Orchestrating Europe (Text Only)

France’s January 1987 devaluation however, which was forced on an unwilling government by the international markets as the American dollar fell steadily, altered this benign pattern.

As Bernard Connolly observes, ‘the ERM had become an inescapable symbol of attachment to sound policies. But lack of complete credibility made it economically costly.’ French acceptance of the price for hard currency status was overtaken by a desire not to peg the franc to the DM, like the guilder or krone, which would have been politically unacceptable to French public opinion, but to fence the DM inside an increasingly rigid ERM structure which would lead logically and remorselessly to monetary union and a single currency – and thus to the disappearance of deutschmark primacy. French ministers evidently believed that this could be done, despite the global development of money markets where billions could flow across the exchanges in a matter of hours. They assumed continuation of the climate of opinion that had seen the G7 arrange the Louvre Accord in February 1987, in order to stabilize the dollar and yen against European currencies, whilst promoting world economic growth.

But the Bundesbank objected because of the implications for West Germany, and its criticisms carried great weight so long as the Reagan administration did nothing to remedy the dollar’s fall and the American budget imbalance. Having been pressed by Bonn to loosen its monetary stance, the Bundesbank reacted instead by raising interest rates in early October 1987, an action which helped to precipitate the New York Stock Exchange crash on ‘Black Monday’. The clash between Bonn and Frankfurt did not diminish until Hannover in July 1988, when the heads of government agreed on progressive reduction of interest rates. But this added new pressures to currencies in the ERM, since it had been agreed that capital would become fully mobile in France and Italy by 1990; so that it would cost their governments and central banks more and more, in each year before EMU took effect, to resist currency flows and speculation, particularly by the vast American ‘hedge funds’. Strengthening the ERM’s operations failed to limit these accumulating risks.

Edouard Balladur had already proposed, in conjunction with Giscard, during the period of cohabitation, that a prototype of the European Central Bank (ECB) should start work before the final move to monetary union; and to plan it, the Committee of Central Bankers, under Delors’s chairmanship, was to be appointed at Hannover. But in the shorter term, two years of overshoot in West German money supply, together with signs of a speculative bubble in Japan, rapid overheating in Britain, and the Netherlands’ government’s unease about shadowing the deutschmark, presaged trouble which the G7’s pardonable overreaction on ‘Black Monday’ did nothing to allay.

With the Bundesbank apparently sulking on the fringe of a political vortex, stubbornly pushing up German and therefore ERM interest rates, the ERM’s deflationary classic phase ended in recrimination between Bonn and Frankfurt, and growing signs of inflation in Britain and Spain. (Denmark, isolated in its own peculiar cycle, experienced both inflation and stagnation, with repercussions on public opinion which were to be of great significance in 1992).

Meanwhile, the Committee of Central Bank governors, chaired by Delors, met between autumn 1988 and April 1989. They took part already having much common ground, both as professionals of a high order with a common discipline and as believers in the ERM’s proven effects on inflation, as well as the likely benefits of lower transaction costs and risks to be gained from monetary union. It is inherently unlikely that they ignored the political effects of a future ECB on members’ national sovereignty; but the possibility of national divergencies was offset by a measure of theoretical agreement: the conceptual ground had been well prepared in economic terms by the Padoa-Schioppa Report.

This highlighted a basic inconsistency: following the completion of the internal market after 1992, which would be accompanied by full capital mobility and a more or less fixed exchange rates in the ERM, member states would still retain monetary autonomy in their national spheres.

Put simply, Padoa-Schioppa argued that it would not be in the interests of weaker economies to conform and bear the pain; instead they would act as backsliders or deviants, forcing the stronger partners to react, and thus prejudicing the whole. Prudent central bankers, inherently suspicious of what politicians would do to appease their electorates after the experience of the fifteen years since 1974, rated the collective good higher than national sovereignty. The fact that Karl-Otto Pöhl chaired the technical group and both he and Robin Leigh-Pemberton, governor of the Bank of England, signed the Delors Report seemed to indicate that unanimity had been achieved.

