monetary union (but to no avail). Structures of European countries would be too different to make it viable.12 Even many Bundesbankers opposed the introduction of the Euro before a political union was achieved. They argued that a common currency should be an end but not the means of economic convergence. By stating that a political union would be a necessary requirement for a monetary union Bundesbankers hoped that the French government would stop pushing for the single currency. In an expression of disapproval the Bundesbank raised interest rates immediately after the drafting of the Maastricht Treaty in December 1991.13

Legal experts raised constitutional concerns about the Maastricht Treaty.14 Law professor Karl Albrecht Schachtschneider argued that a monetary union could only be stable and work in a political union. A political union, however, implied the end of the German state, which itself was unconstitutional. Schachtschneider also pointed out that the German constitution demanded a stable currency, an end not achievable in a monetary union with independent states. The right to property would also be violated in an inflationary monetary union.

The German constitutional court, however, found that the Maastricht Treaty was in fact constitutional. The court stipulated that Germany could only participate in a stable currency, and would have to leave the monetary union if it proved to be unstable.

Finally, politicians changed the German constitution in order to make the transfer of the sovereign power over the currency to a supranational institution possible. All of this was done without asking the people.

Furthermore, German politicians argued that the Euro would be stable due to the convergence criteria, independence of the ECB, and the sanctions that were institutionalized in the Stability and Growth Pact proposed by German Finance Minister, Theo Waigel, in 1995.15 But all three arguments ultimately failed.

The convergence criteria were not automatically and routinely applied, and the Council of the European Union could still decide, with a qualitative majority, to admit countries to the Eurozone. In fact, the Council finally admitted countries such as Belgium and Italy, even though they did not fulfil the criterion of the sixty percent limit of public debt to GDP. Even Germany did not fulfil the criteria. Moreover, many countries only fulfiled some criteria due to accounting tricks which postponed expenditures into the future or generated one time revenues.16 Several countries managed to fulfil the criteria for 1997 only, the year during which the future members of the monetary union were appointed. Moreover, many countries only fulfiled the criteria because it was expected that they would join the monetary union. Thus, their interest rates fell, reducing the debt burden of public debts and deficits.

The Stability and Growth Pact (SGP) was not as harsh as Theo Waigel had suggested. When the SGP was finally signed in 1997, it had lost most of its disciplinary power. The result prompted Anatole Kaletsky to comment in The Times that the outcome of the Treaty of Maastricht represented the third capitulation of Germany to France within the century, citing as well the Treaty of Versailles and Potsdam Agreement.17

Waigel had wanted stricter limits than those set by Maastricht. He had wanted to restrict public deficits to one percent, and demanded automatic monetary sanction for violations of the limit. Revenues from fines would be distributed among members. Yet, after the French government had opposed the measure, sanctions did not become automatic, but dependent on political decisions, and it was decided that revenues would go to the EU.

The Commission of the EU was responsible for monitoring the SGP.18 But even in the Commission there was no strong backing of the SGP. The Chairman of the European Commission, Romano Prodi, described its provisions as “stupid.” In the case of eventual infringements of the provisions of the pact, the SGP establishes that the Commission is to give recommendations to the Council for Economic and Financial Affairs (EcoFin). EcoFin is comprised of the Economics and Finance Ministers of the EU and must meet once a month. U-pon the recommendation of the Commission, EcoFin decides, with a qualitative majority, if the criteria of the SGP are being fulfiled or not, and is then to issue warnings or announce the existence of excessive deficits. EcoFin offers recommendations to reduce the deficits. If the infringing government does not follow the recommendations and continues to miss the criteria, a majority of two thirds is necessary to establish sanctions. Fines can amount to a half percent of GDP.

Sinners were to decide for themselves if they would be punished. If several countries failed to fulfil the criteria, they could easily support each other and block sanctions. To date, no country has had to pay for its failure in this regard.

In November 2003, EcoFin waived sanctions recommended by the Commission against France and Germany. This triggered a discussion concerning the efficacy of the SGP. The already watered-down SGP met its end on the twentieth of March, 2005. Germany violated the three percent limit on public deficits for the third time in a row in 2005. As a consequence, EcoFin watered down the SGP even more by defining several situations and expenditures that would justify a violation of the three percent limit: natural catastrophes, a falling GDP, recessions, expenditures for innovation and research, public investments, expenditures for international solidarity and European politics, and pension reforms.19

The reform meant a carte blanche for deficits. Because politicians themselves decide if the sanctions of the SGP are applied, deficit countries never have to pay. Politicians later justify their behavior by watering down the SGP and effectively ending it.

