Survey article

SURVEY EMU

The history of an idea

THE desire for currency stability in Europe has deep roots. Some go back to the 19th century—the Latin Monetary Union, German currency union, the gold standard. Currency instability in the 1920s and 1930s reinforced that desire. Yet when the common market was established in the late 1950s, monetary union was not explicitly on the agenda, although exchange rates were identified as matters of common interest.

At that time, however, the Bretton Woods system of fixed exchange rates still seemed in good shape. Even so, by 1962 the European Commission had got round to proposing a single currency. By the end of that decade, Bretton Woods was dying; President Nixon’s abandonment in 1971 of the link between gold and the dollar was the final nail in the coffin.

Meanwhile, the revaluation of the D-mark against the French franc in 1969 had caused so much angst across Europe that Willy Brandt, Germany’s then chancellor, revived plans for European monetary union. Brandt’s plan was taken up in the Werner report, which proposed moving to a single currency in 1980. This report was approved by Europe’s heads of state in 1971, but immediately knocked out by the collapse of Bretton Woods. Undeterred, Europe soon introduced a system to tie currencies to the D-mark, dubbed the “snake in the tunnel”. However, the snake was destined to lead a fitful and unsatisfactory life: Britain joined in May 1972, only to leave six weeks later, and both France and Italy joined and left twice.

In 1978, with no sign of a general return to fixed exchange rates, the search for European stability gave birth to the European Monetary System. Its parents were Germany’s Helmut Schmidt and France’s Valéry Giscard d’Estaing, with Roy Jenkins, then commission president, acting as godfather. In March 1979, all member countries except Britain joined the system’s exchange-rate mechanism (ERM), which limited fluctuations to 2¹/₄% either side of a central rate (6% for those with wide bands).

But the ERM, too, proved unsatisfactory. France and Italy repeatedly devalued, and France, under a new Socialist president, François Mitterrand, in 1982-83 toyed with leaving. In the end it decided to stay, thanks not least to Mitterrand’s finance minister, Jacques Delors. And when, a few years later, Mr Delors arrived in Brussels as commission president, he once more dusted down the idea of a single currency.

The result was the Delors report, commissioned in June 1988, which advocated a staged move towards monetary union. This formed the basis for the Maastricht treaty, signed in early 1992. Soon afterwards, however, the treaty was narrowly rejected by Danish voters in a referendum; the subsequent uncertainty led to a speculative attack on the ERM that in September 1992 prompted the departure of the lira and the recently joined sterling, and a year later the widening of the exchange-rate bands for all currencies to 15% either side of the central rate.

The two ERM crises produced remarkably diverse reactions in different member countries. In Britain, they reinforced doubts about the desirability, and even the feasibility, of the single currency. In Italy, they merely strengthened the country’s determination to qualify for the euro. Most other European countries also concluded that, in a world of newly freed capital movements, the single currency was the only way to achieve currency stability. Five years on it is about to burst upon them. But can they live with it?