To a large extent it had: all the governors accepted that a prototype ECB should start work, in order to begin the process of inducing equality of discipline and practice in reducing inflation as soon as possible. All could reasonably expect their governments to have accepted by then that no one country could bear the costs of doing this alone especially when taken together with contingent problems, such as wages and other labour market rigidities, and that if collective action were not initiated, at the next recession the EC might lapse into another sauve qui peut like 1974. The differences between them related mainly to highly technical problems. But the political issues of whether this new single currency, provisionally styled the ecu, would be too soft (as the Bundesbank feared) or too hard, as the British government suspected, and whether it would eventually be intended to stand up against the dollar and yen as an equivalent world currency, were not and probably could not be argued out.

The one fundamental disagreement in the Delors Committee concerned the mode of transition to EMU. It was finally concerted between Pohl and de Larosière (Banque de France) with some mediation from Carlo Ciampi, governor of the Banca d’ltalia, and help from the Netherlands and Spanish central banks, in time for Delors to present his report on 19 April 1989, in advance of the Madrid Summit. At that stage, it was sufficiently uncontentious to convince ‘respectable financial opinion’ in the EC, which in Britain included both The Economist and the CBI. But when Delors introduced it later that month to Ecofin, he added a timetable: there should be three stages, the first to begin as soon as possible. All twelve currencies should move within the ERM’s narrow bands by 1 January 1993, the date for completing the internal market. In stage two, exchange rates in the ERM should become almost rigid, and all central banks should be given the same degree of independence as the Bundesbank. Finally, in stage three, exchange rates would be permanently fixed, under an ECB entirely responsible for the monetary policy of the single currency. There would then be binding conventions on member states’ budgetary deficits, modulated – for example in the Spanish, Portuguese or Greek cases – by new EC cohesion funds.

Little debate took place in Ecofin, which had rarely been a forum for technical monetary matters, and the Spanish Presidency pushed ahead to start stage one on 1 July 1990. The governments of France, Germany, Spain, Italy and Belgium concurred in this timetable (though the Bundesbank held strong reservations); those of Italy, Greece and Portugal were appeased with cohesion promises. Finance ministers from Denmark, Netherlands and Luxembourg argued only over the detailed schedule. British delegates again were isolated. At Madrid, the whole package went through in the wake of Spain’s ERM entry within the 6% bands, (at a surprisingly low rate because Carlos Solchaga, the finance minister, had previously ‘talked the peseta down’). Meanwhile, as Lawson told in his autobiography, he and Howe jointly forced Margaret Thatcher to set out the conditions for British entry, despite her protests up to the last moment of arriving in Madrid.

The Bundesbank gloomily went its way, raising West German interest rates further to contain domestic inflation.

Then the Berlin Wall came down. Very large numbers of East Germans had already escaped, mainly through Hungary’s unofficially opened border, raising the spectre of mass migration from East to West Germany. The situation could be compared with the strong, demand-led inflation experience before the Wall had been built in 1960–61. Bonn poured huge funds into East Germany to forestall such a threat to the DM, and later promised to exchange one deutschmark for each individual’s now almost worthless ostmark at a rate of one to one, a burden on West Germany which ensured high domestic interest rates for the foreseeable future.

Neither of the logical consequences, an ERM realignment or revaluation against the DM, or very high interest rates for all other member currencies, actually occurred. The first broke on French objections, since the franc fort policy had not yet acquired complete credibility, the second on German political reality. Karl-Otto Pöhl’s outspoken protests against the currency swap were ignored, being politically inconvenient before the crucial autumn elections. He was, in fact, threatened with constitutional revision of the Bank’s statutes if he did not give in. As a direct result, the DM’s credibility was impaired.