The independence of the ECB is also questionable. No cen-tral bank is totally independent. Central bankers are nominated by politicians and their constitutions are subject to changes made by the parliament.

Politicians were quite frank about the “independence” of the ECB. François Mitterrand claimed that the ECB would execute the economic decisions of the Council of the European Union. In the conception of French politicians, the Council of the European Union controls the ECB. Fernand Herman, a Belgian member of the European Parliament, demanded that the central bank pursues the ends set by the Council and the Parliament, simultaneously guaranteeing price stability.20

The Maastricht Treaty also establishes that exchange rate strategies are to be determined by politicians and not the ECB. The French government had even demanded (unsuccessfully) that politicians decide on short term exchange rate policies. Still, a political decision that the Euro exchange rate is overvalued and should depreciate stands in contrast with an autonomous operating of a stability guaranteeing central bank. It undermines the autonomy of the ECB.

DIFFERENCES BETWEEN THE BUNDESBANK AND THE ECB

Despite the assurances of German politicians that the ECB would be a copy of the Bundesbank, therefore exporting Bundesbank stability to the rest of Europe, and the ECB’s symbolic location in Frankfurt, the two remain quite different.

From the beginning there were doubts about the independence of the ECB. Its first president, Wim Duisenberg, “voluntarily” stepped down halfway through his term in order to pass the presidency on to his French successor, Jean-Claude Trichet. Before the introduction of the Euro, Trichet, an engineer by training and a statist by mentality had strongly opposed the “independence” of the ECB. From the French government’s point of view, the formal “independence” of the ECB was only the means necessary to get the German government to agree to a monetary union.21 If necessary, the ECB could be put into the service of politics. In fact, this was the intention of French politicians. Mitterrand announced, before France’s Maastricht referendum, that European monetary policy would not be dictated by the ECB. France imagined the ECB would ultimately be dependent on orders from the political sphere.22

An important difference is the accountability of the two institutions. The Bundesbank managed German monetary policy directly. As the German population is very adverse to inflation it was political suicide for politicians to attempt to influence the Bundesbank toward more inflation or to threaten its independence. Higher price inflation would mean that voters punished politicians and withdrew their support for the Bundesbank. It was on the support of the German population that the power of Bundesbankers vis-à-vis politicians was founded. In contrast, if there is price inflation in the Eurozone, both Bundesbankers and German politicians could say that they opposed inflationary monetary measures but that they were just outvoted by their European colleagues. They can blame others for rising prices. And Germans cannot vote the EU Commission out of office since it is not elected by the public.23

The difference between the two institutions can be seen in their official functions. The Bundesbankgesetz (Constitution of the Bundesbank, 1957) establishes guaranteeing the security of the currency as the main task of the Bundesbank (Währungssicherheit), i.e., price stability. The task of the ECB is more ambitious. The Treaty of Maastricht states that its primary objective “shall be to maintain price stability.” Yet, “without prejudice of the objective of price stability, the [Eurosystem] shall support the general economic policies in the Community.”24 This addition is the result of pressure from the French government, which had always wanted direct political control over the printing press. This means that if official price inflation rates are low, the ECB can and actually must print money in order to support economic policies. If price inflation is low and there is unemployment, the ECB must ease its policy stand.

Curiously, the ECB interprets price stability to mean rising prices. Before 2003, the ECB had a target for price inflation in a band of zero to two percent. Due to the widespread fear of deflation, central bankers want a buffer to zero.25 In May of 2003, the ECB showed its tendency toward inflation by raising its target to just below two percent. At the same time, the ECB reduced the importance of its monetary growth pillar. The control of monetary growth quit being an intermediate end and became an indicator for the bank’s policies.

The Bundesbank’s legacy was further reduced in 2006 when the direction of the research department of the ECB passed from Otmar Issing, a German conservative, to Loukas Papademous, a Greek socialist who believes that price inflation is not a monetary phenomenon, but one caused by low unemployment.26 In spring 2011 the dismantlement of the Bundesbank remains continued with the demission of Axel Weber. Weber had repeatedly criticized the inflationary policy of the ECB confronting a superiority of inflationary interests under an alliance of Latin countries lead by France. When it became apparent that he would not be able to push through his Bundesbank philosophy he stepped down as President of the Bundesbank and withdraw as the frontrunner from the race for the next President of the ECB. The influence of the Bundesbank was further pushed back.