ERM partners in 1990, however, concerned themselves more with the effect of rising German interest rates on their own borrowing and their domestic economies, for while the German government expected to bear 80% of unification costs, it was not willing to internalize the consequences for other Community members. The result, if the Bundesbank held to its primary duty of monetary stability, could only be a steady rise in German rates to which the rest would have to adjust. Yet the British government – or rather its chancellor, John Major, fearful of losing the chance should Thatcher change her mind – chose this moment finally to enter the ERM in the narrow bands, on 5 October 1990. It was a bad time, with the dollar still falling and the ERM now nearly rigid, and a worse choice of parity. Yet the British chose not to take the advice of other member states which the ERM’s informal conventions prescribed – and which might perhaps have counselled caution.

Meanwhile, despite these huge potential sources of tension, member governments concerned above all with passage to EMU went ahead, like Captain McWhirr in Conrad’s Typhoon, hoping to win through the storm to the hypothetical calm beyond. The German government’s price for accepting the principle of EMU in such conditions was to be France’s overt support for reunification and rapid progress to political union, so that the new, larger Germany could cement itself firmly into the Community. This can be read as the second stage of the Franco-German bargain made in 1987.

France’s government could accept this, whatever Mitterrand’s initial doubts about reunification, and whatever the impact on French public opinion, because few wished to unleash visceral images of Germany’s past being propounded at this time by Thatcher herself and Nicholas Ridley (except, that is, in languages such as Dutch and Danish which the international press agencies did not read). On that basis, Kohl and Mitterrand agreed their highly important joint declaration of April 1990. It followed, apparently naturally, that EMU would come about via the ERM-convergence path, and according to Delors’s timetable. Franco-German clarity of aim contrasted with Britain’s disarray at the top as Margaret Thatcher fell from power in November 1990, the result of a palace coup within her own Conservative party.

All this time the Bundesbank was constrained not only by its duty to the currency but by its charter obligation to support the Bonn government’s policy in the last resort. Whatever its Directorate felt about Kohl’s pre-election promise that reunification would cost the West German electorate nothing, the bank could not oppose the chancellor’s direction outright. In due course, with the CDU/CSU triumphant in the elections, Pöhl resigned. His lonely gesture and his subsequent explanation, though cogent, had less general effect on events than the new British prime minister’s tone; for John Major’s talk of bringing Britain to a more pro-EC orientation, and signs that his Conservative party might even align with Kohl’s CDU and the European People’s party parliamentary grouping, seemed remarkable after eleven years of marching in another direction.

It was widely assumed during the IGCs that year that the ERM had become the ‘glide path to Monetary Union’.

But that this represented a political as well as an economic judgment was not clear until after Maastricht, in spite of the most unwelcome paradox that developed shortly afterwards, when the peseta went to the top of its ERM range and the French franc to the bottom – the exact reverse of what their relative stabilities indicated should happen. France encountered the greatest economic pain, for despite inflation being almost as low as in Germany, interest rates stayed higher and contributed both to slow growth and persistent high unemployment, and to the government’s repeated attempts to reduce rates rather than let the franc rise.

At the heart of the problem lay the fact that with reunification of Germany costs and prices would eventually rise; unless the Bundesbank permitted higher domestic inflation, France and the other members would pay the price via the ERM. Acceptable though the arrangement might be in 1990–91 while Bérégovoy pursued the franc fort, and while Mitterrand sought to reincorporate Germany coute qui coute, its long term survival could not be taken for granted during the next three years. It also depended entirely on monetary union remaining the agreed end. Yet twelve years of ERM practice offered no precedent for resolving such tension. Any realignment at this stage – even by Britain, now locked into its initial misjudgment – would imperil the ‘glide path’ thesis. As for the Spanish paradox, the others could neither ignore the thesis nor rethink the ERM’s logic. Only the Bundesbank’s council dreamed, as they had since 1987, of a different path to EMU through gradual evolution of a cluster of low-inflation currencies such as the guilder, Belgian franc, Danish krone, and now the French franc, linked to the DM.