The most important difference between the banks is that the ECB has a two pillar model while the Bundesbank had only one pillar: the Bundesbank focused on the evolution of monetary aggregates, i.e., inflation of the money supply. A deviation from its inflationary goals, as expressed by monetary aggregates, would always be corrected.

The ECB has a second pillar. It also relies on the analysis of economic indicators in its monetary policy decisions. The economic indicators include the evolution of wage rates, long term interest rates, exchange rates, price indexes, business and consumer confidence polls, output measures, and fiscal developments, etc. The ECB therefore has more discretionary power than the Bundesbank and can use the monetary press for economic stabilization. Even if money aggregates grow faster than intended, the ECB can argue that economic indicators allow for an expansionary policy. It has plenty of indicators to choose from as justification.

Another reason the ECB may not go for low inflation is that no central banker wants to pass into the history books as a trigger of a recession. A recession in Southern Europe puts immense pressure on the ECB to lower interest rates even though that might endanger monetary stability.

__________________

27 As Connolly, The Rotten Heart of Europe, p. 75 writes: “Delors is a French nationalist as well as a Euronationalist. How is this contradiction resolved? He sees the creation of ‘Europe’ as the best way of extending French influence. In his ten years in Brussels he assiduously packed the Commission with French Socialists: the Commission became, to a large extent, a French Socialist machine. His hope, rather clearly, was that ‘Europe’ would be run by the Commission and thus dominated by France.” See also pp. 104, 380.

28 Bandulet, Die letzten Jahre des Euro, p. 52.

29 Bandulet, Die letzten Jahre des Euro, p. 53.

30 Roland Baader, Die Euro-Katastrophe. Für Europas Vielfalt – gegen Brüssels Einfalt (Böblingen: Anita Tykve, 1993).

31 Weizsäcker, Richard von, “Meilenstein Maastricht,” in Frankfurter Allgemeine Zeitung, April 13, 1992.

32 This argument prevails until the present day, serving to justify the bailout of Greece. Wolfgang Schäuble stated on July 8, 2010: “We are the country in the middle of Europe. Germany has always been at the centre of every major war in Europe, but our interest is not to be isolated.” See Angela Cullen and Rainer Buergin, “Schäuble Denied Twice by Merkel Defies Doctors in Saving Euro,” Bloomberg (July 21, 2010), http://noir.bloomberg.com. He seems to imply that Germany had to bail out Greece in order to prevent another European war.

33 On the reeducation of Germans see Caspar von Schrenk-Notzing, Charakterwäsche. Die Re-education der Deutschen und ihre bleibenden Auswirkungen, 2nd ed. (Graz: Ares Verlag, 2005).

34 On the systematic use of guilt charges by foreign and national political elites in order to manipulate the German population toward these elites’ goals see Heinz Nawratil, Der Kult mit der Schuld. Geschichte im Unterbewußtsein (München: Universitat, 2008). In a similar way, Hans-Olaf Henkel argues that the guilt complexes and fears stemming from Nazi times make German politicians timid still today and inhibit them from representing the interests of Germans. See Hans-Olaf Henkel, Rettung unser Geld! Deutschland wird ausverkauft – Wie der Euro-Betrug unseren Wohlstand gefährdet (München: Heyne, 2010), p. 30.

35 Quoted in Marsh, Der Euro, pp. 68–69.

36 See Marsh, Der Euro, p. 203.

37 The German magazine Der Focus reported in 1997 that the EU Commission contracted 170 economists in all European countries. The economists had to convince the population of the Euro’s advantages. See Günter Hannich, Die kommende Euro-Katastrophe. Ein Finanzsystem vor dem Bankrott? (München: Finanzbuch Verlag, 2010), p. 27.

38 For an overview and discussion of the arguments brought forwards by these economists, see Renate Ohr, “The Euro in its Fifth Year: Expectations Fulfilled?” in The Price of the Euro, ed. Jonas Ljundberg (New York: Palgrave MacMillan, 2004), pp. 59–70, and Joachim Starbatty, “Sieben Jahre Währungsunion: Erwartungen und Realität,” Tübinger Diskussionsbeitrag no. 208 (February 2006). Also academics in the U.S. brought forwards arguments against the EMU and interpreted the decision as political. See Barry Eichengreen, “Is Europe an Optimum Currency Area?” NBER working paper series no. 3579 (January 1991) and Martin Feldstein, “The Political Economy of the European Political and Monetary Union: Political Sources of an Economic Liability,” Journal of Economic Perspectives 11 (24, 1997): pp. 23–42. For an overview of the opinion of U.S. economists see Lars Jonung and Eoin Drea, “It Can’t Happen, It’s a Bad Idea, It Won’t Last: U.S. Economists on the EMU and the Euro, 1989–2002,” Econ Journal Watch 7 (1, 2010): pp. 4–52.