Governments across the EC chose to ignore protests from industry and trade unions about high interest rates, and focused primarily on the IGCs. But the French and German finance ministers did induce the Spanish government, against the advice of the Bank of Spain, to depreciate the peseta (contrary to the ERM’s presumed doctrine that the government should not manipulate the exchange rate but content itself with cutting state spending, wages and public consumption). The Spanish government conformed, fearing to antagonize Germany, its main investor, suspecting that if it did not Spain might lose access to the cohesion funds which alone could help its economy fulfil the EMU convergence criteria. The Spanish government’s version of perceived national interests triumphed over its central bank’s fiscal prudence.

In order to bring EMU to the speediest conclusion, the French government and the Banque de France argued during 1990–91 for even more than Delors had: instead of achieving convergence first, according to generally-agreed criteria, a strict timescale should be imposed, pari passu with the IGC at Luxembourg. Margaret Thatcher’s replacement by the relatively inexperienced John Major facilitated this move, which was incorporated in the Commission’s draft treaty on EMU and the ECB’s draft statutes in December 1990. Thereafter, the two IGCs ran in parallel into a maelstrom where raison d’état, economic logic and deductions from very recent history surged inextricably around two conflicting propositions: on the one hand, that EMU would produce automatic convergence and was therefore a precondition for economic union (advocated especially by Italy and Belgium which most needed the external discipline); and on the other, the contention of the Bundesbank and Chicago monetarists, that convergence and completion of the internal market were themselves the preconditions.

Within this grand argument lay others, such as the shape of stage two and Britain’s proposal for a ‘hard ecu’ rather than an irreversible single currency. (This proposal originated with Sir Michael Butler, and was taken up by Major when he was chancellor. Like Howe’s scheme in 1984 for a Single European Act without an IGC (see p (#ulink_6f3bde8a-8f37-50a2-908a-392fa976438f)), it had certain advantages, one of which was that it made a rigid schedule unnecessary. But, like Howe’s earlier scheme, it came too late. In any case, it would have implied a long delay in stage three. Though acceptable to Spain and possibly others, it ran into outspoken German opposition on the grounds that the ‘hard ecu’ would constitute a ‘thirteenth currency’.

Inevitably a compromise emerged, even in such a Manichean struggle: the timetable should be absolute, but so should be stage two’s move to narrow bands and the convergence criteria themselves, the assumption being that each member state would thus be forced to adjust its own inflation, budget deficits and public debt ratios. To meet British objections, the Maastricht Treaty’s EMU sections added that the Commission should monitor member states’ performance, as it was already doing in their progress towards the internal market.

Governments’ various alignments in the EMU IGC were composed by a sort of logic outside time and public opinion, far from the actual recession which was beginning to affect industrial players in the second half of 1991.

Stage two was set to begin on 1 January 1994, stage three in January 1997 or up to two years later, a date from which John Major obtained his celebrated opt-out clause with Kohl’s direct assistance.

Only one event disturbed the tenor of compromise, when the Netherlands Presidency introduced a proposal that the four convergence principles should be achieved before making any move to set up an ECB. This was attacked both by the French and the Commission, with support from Italy and Greece, whose governments saw the external agency which was to help them reform their public finances evaporating. Yet this was what German ministers, primed by the Bundesbank, actually wanted. It also pleased the British whom at this stage the German government wished to carry with them. The ECB was not therefore to take its final form during stage two, but only a European Monetary Institute (EMI), whose precise relationship to the existing array of central banks was far from clear. Convergence seemed assured, and in fact developed most markedly at first among the more widely divergent members like Spain, Italy, Belgium and Britain. Commentators in the United States assumed parities already to have been fixed so that ‘hedge funds’, managed by men like George Soros, had a straight gamble on whether EC governments would hold to this resolve.

The denouement came quickly, as the Bundesbank pushed rates higher to cope with German domestic inflation in the second half of 1991. For the next year Pöhl’s successor, Helmut Schlesinger, pursued the lonely path of rectitude to maintain the bank’s reputation against manifestly political pressures from Bonn and other EC capitals, all of which watched the struggle between Frankfurt and Bonn with increasing dismay.

Speculators inevitably targeted those currencies, the peseta and the lira, whose governments had most to lose from the deflationary regime and were most likely to have to devalue long before 1997.