39 See Connolly, The Rotten Heart of Europe, pp. 74 and 302.

40 German University professors Karl Albrecht Schachtschneider, Wilhelm Hank, Wilhelm Nölling and Joachim Starbatty filed a suit at the constitutional court against the introduction of the Euro.

41 The Stability and Growth Pact sets fiscal limits to member states in the Eurozone.

42 Accounting tricks included manoeuvres with France Telecom, the Eurotax in Italy, Treuhand in Germany, Germany’s hospital debt, and an attempt to revaluate gold reserves in several countries. See James D. Savage, Making the EMU. The Politics of Budgetary Surveillance and the Enforcement of Maastricht (Oxford: Oxford University Press, 2005).

43 Bandulet, Die letzten Jahre des Euro, p. 84.

44 See Roy H. Ginsberg, Demystifying the European Union. The Enduring Logic of Regional Integration (Plymouth, UK: Rowman & Littlefield, 2007), p. 249.

45 Bandulet, Die letzten Jahre des Euro, p. 97.

46 Baader, Die Euro-Katastrophe, p. 195.

47 See Marsh, Der Euro, p. 287.

48 Thus, Feldstein, “The Political Economy,” p. 38, states: “France recognizes that the institution of the EMU will evolve over time and continually presses for some political body (an ‘economic government’) to exert control over ECB. It has already made significant progress toward that end.” Mitterrrand said literally: “One hears it said that the European Central Bank will be the master of the decisions. It’s not true! Economic policy belongs to the European Council and the application of monetary policy is the task of the [European] Central Bank, in the framework of the decisions of the European Council . . . The people who decide economic policy, of which monetary policy is no more than a means of implementation, are the politicians.” Quoted in Connolly, The Rotten Heart of Europe, p. 142. See also p. 248.

49 See Stefan Homburg, “Hat die Währungsunion Auswirkungen auf die Finanzpolitik?,” in Franz-Ulrich Willeke, ed., Die Zukunft der D-Mark. Eine Streitschrift zur Europäischen Währungsunion ( München: Olzog, 1997), pp. 93–108.

50 See Tommaso Padoa-Schioppa, The Euro and its Central Bank (Cambridge: MIT Press, 2004), for more details on the functions and strategies of the ECB.

51 On the irrational fear of deflation and the erroneous arguments brought forwards against it, see Philipp Bagus, “Deflation: When Austrians Become Interventionists,” Quarterly Journal of Austrian Economics 6 (4, 2003): pp. 19–35, and “Five Common Errors about Deflation,” Procesos de Mercado: Revista Europea de Economía Política 3 (1, 2006): pp. 105–123.

52 See Roland Vaubel, “The Euro and the German Veto,” Econ Journal Watch 7 (1, 2010): p. 87.

• 1Roughly a year before starting to purchase government bonds, the ECB started to buy covered bonds issued by German banks. The purchases were progressive and reached €60 billion.
• 2Cash-online, “Forsa: Deutsche überwiegend gegen den Euro-Rettungsschirm.” News from June 7, 2010, http://www.cash-online.de.
• 3Shortnews.de, “Umfrage: Mehr als die Hälfte der Deutschen wollen die DM zurück haben.” News from June 29, 2010, http://shortnews.de.
• 4GRReporter, “The Social Tourism of Bankrupt Greece,” July 12, 2010, http://www.grreporter.info. In the summer of 2010, many Greek entrepreneurs did not want to serve clients participating in the state programme. The Greek government pays its bills six months late, if at all.
• 5D. Hoeren and O. Santen, “Griechenland-Pleite: Warum zahlen wir ihre Luxus-Renten mit Milliarden-Hilfe?” bild-online.de, April 27, 2010, http://bild.de.
• 6The European Communities consisted of the European Coal and Steel Community, creating a common market for coal and steel; the European Economic Community (EEC), advancing economic integration; and the European Atomic Energy Community, creating a specialist market for nuclear power and distributing it through the Community. Yet, even at the very beginning of European integration we can already appreciate the “socialist intentions” of Jean Monnet, the French intellectual father of the European Community. Monnet planned the European Community to be a supra-national rather than an inter-governmental organization [Christopher Booker and Richard North, The Great Deception: Can the European Union Survive? (London: Continuum, 2005)]. For Monnet’s tendency toward central planning see also Tony Judt, Postwar: A History of Europe since 1945 (London: Vintage, 2010, p. 70). The French government feared a German revival after World War II. The EEC assured the French privileged access to German resources (Judt, Postwar, p. 117). The integration of Germany into Europe was thought to prevent a German revolt against the conditions imposed upon it after the war. As Judt, Postwar, p. 156, writes: “[The High Authority of the EEC] above all would take control of the Ruhr and other vital German resources out of purely German hands. It represented a European solution to a—the—French problem.” Despite these political intentions behind the EEC, elements of the classical liberal tradition remained strong in the beginning.
• 7The Council of the European Union, often referred to as the “Council” or “Council of Ministers,” is constituted by one minister of each member state and should not be confused with the European Council. The European Council is composed of the President of the “Council of Ministers,” the President of the Commission, and one representative per member state. The European Council gives direction to the EU by defining the policy agenda.
• 8These important birth defects reduce the credit given to the founding fathers such as Schuman, Adenauer and others.
• 9In 1959, for instance, the British government suggested a free trade zone for all of non-communist Europe. The proposal was rejected by Charles de Gaulle.
• 10Larsson, “National Policy in Disguise,” p. 162. As Larsson writes: “The arena, in which France sought to recreate its honor and international influence was that of Western Europe. As the leading country in the EEC, France regained influence to compensate for the loss of its empire, and within an area where France, traditionally and in different ways, had sought to dominate and influence.” As Judt, Postwar, p. 153 writes: “Unhappy and frustrated at being reduced to the least of the great powers, France had embarked upon a novel vocation as the initiator of a new Europe.” “For Charles de Gaulle, the lesson of the twentieth century was that France could only hope to recover its lost glories by investing in the European project and shaping it into the service of French goals.” (p. 292) Already in 1950 the French premier, René Pleven, proposed to create a European Army as part of a European Defence Community (under the leadership of France). Even though the plan ultimately failed, it provides evidence that from the very beginning, French politicians pushed for centralization and the empire vision of Europe. An exception is French President Charles de Gaulle, who opposed a supranational European state. During the “empty chair crisis” France abandoned its seat in the Council of Ministers for six months in June 1965 in protest against an attack on its sovereignty. The Commission had pushed for a centralization of power. Yet, de Gaulle was also trying to improve the French position and leadership in the negotiations over the Common Agricultural Policy. The Commission had proposed majority voting in this area. French farmers were the main beneficiaries of the subsidies while Germany was the main contributor. Majority voting could have deprived French farmers of their privileges. Only when de Gaulle’s agricultural funding demands were accepted the policy of the empty chair ended. Many Germans including Ludwig Erhard opposed the agricultural subsidies and favored a free trade zone. (See Judt, Postwar, p. 304). Adenauer, however, would never break with France. In exchange for subsidies for French farmers, German goods gained free entry into France. It was agricultural subsidies in exchange for free trade.
• 11Roland Vaubel, “The Political Economy of Centralization and the European Community,” Public Choice 81 (1–2 1994): pp. 151–190, explains the trend toward centralization in Europe with public choice arguments.
• 12Larsson, “National Policy in Disguise,” p. 163.