Substantial issues affecting members’ sovereignty had been traded, as British, Dutch and Danish ministers constantly pointed out. Yet the pass had been sold with the Central Bankers’ Report. All the more scrutiny was therefore imposed on the political union IGC, at a particularly fractious time of quarrels over agriculture and GATT, and the siting of the EC’s new institutions such as the EMI. Meanwhile the Commission’s interventions brought accusations of overbearing behaviour: a proposal in May 1991 to make detailed regulations within existing laws earned the criticism that Delors sought to make it the ‘thirteenth state’. Delors himself, nearing the end of his second term, needed to keep in line not only the IGCs – the second of which was largely outside the Commission’s scope – but the future budget on which the promised cohesion funds (and thus the acquiescence above all of Spain) depended. Yet in the second IGC, the Commission had to be a broker between member states whose tolerance had already worn thin.

The first IGC did nevertheless settle the fundamental issue of where power would lie: in Michael Artis’s phrase, ‘it was the culmination of an unparalleled effort to think through the implications of monetary union and to strike realistic bargains in the interests of realizing this good.’

Whether the Commission’s powers of enforcement, or the logic of convergence and the timescale, would be adequate to reach that point was another matter, when the ERM reached its foreseeable long crisis in 1992–3.

II. Contingencies

REGIONS

Although the aim of creating ‘a more favourable business environment through the dehnition of a common industrial policy as a whole’, which was set out by the Commission in its paper on industrial policy in 1990, belongs to a distinct history, it affected the IGCs in a very broad sense, since it touched on key matters like trans-European networks for research and development, initiatives for training, liberalizing civil aviation or telecoms, the differing competences of the Directorates concerned with industry and member states, and the attempts to iron out economic and social imbalances in the Community. Since the imbalances, especially in the infrastructure, had a strong regional formation, a leading managerial and supervisory role had to be envisaged for the Commission. DG16 already had a claim to be the residuary legatee of such a role, by virtue of its responsibility for the Regional Fund.

But the more politically salient regions, above all certain West German Länder, led by Bavaria and North Rhine Westphalia, wanted a more tangible sign, outside the Commission’s competence. So great was their influence on Bonn, in the sensitive period before the East German Länder were assimilated, that an argument developed for instituting an entirely new political structure, one avidly welcomed by Spanish, Belgian and Italian regions. The Maastricht Treaty therefore embodied a new Committee of Regions, similar to the old Economic and Social Committee. At the time of signature, what this committee would become remained speculative (see chapter 9 (#litres_trial_promo)). But that it could be a useful sounding-board for the ambitions of different sorts of regions, ranging from German Länder to the partly autonomous Spanish regions was not in doubt. Hence the interest of trade union confederations, now once again linked under a regenerated central body, the ETUC, across the north-south divide in order to further the Treaty’s Social Charter.

SOCIAL CHARTER

The Charter’s roots can be traced back to the previous period of trade union influence nearly two decades earlier; more directly to the report from the Commission working group in 1979. It was also influenced by the high levels of tripartite consultation in the EFTA countries which were already requesting membership, such as Austria, displayed in the 1989 Kreisky Report. If, as the Commission forecast, these states were soon to enter the EC, then the Community’s labour market arrangements should be compatible with the conditions they already enjoyed. So argued the Netherlands, who were the leaders in this particular field. Delors and leading members of the ETUC such as Ernst Breit (DGB), Bruno Trentin (CGIL), and Nicolas Redondo of Spain’s UGT drew up the Social Charter, which was then adopted as part of the IGC agenda by eleven member states to one in December 1989. Its intention was to renew the earlier ‘social dialogue’ and compensate for the deleterious impact of the internal market and industrial restructuring, of which rising unemployment – forecast to reach 13% across the EC by 1992–3 – was the first consequence.

The Charter itself set out twelve categories of workers’ rights, based usually on the West German model of mitbestimmung, which were presumed to facilitate the emergence of a single European labour market, more flexible and endowed with higher skills.

The Charter embodied the Vredeling directive under another, non-compulsory form, and was likely to arouse opposition from UNICE and the European Committee members of AmCham because of employers’ predictable fears about higher costs, restrictions on the rights of management to hire and fire, and the imposition of standard contracts of employment. Indeed Delors told one British chief executive that the Charter was meant to be ‘the instrument for levelling the (labour) field’.

In spite of a proposed directive linking progress on rights to the cross-border mergers on which large companies were now keen, the only coordinated opposition came from Britain and Denmark. With their higher labour costs and legally protected markets, the governments, and in many cases the trade and employers federations of France, Germany and the Benelux countries, saw the Charter as a way of balancing the ‘Anglo-Saxon advantage’ which was initially predicted to derive from the internal market. Italy and Spain also wished to avoid disruption from trades unions at a sensitive period while their governments pruned public finances. The Charter thus stimulated systemic conflict between very different approaches to industrial relations, labour law, social security, welfare and pensions.

Yet there existed a strong case for arguing that the Charter would actually facilitate the internal market transition of which, according to the Commission, it was now a component (just as Structural Funds – doubled in size to 50 million ecus in 1989–92 – would ease the problems of declining industry and long-term unemployment (including the British coal industry)). The case for harmonizing laws on health and safety had been agreed already and if there were to be derogations they would be for the poorer countries, not Britain or Denmark. Thus the issue rested on the legal weight to be given to rights such as adequate information for employees about company strategies.

On the European Companies Statute (the heir to Vredeling) the Commission set out three basic models: that of Germany, the Franco-Belgian factory council model, and the British tradition of voluntary arrangements or bargains. From the list, all large and medium-sized firms would have to select one. It was perhaps unfortunate that the Commissioner in charge was neither much liked nor diplomatically skilled, because the Commission college let Vasso Papandreou, with her forty-seven directives, take the brunt of UNICE’s attack,

while keeping in reserve a still-tripartite but more voluntarist alternative.

Much depended on the powers that trade union confederations still maintained at national level, in what was inevitably a subordinate part of the Maastricht arena, even for the more committed member states. Mitterrand’s phase ‘no Europe without a social Europe’ carried little weight even with social-democratic governments in 1991. During the IGC, the Dutch Presidency did its best for the Social Charter. But Britain, its government relatively united on Thatcherite principles, refused, on this matter, to accept QMV at all.

There being no choice, if the Charter were to be salvaged from a British veto, the other eleven governments proceeded with it as if it had been part of the Treaty, in a masterpiece of informal politics which the Netherlands Presidency then turned into a Protocol. John Major, taken aback by the long-term prospects if the Commission were to choose (under Article 100A of the Single European Act) to launch fresh legislation under a QMV heading, presented this optin by the majority of eleven to the House of Commons as if it had been a successful opt-out by the one.

REFORM OF INSTITUTIONS

Bargaining about the Commission’s competences surged up on these issues, often for financial reasons, because many of the trade-offs included compensation, through the proposed cohesion funds, for member states which expected to do badly out of EMU as well as the internal market. But behind disputes about the EC’s swelling budget rested issues of sovereignty and institutional reform. Insofar as the cost of regional equilibrium would rise, for example, the ‘northern’ member states who paid the most required supervision of the allocation and spending of both structural and cohesion funds.

At the same time, the collapse of Communist regimes in eastern Europe required a response. If there were not to be a rush by Western countries to take easy advantage of newly democratic, politically inexperienced states with weak economies overloaded with Comecon debts, the Community had to act together. So it did; but it was the Commission which coordinated the West’s rehabilitation and loan programme, first for Poland and Hungary, then for all of eastern Europe. Fears that the Commission would thus slip into defining a sort of Community foreign policy led Mitterrand at Strasbourg to sponsor the grand concept of a European economic entente, a case which – like the Kohl-Mitterrand declaration on EMU and EPU – revealed the Council’s increasing habit of reaching major decisions in principle, usually on a Franco-German basis, preempting in practice both the Commission and Parliament.