• 13As Arjen Klamer, “Borders Matter: Why the Euro is a Mistake and Why it will Fail,” in The Price of the Euro, ed. Jonas Ljundberg, (New York: Palgrave MacMillan, 2004), p. 33, writes on the strategy of using the single currency as a vehicle for centralization: “The presumption was that once the monetary union was a fact, a kind of federal construction or at least a closer political union, would have to follow in order to make the monetary union work. Thus, the wagon was put in front of the horse. It was an experiment. No politician dared to face the question of what the consequences would be of failure, or of that would happen if a strong political union did not come about. The train had to go on.”
• 14Frankfurter Allgemeine Zeitung, June 1, 1996. German Foreign Minister Hans-Dietrich Genscher had proposed to absorb the Eastern European countries into the EU as fast as possible. Margaret Thatcher also called for a fast enlargement with the hope that the enlarged EU would turn into a free trade area. Fearing a free trade area and a diminishing influence, the French government opposed the early access of Eastern European countries into the EU. See Judt, Postwar, pp. 716, 719.
• 15Charles Gave, “Was the Demise of the USSR a Negative Event?” in Investors-Insight.com, ed. John Mauldin, (May 5, 2010), http://investorsinsight.com.
• 16Until today, the French government has succeeded in building a disproportionate influence in the EU. Most EU institutions are hosted by France and Belgium and modelled on the French system of governance. French is a working language in the EU, next to English. But not German, even though the Union has far more German-speaking citizens. In the weighted influence of the member states based on their population, France is overrepresented and Germany is underrepresented. In fact, Germany’s weighted influence did not increase at all after reunification. As Larsson (“National Policy in Disguise,” p. 165) writes: “In short, the EU and its predecessors are primarily of French design, which, apart from official declarations, have in many respects served the purpose of using all possible means to enlarge, or at least maintain, French political world influence, particularly in Europe.”
• 17More on the history of the Euro can be found in Chapter 9.
• 18See Roy H. Ginsberg, Demystifying the European Union. The Enduring Logic of Regional Integration (Plymouth, UK: Rowman & Littlefield, 2007), p. 249.
• 19Bandulet, Die letzten Jahre des Euro, p. 97.
• 20Baader, Die Euro-Katastrophe, p. 195.
• 21See Marsh, Der Euro, p. 287.
• 22Thus, Feldstein, “The Political Economy,” p. 38, states: “France recognizes that the institution of the EMU will evolve over time and continually presses for some political body (an ‘economic government’) to exert control over ECB. It has already made significant progress toward that end.” Mitterrrand said literally: “One hears it said that the European Central Bank will be the master of the decisions. It’s not true! Economic policy belongs to the European Council and the application of monetary policy is the task of the [European] Central Bank, in the framework of the decisions of the European Council . . . The people who decide economic policy, of which monetary policy is no more than a means of implementation, are the politicians.” Quoted in Connolly, The Rotten Heart of Europe, p. 142. See also p. 248.
• 23See Stefan Homburg, “Hat die Währungsunion Auswirkungen auf die Finanzpolitik?,” in Franz-Ulrich Willeke, ed., Die Zukunft der D-Mark. Eine Streitschrift zur Europäischen Währungsunion ( München: Olzog, 1997), pp. 93–108.
• 24See Tommaso Padoa-Schioppa, The Euro and its Central Bank (Cambridge: MIT Press, 2004), for more details on the functions and strategies of the ECB.
• 25On the irrational fear of deflation and the erroneous arguments brought forwards against it, see Philipp Bagus, “Deflation: When Austrians Become Interventionists,” Quarterly Journal of Austrian Economics 6 (4, 2003): pp. 19–35, and “Five Common Errors about Deflation,” Procesos de Mercado: Revista Europea de Economía Política 3 (1, 2006): pp. 105–123.
• 26See Roland Vaubel, “The Euro and the German Veto,” Econ Journal Watch 7 (1, 2010): p. 87.
• 27In reaction to the crisis, the political class has tried desperately to save the socialist project of a common fiat currency for Europe. They have been successful—at least for the time being. After intense negotiations, an unprecedented €750 billion “rescue parachute” has been created to support European governments and banks. At the same time, however, the ECB has started what many had regarded as unthinkable before: the outright purchase of government bonds, an action which undermines its credibility and independence. The public and market perception of the monetary setup of the European Monetary Union (EMU) will never be the same.
• 28Resistance to these unprecedented measures is on the rise, especially in countries with traditionally conservative monetary and budget policies. A poll in Germany showed that fifty-six percent of Germans were against the bailout fund.
• 29It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 30It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 31It is not surprising that the majority of Germans want to return to the Deutschmark. They seem to understand intuitively that they are at the losing end of a complex system. They see that they are saving and tightening their belts on a regular basis while other countries’ governments embark on wild spending sprees. A prime illustration is the “Tourism for All” programme in Greece: the poor receive government funds toward vacations. Even amid the crisis, the Greek government continues the programme, albeit reducing the number of subsidized vacation nights to two. The Greek government also upholds a more generous public pension system than Germany does. Greek workers get a pension of up to eighty percent of their average wages. German workers get only forty-six percent, a number that will fall to forty-two percent in the future. While Greeks get fourteen pension payments per year, Germans receive twelve.
• 32The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 33The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 34The two visions have been struggling with each other since the 1950s. In the beginning, the design for the European Communities adhered more closely to the classical liberal vision. The European Community consisted of sovereign states and guaranteed the four basic liberties. From the point of view of the classical liberals, a main birth defect of the community was the subsidy and intervention in agricultural policy. Also, by construction, the only legislative initiative belongs to the European Commission. Once the Commission has made a proposal for legislation, the Council of the European Union alone, or together with the European Parliament, may approve the proposal. This setup contains the seed of centralization. Consequently, the institutional setup, from the very beginning, was designed to accommodate centralization and dictatorship over minority opinions, as unanimity is not required for all decisions and the areas were unanimity rule is required have been reduced over the years.
• 35The classical liberal model is defended traditionally by Christian democrats and states such as the Netherlands, Germany, and also Great Britain. But social democrats and socialists, usually led by the French government, defend the Empire version of Europe. In fact, in light of its rapid fall in 1940, the years of Nazi occupation, its failures in Indochina, and the loss of its African colonies, the French ruling class used the European Community to regain its influence and pride, and to compensate for the loss of its empire.
• 36The classical liberal model is defended traditionally by Christian democrats and states such as the Netherlands, Germany, and also Great Britain. But social democrats and socialists, usually led by the French government, defend the Empire version of Europe. In fact, in light of its rapid fall in 1940, the years of Nazi occupation, its failures in Indochina, and the loss of its African colonies, the French ruling class used the European Community to regain its influence and pride, and to compensate for the loss of its empire.
• 37Over the years there has been a slow tendency toward the socialist ideal—with increasing budgets for the EU and a new regional policy that effectively redistributes wealth across Europe. Countless regulations and harmonization have pushed in that direction as well.
• 38The influence of the French government was now reduced. The socialist camp saw its defeat coming. A fast enlargement of the EU incorporating the new states in the East had to be prevented. A step toward a central state had to be taken. The single currency was to be the vehicle to achieve this aim. According to the German newspapers, the French government feared that Germany, after its reunification, would create “a DM dominated free trade area from Brest to Brest-Litowsk.” European (French) socialists needed power over the monetary unit urgently.
• 39The influence of the French government was now reduced. The socialist camp saw its defeat coming. A fast enlargement of the EU incorporating the new states in the East had to be prevented. A step toward a central state had to be taken. The single currency was to be the vehicle to achieve this aim. According to the German newspapers, the French government feared that Germany, after its reunification, would create “a DM dominated free trade area from Brest to Brest-Litowsk.” European (French) socialists needed power over the monetary unit urgently.
• 40The influence of the French government was now reduced. The socialist camp saw its defeat coming. A fast enlargement of the EU incorporating the new states in the East had to be prevented. A step toward a central state had to be taken. The single currency was to be the vehicle to achieve this aim. According to the German newspapers, the French government feared that Germany, after its reunification, would create “a DM dominated free trade area from Brest to Brest-Litowsk.” European (French) socialists needed power over the monetary unit urgently.
• 41As Charles Gave argued on the events following the fall of the Berlin wall:
• 42The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification. It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away—in other words, disarmament.
• 43The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification. It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away—in other words, disarmament.
• 44The Commission of the EU was responsible for monitoring the SGP. But even in the Commission there was no strong backing of the SGP. The Chairman of the European Commission, Romano Prodi, described its provisions as “stupid.” In the case of eventual infringements of the provisions of the pact, the SGP establishes that the Commission is to give recommendations to the Council for Economic and Financial Affairs (EcoFin). EcoFin is comprised of the Economics and Finance Ministers of the EU and must meet once a month. U-pon the recommendation of the Commission, EcoFin decides, with a qualitative majority, if the criteria of the SGP are being fulfiled or not, and is then to issue warnings or announce the existence of excessive deficits. EcoFin offers recommendations to reduce the deficits. If the infringing government does not follow the recommendations and continues to miss the criteria, a majority of two thirds is necessary to establish sanctions. Fines can amount to a half percent of GDP.
• 45In November 2003, EcoFin waived sanctions recommended by the Commission against France and Germany. This triggered a discussion concerning the efficacy of the SGP. The already watered-down SGP met its end on the twentieth of March, 2005. Germany violated the three percent limit on public deficits for the third time in a row in 2005. As a consequence, EcoFin watered down the SGP even more by defining several situations and expenditures that would justify a violation of the three percent limit: natural catastrophes, a falling GDP, recessions, expenditures for innovation and research, public investments, expenditures for international solidarity and European politics, and pension reforms.
• 46Politicians were quite frank about the “independence” of the ECB. François Mitterrand claimed that the ECB would execute the economic decisions of the Council of the European Union. In the conception of French politicians, the Council of the European Union controls the ECB. Fernand Herman, a Belgian member of the European Parliament, demanded that the central bank pursues the ends set by the Council and the Parliament, simultaneously guaranteeing price stability.
• 47From the beginning there were doubts about the independence of the ECB. Its first president, Wim Duisenberg, “voluntarily” stepped down halfway through his term in order to pass the presidency on to his French successor, Jean-Claude Trichet. Before the introduction of the Euro, Trichet, an engineer by training and a statist by mentality had strongly opposed the “independence” of the ECB. From the French government’s point of view, the formal “independence” of the ECB was only the means necessary to get the German government to agree to a monetary union. If necessary, the ECB could be put into the service of politics. In fact, this was the intention of French politicians. Mitterrand announced, before France’s Maastricht referendum, that European monetary policy would not be dictated by the ECB. France imagined the ECB would ultimately be dependent on orders from the political sphere.
• 48From the beginning there were doubts about the independence of the ECB. Its first president, Wim Duisenberg, “voluntarily” stepped down halfway through his term in order to pass the presidency on to his French successor, Jean-Claude Trichet. Before the introduction of the Euro, Trichet, an engineer by training and a statist by mentality had strongly opposed the “independence” of the ECB. From the French government’s point of view, the formal “independence” of the ECB was only the means necessary to get the German government to agree to a monetary union. If necessary, the ECB could be put into the service of politics. In fact, this was the intention of French politicians. Mitterrand announced, before France’s Maastricht referendum, that European monetary policy would not be dictated by the ECB. France imagined the ECB would ultimately be dependent on orders from the political sphere.
• 49An important difference is the accountability of the two institutions. The Bundesbank managed German monetary policy directly. As the German population is very adverse to inflation it was political suicide for politicians to attempt to influence the Bundesbank toward more inflation or to threaten its independence. Higher price inflation would mean that voters punished politicians and withdrew their support for the Bundesbank. It was on the support of the German population that the power of Bundesbankers vis-à-vis politicians was founded. In contrast, if there is price inflation in the Eurozone, both Bundesbankers and German politicians could say that they opposed inflationary monetary measures but that they were just outvoted by their European colleagues. They can blame others for rising prices. And Germans cannot vote the EU Commission out of office since it is not elected by the public.
• 50The difference between the two institutions can be seen in their official functions. The Bundesbankgesetz (Constitution of the Bundesbank, 1957) establishes guaranteeing the security of the currency as the main task of the Bundesbank (Währungssicherheit), i.e., price stability. The task of the ECB is more ambitious. The Treaty of Maastricht states that its primary objective “shall be to maintain price stability.” Yet, “without prejudice of the objective of price stability, the [Eurosystem] shall support the general economic policies in the Community.” This addition is the result of pressure from the French government, which had always wanted direct political control over the printing press. This means that if official price inflation rates are low, the ECB can and actually must print money in order to support economic policies. If price inflation is low and there is unemployment, the ECB must ease its policy stand.
• 51Curiously, the ECB interprets price stability to mean rising prices. Before 2003, the ECB had a target for price inflation in a band of zero to two percent. Due to the widespread fear of deflation, central bankers want a buffer to zero. In May of 2003, the ECB showed its tendency toward inflation by raising its target to just below two percent. At the same time, the ECB reduced the importance of its monetary growth pillar. The control of monetary growth quit being an intermediate end and became an indicator for the bank’s policies.
• 52The Bundesbank’s legacy was further reduced in 2006 when the direction of the research department of the ECB passed from Otmar Issing, a German conservative, to Loukas Papademous, a Greek socialist who believes that price inflation is not a monetary phenomenon, but one caused by low unemployment. In spring 2011 the dismantlement of the Bundesbank remains continued with the demission of Axel Weber. Weber had repeatedly criticized the inflationary policy of the ECB confronting a superiority of inflationary interests under an alliance of Latin countries lead by France. When it became apparent that he would not be able to push through his Bundesbank philosophy he stepped down as President of the Bundesbank and withdraw as the frontrunner from the race for the next President of the ECB. The influence of the Bundesbank was further pushed back.